2004 International Law Update, Volume 10, Number 3 (March)

2004 International Law Update, Volume 10, Number 3 (March)

Legal Analyses published by Mike Meier, Attorney at Law. Copyright 2017 Mike Meier. www.internationallawinfo.com. 

ANTI-SUIT INJUNCTIONS

In litigation related to Enron collapse, English Court of Appeal, Civil Division, upholds refusal of first instance court to enjoin defendant from pursuing its suit in New York to decision on merits of claims that mirror issues in English case by rejecting plaintiff’s claims that filing U.S. action was breach of contract as well as vexatious and oppressive

The Royal Bank of Canada (plaintiff or RBC) is a Canadian bank based in Toronto. The Cooperatieve Centrale Raiffeisen‑Boerenleenbank BA (defendant or Rabobank) is a Netherlands bank, with its principal place of business in Utrecht. Both parties carry on the banking business in London and New York. RBC’s claim rests upon a “swap agreement” with Rabobank recorded in a Total Return Swap Confirmation (TRS) dated in January 2001. The agreement formed part of, and was subject to, the 1995 International Swap Dealers Association Master Agreement (ISDA or Master Agreement).

Under its express terms, English law was to govern both substantive rights and the interpretation of the TRS. ISDA also contained a non‑exclusive jurisdiction clause authorizing the English courts to decide disputes arising out of a TRS arrangement. It also had the following clause: “Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction... nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction.”

According to their swap agreement, Rabobank was to pay RBC $517m plus $6m interest on June 28, 2002. The TRS formed part of a structured finance deal. It had to do with a block of shares in a publicly traded company called EOG Resources Inc, the shares being owned by Enron Corporation.

The TRS involved two closings. By the second closing on January 31, 2001, RBC had effectively advanced the full sum of $517m to an agreed entity called Heracles Trust. Rabobank’s involvement in the TRS came at the second-closing phase. At this point, there was an Equity Swap with Enron North America, which Enron guaranteed. In the course of the second closing, Rabobank assumed part of the Enron credit risk. The present case deals to a substantial degree with the circumstances surrounding Enron’s demise.

Next, a dispute sprang up between the parties. RBC’s claim was for damages of about $523.8m payable under the contract on June 28, 2002, which Rabobank declared on June 21 it would not pay. On the latter date, Rabobank filed proceedings in the New York state courts -- mainly to rescind the TRS agreement. Alternatively, it asked for $523.8m in damages, alleging fraudulent misrepresentation.

RBC filed the instant case in the English courts on the next working day after June 21. The claims and cross claims in the English and New York proceedings mirrored each other. The plaintiff asked the court below to enjoin the defendant from taking any steps to obtain a ruling on any issue raised in the New York proceedings except in the context of completing pretrial discovery. In December 2003, the English court of first instance rejected this application and the plaintiff appealed. The English Court of Appeal (Civil Division), however, dismisses the appeal.

In the lead opinion, the Judge points out that RBC’s broad objections are (1) that Rabobank was acting unconscionably and vexatiously and (2) that it breached its contract when it filed the New York lawsuit. “Its complaint is that the only proper purpose for conducting the New York proceedings was in order to use the New York procedures for disclosure and depositions in order to gather evidence, which can be deployed in this action. In the course of argument before this court, ... RBC accepted that, at no stage, had Rabobank given RBC any representation or reason to assume that, having commenced the New York proceedings, they would not be pressed to a hearing and judgment.” [¶ 12]

The lead opinion agrees with the way the lower court sized up the problems that simultaneous litigation in different countries can bring about. He then cites the following comment by the lower court. “All this is unattractive: it presents an extreme example of the ‘ugly rush’ that concerned Lord Brandon. However this cannot, in my judgment, justify the court in interfering with Rabobank’s prima facie right to choose where it litigates, given that the chosen court has internal jurisdiction over the defendant and the dispute, and to pursue the litigation to a determination.”

“The matter, as I see it, must be tested by considering whether Rabobank is guilty of conduct or threatens conduct, that can properly be said to be [1] in breach of any contract right enjoyed by RBC or [2] otherwise unconscionable, vexatious or oppressive, or [3] an abuse of the English Court. Otherwise, it is for the English Court to manage the proceedings before it so as best to minimise these problems and to leave the New York Court to handle the impact of these problems in the New York proceedings.” [¶ 20 (quoting ¶ 82 of trial judge’s opinion)]

“ ... I cannot accept that the court should imply a term into the jurisdiction clause that, in the event that parallel proceedings throw up the possibility of simultaneous trials and one of the sets of proceedings is in the English court, either of the parties is entitled to insist that the English trial should take precedence and be completed before any trial in another jurisdiction can start. Any such implied term would be inconsistent with the express term of the jurisdiction clause.”

