After remand from U. S. Supreme Court, Second Circuit reinstates its earlier opinion that common law "revenue rule" barred civil action by European Community and several Member States against tobacco companies for their alleged support of cigarette smuggling to avoid local taxation
The European Community, various of its Member States, as well as certain Departments of the country of Colombia (plaintiffs) brought an action alleging that certain tobacco companies were directing and facilitating cigarette smuggling. Among other claims, plaintiffs alleged violations under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sections 1961-1968 (RICO). The district court dismissed the smuggling-related claims as barred by the Revenue Rule. The common law Revenue Rule provides generally that U. S. courts may not interpret and enforce foreign revenue laws.
Plaintiffs appealed, arguing that certain amendments to RICO had abrogated the Revenue Rule. In the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, Pub.L. No. 107-56, 115 Stat. 272 (Patriot Act), congress had added certain smuggling or export control violations to the list of RICO acts under 18 U.S.C. Section 1956(c)(7). Disagreeing with plaintiffs, the U. S. Court of Appeals for the Second Circuit held in European Community v. RJR Nabisco, Inc., 355 F.3d 123 (2d Cir. 2004) (EC I) that the Revenue Rule does preclude civil suits brought by foreign sovereigns under RICO to recover lost tax revenues and law enforcement costs caused by smuggling. See 2004 International Law Update 41.
On certiorari, the Supreme Court vacated and remanded the case for reconsideration in light of Pasquantino v. United States, 125 S.Ct. 1766 (2005). It held that the Revenue Rule did not apply to the criminal prosecutions of smugglers under 18 U.S.C. Section 1343. European Community v. RJR Nabisco, 125 S.Ct. 1968 (2005). The Court, however, specifically declined to express a view as to "whether a foreign government, based on wire or mail fraud predicate offenses, may bring a civil action under [RICO] for a scheme to defraud it of taxes." 125 S.Ct. at 1771.
On reconsideration, the Second Circuit now holds that Pasquantino does not affect the findings of EC I. It reinstates its opinion in EC I, and affirms the judgment of the district court as to the judgments in European Community v. RJR Nabisco, Inc., No. 02-7330, and Department of Amazonas v. Philip Morris Companies, No. 02-7325, and vacates and remands as to European Community v. Japan Tobacco, Inc., No. 02-7323, for further proceedings consistent with this opinion and the re-instated opinion in EC I.
"Pasquantino considered whether the revenue rule precluded a criminal prosecution for wire fraud under 18 U.S.S. Section 1343 for use of interstate wirings as part of a scheme to smuggle liquor into Canada. The Supreme Court first determined that Canada's right to collect tax money was "property' for purposes of the statute, and that a plot to smuggle liquor into Canada was a scheme to defraud Canada of that right to collect tax money. ... Thus, the plain language of the statute created liability for this type of smuggling. ... The Court then held that the revenue rule did not preclude criminal prosecutions of this kind."
"None [of the cited cases applying the revenue rule] involved a domestic sovereign action pursuant to authority conferred by a criminal statute. The difference is significant. An action by a domestic sovereign enforces the sovereign's own penal law. A prohibition on the enforcement of foreign penal law does not plainly prevent the Government from enforcing a domestic criminal law. [...]"
"The Supreme Court also analyzed the question in light of the purposes of the revenue rule and found that concerns about sovereignty and separation of powers were not implicated where the United States government brings a criminal prosecution. ... First, in light of the government's decision to prosecute, the Court found "little risk of causing the principal evils against which the revenue rule was traditionally thought to guard: judicial evaluation of the policy-laden enactments of other sovereigns.' ... The fact of the prosecution implies an assessment of risk by the executive branch on which the courts may rely. "[W]e may assume that by electing to bring this prosecution, the Executive has assessed this prosecution's impact on this Nation's relationship with Canada, and concluded that it poses little danger of causing international friction.' ..."
"Second, the Court found concerns about separation of powers greatly diminished where the government brings prosecution within the bounds of a statute created by Congress. [...]
The present civil lawsuit, on the other hand, is brought by foreign governments, not by the United States. Moreover, the executive branch has given us no signal that it consents to this litigation. ... In short, the factors that led the Pasquantino Court to hold the revenue rule inapplicable to Section 1343 smuggling prosecutions are missing here." [Slip op. 5-6]
Citation: The European Community v. RJR Nabisco, Inc., 2005 WL 2210646 (2d Cir. September 13, 2005). See also related case of European Court of First Instance in Joined Cases T-377/00, T-379/00, T-380/00, T-260/01 and T-272/01 (15 January 2003), 2003 International Law Update 52.
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