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NEW YORK — A legal doctrine with a claim to legitimacy that’s disputed by some scholars has repeatedly been used to deprive foreign governments of a U.S. legal forum in which to recover taxes lost to cigarette smuggling. For a decade, foreign governments have been suing tobacco companies in U.S. courts to recover hundreds of millions of dollars in tax revenues. The companies, they say, are complicit in a huge illegal international trade in cigarettes. Almost without exception, those suits have been thrown out under the so-called common law revenue rule. The effect of the rule is that foreign governments can’t use U.S. courts to recover taxes, even though American laws like the Racketeer Influenced and Corrupt Organizations Act (RICO) seem to allow just that. Several U.S. appeals courts have called the rule a common law doctrine with an impeccable ancestry. A PARVENU RULE But the few scholars who have studied the rule accuse it of being something of a parvenu — a view shared by some dissenting judges. They say that what the rule means today bears little resemblance to its 18th century namesake. The doctrine promoted England’s mercantile interests by upholding private contracts even if they were devised for the purpose of evading foreign duties and taxes. It is usually traced to a pair of decisions, dated 1775 and 1779, by the English jurist Lord Mansfield, who gave his blessing to such contracts with offhand remarks like “no country ever takes notice of the revenue laws of another.” For most of its critics, the rule’s shifting purposes and rationales over the years are enough to retire it or to restrict its reach severely. In an article in the Washington Law Review last year, Elizabeth J. Farnam argued that Congress could not have meant for RICO to be limited by the revenue rule because the “rule’s existence was uncertain when RICO was promulgated” in 1970. She observed that “the revenue rule was never used to deprive a foreign country of a statutory cause of action” until 1979. William S. Dodge, a professor at the Hastings College of the Law, agrees that the rule’s pedigree is shaky. He nonetheless thinks that federal courts have rightly denied foreign governments access to U.S. courts to recover tax revenues lost to cigarette smuggling. “We shouldn’t adhere to the revenue rule simply because of something Lord Mansfield said in 1775,” he said. “But there is another good reason for adhering to it. U.S. courts have no way of ensuring reciprocity.” He argues that only the political branches can ensure, as through treaties, that countries allowed to recover their taxes in U.S. courts don’t throw up barriers when this country wants to pursue its tax cheats in theirs. Federal courts have often said that the rule’s force derives from its “long history of recognition and application,” to use the language of the Eleventh Circuit U.S. Court of Appeals in an August decision, Republic of Honduras v. Philip Morris Cos. Inc., No. 02-11727. But the Eleventh Circuit and other courts have taken pains to explain the separation-of-powers rationale for the rule, suggesting that Dodge may be close on the mark in explaining the real reason it has played so important a role in the tobacco smuggling cases. RECENT HISTORY According to a 2002 article by Dodge in the Harvard International Law Journal, the 18th century rationale for the rule, promotion of private trade at the expense of foreign tax collectors, was all but forgotten in the 20th century, when American courts sometimes invalidated private contracts precisely because they had the purpose of evading foreign laws. The rule reappeared in a new guise in 1929, Dodge wrote, when Judge Learned Hand of the Second Circuit invoked it to explain why one U.S. state need not enforce a tax judgment rendered in the courts of another state. Moore v. Mitchell, 30 F.2d 600. “Hand thought it was safer to refuse enforcement of important foreign laws altogether than to risk having to declare them contrary to public policy, which might offend a foreign state,” Dodge wrote. Hand’s views on state-to-state relations became a dead letter in 1935 when the Supreme Court held that the Constitution’s full faith and credit clause requires states to recognize one another’s tax judgments. Hand’s reasoning lived on in the international arena, Dodge and Farnam said. In 1979, the Ninth Circuit denied a suit brought by Canada to enforce a British Columbia tax judgment against four residents of Oregon. Her Majesty the Queen in Right of the Province of British Columbia, 597 F.2d 1161. The court managed to turn the spotty history of the revenue rule into a sign of its vitality. It said of the rule that “since its inception it has become so well recognized that this appears to be the first time that a foreign nation has sought to enforce a tax judgment in the courts of the United States.” The court argued that Hand’s rationale had continued validity in international affairs. The revenue rule entered its