“Since I do not accept that it is possible to imply the term proposed ... into the jurisdiction clause, it follows that Rabobank’s pursuit of the New York proceedings to a hearing and judgment, being permitted by the terms of the agreement between the parties, cannot constitute a breach of contract by Rabobank [or] vexatious and oppressive conduct.” [¶¶ 24-25]

The lead opinion also touches upon the delicacy of having one national court enjoin a party from litigating in the courts of another sovereign state. “ ... Lord Justice Waller accepted that although anti‑suit injunctions are theoretically in personam, ‘foreign courts do consider such injunctions as an interference with proceedings in that country and that English courts for that reason should be cautious before granting such an injunction.’”

“In the present case the judge had a discretion whether or not to grant the injunction sought. His approach to his decision to refuse the injunction does not reveal any error of law and, in my judgment, he was right to refuse it. In any event it is clear that he was entitled to arrive at that conclusion on the material before him.” [¶ 32] Thus, dismissal of the appeal is appropriate.

A concurring Judge further illuminates the rationale of the Court. “Rabobank submits and the judge accepted that, in addition to the fact that the New York suit is coming on for trial within a usual period, ... trial of the issues in New York is of legitimate juridical advantage to it, in so far as its claims include some claims, notably in deceit and fraud which are (Rabobank will submit) subject to New York law and fall outside clause 13(a). The judge accepted this as a valid point and gave it some weight [Cite].”

“In my view, it cannot be right for this court to contemplate interfering indirectly with the trial of the New York suit at this stage, in circumstances when it must be taken, on RBC’s own case, that (a) the New York suit was properly commenced and (b) the New York suit offered Rabobank perceived procedural advantages in terms of pre‑trial discovery including oral depositions, which RBC itself has not before us sought to deny; and when, further, (c) both parties have, subsequent to the commencement of the English action, vigorously participated in the New York suit over a very considerable period, without any agreement by Rabobank that the New York suit should not go to trial, (d) the New York court was asked to stay its own proceedings on grounds of forum non conveniens and refused in early 2003 in a decision upheld on appeal in June 2003 and (e) the New York trial date has now been fixed in the ordinary course of the New York court’s practice in relation to such a suit, as far as the New York judge is concerned.” [¶¶ 47-48]

Citation: Royal Bank of Canada v. Cooperatieve Centrale Raiffeisen ‑ Boerenleenbank BA, [2004] E.W.C.A. Civ. 07, [2004] All E.R. (D) 216 (Jan. 24) (Approved judgment).

ANTI-SUIT INJUNCTIONS

In securities fraud case against Belgian auditor, First Circuit adopts “conservative” approach of Second, Third, Sixth and D.C. Circuits and upholds injunction against Belgian defendant from pursuing home court action to penalize U.S. document discovery

Klynveld Peat Marwick Goerdeler Bedrijfsrevisoren (KPMG-B) (defendant) is a Belgian company that served as the auditor of the now bankrupt company, Lernout & Hauspie Speech Products, N.V. (hereinafter “L&H”). Several plaintiffs filed securities fraud actions against KPMG-B and others in the U.S., including the present one. KPMG-B, however, refused to produce auditing records and other documents, contending that revelation would violate Belgian law. A magistrate judge in Massachusetts, however, ordered KPMG-B to produce the documents.

Defendant then requested a Belgian court to levy penalties of $1 million EURO for each violation by those who “take any step of a procedural or other nature in order to proceed with the discovery-procedure.” When the Massachusetts district court issued an anti-suit injunction to prevent plaintiff from pursuing the Belgian action, KPMG-B appealed. The U.S. Court of Appeals for the First Circuit affirms.

The extension of the U.S. legal system beyond U.S. territorial borders is most controversial where a party seeks the production of documents for investigations and litigation in the U.S. The sensitivity of an international anti-suit injunction justifies a heightened level of appellate review, i.e., just short of plenary.

Federal appellate courts have developed two contrasting approaches in this area. The Fifth, Ninth and Seventh Circuits seem to prefer a “liberal” approach. Their doctrine is that an international antisuit injunction is appropriate whenever there is a duplication of parties and issues, and the court finds that carrying out simultaneous proceedings would frustrate the speedy and efficient determination of the U.S. case.

On the other hand, the “conservative” method of the Second, Third, Sixth and D.C. Circuits is narrower. It demands that the lower court find out whether a party’s pursuit of the foreign lawsuit either (1) imperils the jurisdiction of the forum court or (2) threatens some strong national policy. The “conservative” approach thus gives more weight to international comity.

