Tax Suits Against Tobacco Rejected

Tobacco companies scored a legal victory Tuesday when a federal judge in Brooklyn, N.Y., dismissed a pair of lawsuits that accused them of cheating governments in Europe and Colombia out of hundreds of millions of dollars in taxes through cigarette smuggling operations.

The ruling by U.S. District Judge Nicholas G. Garaufis did not absolve the cigarette makers of charges they took part in a global smuggling conspiracy. Rather, it was based narrowly on a finding that they are immune to being pursued by foreign governments for unpaid taxes in U.S. courts.

One of the cases dismissed Tuesday was filed in November 2000 by the European Economic Community and 10 of its member nations against Philip Morris Cos. Inc., R.J. Reynolds Tobacco Co. and Japan Tobacco Inc. The other was filed in May 2000 by 22 Colombian states against Philip Morris and British American Tobacco.

“We are pleased that the court . . . agreed that these lawsuits should be dismissed,” said William S. Ohlemeyer, vice president and associate general counsel of Philip Morris, after Tuesday’s ruling.

The ruling brings to three the number of major anti-smuggling cases to founder because of the “revenue rule”--a common-law doctrine crafted in 18th century England that prevents foreign plaintiffs from using U.S. courts to enforce their tax laws.

The revenue rule also caused a $1-billion suit by Canada against R.J. Reynolds to be dismissed in July 2000. The U.S. 2nd Circuit Court of Appeals upheld the dismissal last fall.

But in his ruling Tuesday, Garaufis left the door ajar for the European and Colombian plaintiffs to pursue some of their claims. In both cases, he dismissed racketeering charges “with prejudice,” meaning the charges cannot be refiled. But he said it might be possible for the plaintiffs to amend their money laundering charges and other claims to avoid colliding with the revenue rule.

The judge “has given us leave to replead” the money laundering portion of the suit, “and that is what we’re going to do,” said Carlos Acevedo, a lawyer for the Colombian states. A lawyer for the EEC declined to comment.

The lawsuits accused cigarette makers of knowingly dealing with narcotic traffickers, money launderers and organized crime figures in smuggling their brands. The litigation has been fueled by disclosure of hundreds of British American documents suggesting that the cigarette maker relied on smuggling to compete with rivals, such as Philip Morris, who it assumed was doing the same.

According to some estimates, about 15 billion packs of cigarettes a year--nearly one-third of those in international commerce--get smuggled across national borders without duties or taxes being paid.

Health authorities say that smuggling increases the worldwide burden of smoking-related disease by keeping supplies of cheap cigarettes on the market.

Cigarette makers say they do not condone cigarette smuggling but cannot control the illegal cross-border trade.

In his order Tuesday, Garaufis said that while arguably obsolete, the revenue rule has not been supplanted by treaties or legislation by Congress. Thus, “while times have changed greatly, the revenue rule has not.”

Garaufis, who is under the 2nd Circuit Court of Appeals, several times cited its reasoning last fall when it upheld the dismissal of Canada’s anti-smuggling lawsuit against R.J. Reynolds.