modern heyday in the late 1990s, largely as the result of the fallout from litigation against the tobacco industry. THE SMUGGLING PROBLEM According to an April 2001 report by the Campaign for Tobacco-Free Kids, documents uncovered during litigation revealed that U.S. tobacco companies and their international counterparts are complicit in the flouting of import restrictions and duties around the globe. “One-third or more of cigarettes in international trade are being diverted into smuggling,” Eric Lindblom, the organization’s associate general counsel, said in an interview. Those allegations have led a number of countries to file suit in U.S. courts, generally alleging that the tobacco companies’ failure to pay their taxes, among other acts of wrongdoing, constituted predicate offenses that added up to RICO violations. The plaintiff countries include Canada, 10 members of the European Union, Honduras, Ecuador and other Latin American and Caribbean nations and several political subdivisions of Colombia. In some of the suits, the foreign governments allege that the tobacco companies knowingly dealt with drug dealers who laundered their cocaine profits by acting as middlemen between the companies and Colombian smugglers. In a trial-level hearing last year in a case that is currently pending before the Second Circuit, European Community v. R.J.R. Nabisco Inc., No. 00-6617 (E.D.N.Y.), lawyers for the European Union went so far as to allege that the Taliban rode to power in Afghanistan on the strength of tobacco smuggling profits and that smuggling in defiance of United Nations import restrictions helped prop up Saddam Hussein’s regime. One EU lawyer claimed “cigarettes and smuggling and narcotic[s] and terrorism, they are all interrelated.” The attorney who represents Philip Morris Inc. in that proceeding, Murray R. Garnick, a partner at Arnold & Porter of Washington, declined to comment on those factual allegations because the plaintiff countries’ appeal to the Second Circuit is pending. “To suggest that R.J. Reynolds is involved in smuggling or terrorism is totally untrue and unsupportable,” said Ellen Matthews, manager of corporate communications for the company. The signs are not good for the plaintiff countries in the EU case. The Second Circuit invoked the revenue rule to dismiss Canada’s suit in October 2001. Attorney General of Canada v. R.J. Reynolds Tobacco Holdings Inc., 268 F.3d 103. When Canada asked the U.S. Supreme Court to review that decision, the Bush administration filed a brief arguing that the rule serves a number of important purposes, giving pride of place to the separation-of-powers rationale of leaving foreign policy to Congress and the president. The Supreme Court declined to take the case. The Canadian government has since filed a civil suit in a Canadian court, laying claim to more than 1 billion Canadian dollars in lost revenue. But Canada will not be able to reap the windfall of RICO’s treble damages there. In its August decision, the Eleventh Circuit ruled against Honduras, Ecuador and Belize. In the case pending before the Second Circuit, it may be to the advantage of the plaintiffs that one member of the Second Circuit panel, Judge Guido Calabresi, was the sole dissenting voice in the Canada case. He said that separation of powers was not a factor because Congress and the president had already blessed the smuggling suits, in effect, when they enacted RICO in a form that allowed such suits. Calabresi downplayed concerns about reciprocity by interpreting RICO as a statement by the political branches that any curtailment of corruption, no matter who initiated it, was a positive boon to the United States. Nonetheless, the experts say that, like it or not, Calabresi is bound by the Canada decision. In the pending case, the European Union and other plaintiffs have tweaked the usual arguments to take advantage of recent developments. THE PATRIOT ACT They argue that even if Congress had no intention of abrogating the revenue rule when it passed RICO, the USA Patriot Act of 2001 tells a different story. They point to language in the act that encourages international cooperation against money laundering, and they argue that it was significant that Congress removed a provision, reportedly sought by tobacco lobbyists, to the effect that the Patriot Act had no bearing on the revenue rule. Those arguments did not fare well in the lower court, however. According to Dodge, the foreign governments could probably try knocking on the doors of state courts. The tobacco companies could counter that the revenue rule would stand in the way not only because of separation-of-powers concerns but also because of the federal government’s constitutional preeminence in foreign policy, he said. Dodge sees that as a fairly weak argument because common law is generally considered to be the province of the states. Gary Young is a reporter for The National Law Journal , a Recorder affiliate based in New York.

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