The tobacco industry scored a legal victory Monday when the U.S. Supreme Court refused to hear a cigarette smuggling case filed by the government of Canada against R.J. Reynolds Tobacco Co.
Canada had asked the court to reinstate the suit, in which it accused RJR and several affiliates of violating U.S. anti-racketeering laws by colluding with smugglers during the 1990s to sell billions of cigarettes on the Canadian black market in a giant tax evasion scheme.
In a 2-1 decision last year, the U.S. 2nd Circuit Court of Appeals upheld a lower court ruling that the case was barred by the revenue rule, a 17th century doctrine that prevents foreign countries from pursuing alleged tax cheats in U.S. courts.
Canada argued in its appeal that the rule had been interpreted too broadly and that it was not seeking unpaid taxes but damages for violations of U.S. fraud and anti-racketeering laws.
“We’re very disappointed that the court decided that the time wasn’t ripe for review,” said Gordon Bourgard, senior general counsel with the Canadian Department of Justice. Bourgard described the decision as “at cross purposes” with combating international cigarette smuggling.
Asked whether an action now will be brought in Canadian courts, Bourgard said only that officials “are considering possible next steps.”
RJR hailed the court’s decision. This “is another affirmation that foreign governments cannot use our country’s judicial system to enforce their revenue laws,” said Martin L. Holton III, RJR vice president and assistant general counsel.
Although RJR is the immediate beneficiary, the action also could benefit Philip Morris Cos., British-American Tobacco and other firms defending anti-smuggling claims. Suits by Belize, Ecuador, Honduras, the European Union and a group of Colombian states have all been dismissed and are winding their way through appeals.
The European Union last week filed a separate lawsuit against RJR that seeks to avoid colliding with the revenue rule. In that case, filed in U.S. District Court in Brooklyn, N.Y., the EU accused the company of engaging in money laundering to conceal its dealings with narcotics traffickers and other criminals who allegedly distribute its cigarettes in Europe.
Monday’s action was not unexpected because the court had sought the advice of the Bush administration, which took the position that the revenue rule applied. The court requested the input in May from the solicitor general, though the government did not stake out its position until last month in a friend-of-the-court brief.
Three high-ranking Bush administration lawyers had removed themselves from the case because of tobacco industry ties.
Solicitor General Theodore B. Olsen recused himself because within days of his appointment in February 2001. He had filed a friend-of the-court brief with the 2nd Circuit on behalf of the National Assn. of Manufacturers and the U.S. Chamber of Commerce in support of RJR’s position in the case.
Olsen’s No. 2, principal Deputy Solicitor General Paul Clement, recused himself because his former law firm, King & Spalding, represented the Canadian Tobacco Manufacturers Council, RJR’s co-defendant in the Canadian case.
And Treasury Department General Counsel David Aufhauser also disqualified himself because Williams & Connolly, where he was a partner until last year, has worked for RJR and other tobacco companies.
Among those who did sign the administration’s brief was Robert D. McCallum Jr., who was confirmed in May 2001 as head of the Justice Department’s civil division.
McCallum, a Yale classmate of Bush, had been a longtime partner at Alston & Bird, an Atlanta-based firm that does trademark and patent work for RJR. Neither McCallum nor the firm took part in the smuggling case; RJR officials told The Times that they did not think McCallum had represented them in other matters.
Under ethics rules, a government lawyer would be barred from involvement in a case if he or she had worked on the matter as a private attorney.
McCallum could not be reached, but a Justice Department spokesman said its ethics office had cleared him.
The Times reported in September that the 2-1 appeals court majority that rejected Canada’s claim included federal District Judge Lewis A. Kaplan, a one-time tobacco industry lawyer who was sitting as a visiting judge with the 2nd Circuit when he cast the swing vote on Canada’s appeal in October 2001.
Kaplan’s former law firm, Paul Weiss Rifkind Wharton & Garrison, represented tobacco companies from the 1970s through 1990s.