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With a sharply worded opinion in its favor, Philip Morris USA has won the latest round in an effort to curb Internet and counterfeit sales of its cigarettes. The decision came in a Southern District of New York case that pitted the cigarette maker against what it called one of the largest Internet sellers in the world. Philip Morris USA v. Otamedia, 02 Civ. 7575. The opinion by Judge Gerard Lynch modified a previous ruling ordering Otamedia to stop the sale of Philip Morris cigarettes to customers in the United States. Otamedia disobeyed the order, leading Judge Lynch to hand the Otamedia domain names from which it sold cigarettes over to Philip Morris. The cigarette manufacturer is not waging this battle alone. State and city governments have sued sellers who avoid taxes on cigarette sales. But its victory may prove hollow as the company chases the online retailer around the globe. Even before the final decision, Otamedia transferred its online operations to a new Web site registered in Switzerland. ACTION SINCE 2002 Philip Morris established a brand-integrity unit in March 2002 to combat counterfeit sales, illegal-import sales often made through the Internet and sales not subject to the high taxes paid by cigarette manufacturers. Through these avenues, illegal sellers gross hundreds of millions a year, the company says. With so much at stake, finding online retailers is “a project that’s of high priority to Philip Morris,” said its lead outside counsel on the matter, Kenneth Chernof of the Washington office of San Francisco’s Heller Ehrman White & McAuliffe. State and city governments also joined in the effort. New York City last year sued 15 Internet retailers claiming they evaded taxes totalling $15 million. The U.S. General Accounting Office estimates that Internet cigarette sales could exceed $5 billion in 2005 with $1.4 billion in lost taxes. It is easy to see why smokers would be interested in buying untaxed cigarettes from abroad. Otamedia sells a carton of Marlboro Lights, among Philip Morris’ most popular products, for $13.95 (plus postage). In New York City, the same carton typically costs more than $60. In 2000, Congress passed the Imported Cigarette Compliance Act banning the re-importation of brand name cigarettes without permission from the manufacturer, which Philip Morris declined to grant. Philip Morris has filed seven suits under the act and won six of them, said Dana Bolden, a company spokesman. It has also filed 20 other suits alleging trademark infringement and other wrongs, Bolden said. Of these, seven have led to consent decrees or settlements and seven ended in default judgments, he said. The case against Otamedia fell within the latter group. DEFAULT JUDGMENT Philip Morris USA, a subsidiary of Altria, won a default judgment in January when Otamedia declined to participate in the case. The ruling, largely based on trademark infringement, barred the sale of Philip Morris cigarettes on Otamedia’s Web site and ordered Otamedia to post a notice on its site informing visitors that it would not sell Philip Morris cigarettes to people in the United States. Otamedia, a Belizean company based in Switzerland, simply continued to sell the cigarettes through its sites, yesmoke.com and yessmoke.com. Philip Morris pursued an unusual remedy by asking the court to transfer Otamedia’s Web sites to it. At that point Otamedia began to participate in the litigation. It hired lawyers from Kenyon & Kenyon to oppose the transfer of its domain names. Lynch rejected Otamedia’s arguments and ordered the names transferred. The company enforced the order by presenting it to Network Solutions, one of the companies that registers domain names in the United States. Then it shut down the sites. Otamedia had told the judge that Philip Morris cigarettes accounted for only 18 percent of the products on its sites and that sales of Philip Morris cigarettes in the United States accounted for 3.2 percent of its worldwide total. The Draconian measure of handing over its Web sites, the exclusive means by which it conducted business, would essentially destroy its entire business or in its own words to the court, “would be a classic case of using an elephant gun to kill a flea.” COURT’S FINDINGS Judge Lynch was unconvinced. He found that Otamedia’s Web site was devoted almost exclusively to cigarette sales. A substantial portion of these sales were Philip Morris cigarettes sold to American consumers. If Otamedia sales of Philip Morris cigarettes to Americans were indeed negligible, he wrote, it should be willing to give them up to protect the rest of its Web business. “From this history,” he wrote, referring to Otamedia’s defiance of the original court order, “the Court infers that Otamedia has now decided to enter an appearance in this case because it earns a large percentage of its revenues by violating the Judgment and recognizes that Philip Morris for the first time seeks a form of relief … that threatens those revenues.” Lynch rejected most of Otamedia’s evidence in support of its claim that it was not primarily in the business of selling cigarettes online. Otamedia’s efforts to portray itself “as anything but an Internet retailer of cigarettes were clearly disingenuous and only bolstered the inference that Otamedia earns the vast majority of its revenues by sales that violate the Judgment,” the judge held. Otamedia’s move of its Internet site to Swiss registry presents Philip Morris with a problem, since continuing the fight will mean entering a new legal arena. “That’s the next frontier,” said Chernof. He said nearly every nation has laws allowing Philip Morris to close down a Web site if it is operating illegally. “This truly is a global effort,” he said. The laws under which Philip Morris won its injunction may not be the same in Switzerland. At the least, Switzerland does not ban cigarette exports to the United States. And attempts to enforce American judgments abroad often face roadblocks. The United States is not a party to any treaty calling for mutual enforcement of judgments, said John Fellas, an international litigator at Hughes Hubbard & Reed. Foreign courts often reject decisions from American courts under jurisdictional grounds, he said. Many courts do not approve of the broad jurisdiction employed by American courts and will require the plaintiff to relitigate the case on the merits, he said. If a client has no assets in the United States, Fellas sometimes advises it not to litigate the matter and accept a default judgment. An uncontested judgment makes it more likely for a foreign court to reject the American decision, he said, rather than a decision in which the merits were litigated. Otamedia’s lawyers at Kenyon & Kenyon could not be reached for comment. On its Web site, Otamedia described Philip Morris’s judgment as a “virtual victory” lacking enforceability in Switzerland but said it would appeal the decision. Chernof said Philip Morris will pursue Otamedia despite any potential jurisdictional barriers.

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