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Lawyers for five U.S. tobacco companies have persuaded the 11th U.S. Circuit Court of Appeals to adopt a 225-year-old common law principle that bars three Latin American countries from suing them in U.S. courts. That principle, called the revenue rule, prohibits one country from trying to enforce its own revenue laws in another country’s courts. In the defense’s brief, Goodwin Proctor’s Kenneth J. Parsigian, who represented the tobacco companies, cited cases from 225 years of Anglo-American jurisprudence, the earliest of which was Holman v. Johnson, 98 Eng. Rep. 1120, 1121 (K.B. 1775). The most recent case cited in the brief was Attorney General of Canada v. R.J. Reynolds Tobacco Holdings, 268 F3rd 103 (2nd Cir. 2001). At oral argument in December, Parsigian noted that no court in history had allowed a claim like this one to proceed. In his opinion for a unanimous panel comprising Chief Judge J. L. Edmondson and the Middle District of Florida’s Judge William T. Hodges, Judge Joel F. Dubina noted that English courts in the 18th century used the rule to protect British trade, but U.S. courts have applied it on grounds of separation of powers. However, the 11th Circuit had never had occasion to apply it before this decision. Republic of Honduras v. Phillip Morris Cos., No. 02-11727 (11th Cir. Aug. 14, 2003). “This circuit has not previously considered or adopted the rule,” Dubina wrote. “We now recognize the continuing vitality of the revenue rule, adopt it as the rule of this circuit and apply it to the facts of this case.” TAX TROUBLES The Republics of Ecuador, Honduras and Belize had accused five tobacco companies, among them R. J. Reynolds Tobacco Co., Phillip Morris Cos. Inc. and Brown & Williamson Tobacco Corp., of crafting byzantine schemes to sneak tobacco into the countries and avoid paying taxes. According to the plaintiffs’ complaint, some of the schemes involved smuggling tobacco to the nations and then laundering the money through “various illegal money laundering channels.” Other schemes involved moving tobacco through free trade zones and then selling it to drug smugglers, who smuggled the cigarettes into the countries as part of their own money laundering operations. The effect, the plaintiffs argued, was to lower prices for consumers, maximize company profits and deprive the countries of tax revenue. The countries filed their original complaint in a Florida state court, accusing the companies of money laundering and mail and wire fraud, among other charges. Under the Racketeer Influenced and Corrupt Organizations Act, the plaintiffs sought to recover their lost tax revenue, the cost of treating those addicted to tobacco and triple damages. The defendants had the case moved to federal court in Miami, where the judge dismissed the complaint with prejudice. Republic of Ecuador v. Phillip Morris Cos., F. Supp. 2d at 1360 (2002). The 11th Circuit opinion affirmed the lower court’s ruling. Parsigian said he was “very happy” with the decision and doesn’t see much leverage for reconsideration by the full bench or certiorari by the U.S. Supreme Court. Dubina’s decision, Parsigian said, showed that the court had read the briefs and listened to arguments closely. “They took it right down the middle, which is the way I like it,” he said. The plaintiffs’ lawyer, Joel S. Perwin of Podhurst Orseck in Miami, agreed that asking for a full bench hearing probably “would not be very fruitful. I doubt very seriously the court is going to change its mind.” “They understood exactly what we were saying,” he said. “They simply disagreed with us.” At oral argument in December, Perwin argued that the plain language of the RICO statute permits nations to sue for damages in U.S. courts. The federal statute, he argued, should take precedence over the common law rule. The court disagreed. “[T]he mere fact that the RICO statute is written in broad terms does not, standing alone, pre-empt application of the revenue rule to the Republics’ RICO claims,” Dubina wrote. The court, Dubina noted, must consider the substance of the complaint, rather than the method under which the plaintiffs bring it. Though the plaintiffs brought their complaint under the RICO statute, he wrote, it’s still a tax claim. Permitting the RICO complaint to proceed, he added, would allow litigants to get around the revenue rule by disguising their tax claim as something else. “This is precisely what the Republics are trying to do here,” he wrote. “Big Tobacco’s scheme to avoid the Republics’ tax laws is at the heart of all of their claims.” Each complaint, he wrote, involves schemes to avoid paying taxes, and all seek to collect those taxes. “[W]e hold that the Republics’ civil RICO claims implicate the revenue rule because, in substance, they seek redress for violations of the Republics’ tax laws,” he wrote. NOT A JUDICIAL DECISION The decision to help other countries enforce their tax laws is best left to the political branches, Dubina wrote. For example, the United States already has such treaties with Denmark, Canada and France. However, Belize, Honduras and Ecuador do not have such agreements with the United States. Further, Dubina wrote, Congress and the executive branch have the authority to pass laws allowing other countries to enforce their revenue laws in the United States. “However … the political branches have made no such allowance; and, thus, this justification for the revenue rule remains intact and requires us to abstain from considering the Republics’ claim,” he wrote. “If we were to provide them with the relief they seek, we would be allowing them to assert their sovereign political will, as embodied in their tax laws, in our country,” Dubina wrote. “This is precisely what the revenue rule exists to prevent.” Perwin said the court’s decision allows the tobacco companies to take cover behind the revenue rule and continue to pursue their allegedly fraudulent behavior abroad. Perwin has not had the opportunity to address the merits of the case in any court, a situation he called “frustrating.” He said his clients might consider asking the U.S. Supreme Court for cert, because the issue of the interrelation between common law and the RICO statute might interest the justices. The plaintiffs’ lawyer has argued that the RICO statute’s broad language allows for his clients’ claim. Parsigian has countered that statutes are passed “against the backdrop” of the common law, and if Congress doesn’t specifically abrogate the common law, it is presumed to survive. And congressional activity for the past 200 years or so indicates that it intended to retain the revenue rule. No country has right of access to U.S. courts for tax enforcement, Parsigian said — not even Canada. “It’s not as if Congress for 200 years has been itching to get rid of this rule,” he said.

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