The First Circuit here rejects the “liberal” philosophy. “We stop short, however, of an uncritical acceptance of the conservative approach. The recent expositions of that approach have come to regard the two main rationales upon which international antisuit injunctions may be grounded – preservation of jurisdiction and protection of important national policies – as exclusive. ... We are uncomfortable with this gloss, for it evinces a certain woodenness. In our view, the sensitive and fact-specific nature of the inquiry counsels against the use of inflexible rules.”

“We therefore reject this reworking of the conservative approach and instead endorse its traditional version. That version is not only more flexible but also more consistent with [Laker Airways Ltd. v. Sabena, Belgian World Airlines, 731 F.2d 909 (D.C. Cir. 1984)] – which we regard as the seminal opinion in this field of law. The Laker Airways court did not suggest that its two stated rationales were the only ones that could justify issuing an international antisuit injunction. ... Rather, the court indicated that it was prudent to use a wider-angled lens, making it clear that the equitable considerations surrounding each request for an injunction should be examined carefully.”

“ ... The gatekeeping inquiry is, of course, whether parallel suits involve the same parties and issues. Unless that condition is met, a court ordinarily should go no further and refuse the issuance of an international antisuit injunction. ... If -- and only if -- this threshold condition is satisfied should the court proceed to consider all the facts and circumstances in order to decide whether an injunction is proper. In this analysis, considerations of international comity must be given substantial weight – and those considerations ordinarily establish a rebuttable presumption against the issuance of an order that has the effect of halting foreign judicial proceedings.” [Slip op. 16-17]

Applying this approach to the present case, the Court finds that the district court acted within its discretion in enjoining KPMG-B from pursuing the Belgian action. The lower court soundly applied the traditional test for granting preliminary injunctions, and took into account all critical factors. These included: (1) international comity, (2) the character of the foreign action, (3) the public policy protecting investors from securities fraud, (4) the need to protect the court’s own processes, and (5) balancing the equities.

[Editors’ Note: similar aspects of the L&H bankruptcy have already been litigated in the U.S., see, e.g., 2002 International Law Update 165.]

Citation: Quaak v. Klynveld Peat Marwick Goerdeler Bedrijfsrevisoren, No. 03-2704, 2004 WL 415282(1st Cir. March 8).

ARBITRATION

As matter of first impression, Second Circuit overturns lower court’s failure to confirm Swedish arbitral award against sovereign nation (here Russian Federation) where Russian Government, one of sovereign’s political organs, was party to arbitration

Compagnie Noga D’Importation et D’Exportation, S.A. (“Noga”) sought confirmation of a Swedish arbitration award by a New York federal court, naming the “Russian Federation” as defendant. In 1990, Noga and the former Union of Soviet Socialist Republics (USSR) (the predecessor of the Russian Federation) had entered into $550 million worth of contracts to supply food and consumer goods to foreign trade agencies of the USSR and the Federative Socialist Soviet Republic of Russia (RSFSR) (a constituent republic of the USSR). The anticipated third-party financing for these contracts failed, and Noga agreed to make up part of the shortfall.

In April 1991, Noga lent $422.5 million to the RSFSR in return for the RSFSR’s crude oil products. Nine months later, Noga signed onto another $400 million loan agreement with “the Government of the Russian Federation, acting for and on its own behalf” (the Government) also in return for crude oil.

Both loan agreements provided (1) for arbitration of contract disputes before the Chamber of Commerce of Stockholm, Sweden; (2) for the application of Swiss substantive law to these disputes; (3) for the waiver of immunity with respect to the enforcement of any arbitration award, and (4) for its consent to be sued, inter alia, in New York. [Editors’ Note: The USSR collapsed between the 1991 and 1992 loan agreements. In the 1992-1993 period, the Russian Federation assumed the debts and assets of the former USSR and its constituent republics.]

In December 1992, Noga declared the Government to be in default on the loans. Accordingly, it began arbitration proceedings before the Stockholm Chamber of Commerce, naming the “Russian Federation” as respondent. The Government’s attorneys argued that the Russian Federation was not the proper respondent, but nevertheless, for eight years, participated in the arbitration. The tribunal awarded Noga about $50 million in the liability and damages phase of the arbitration, and another $23.3 million in consequential damages.

During 1993 and 1994, Noga assigned portions of the expected arbitration awards to four Swiss banks which had financed Noga’s performance of the 1991 and 1992 loan agreements. In 1997, however, Noga filed for protection from creditors in a Swiss court in Geneva. It proposed a composition plan [similar to a Chapter 11 reorganization plan in the U.S.] to pay back its creditors. The Geneva court approved Noga’s plan and allowed Noga to discharge its debts by paying 12 percent on the creditors’ claims. The assignee banks were to receive their portions from Noga’s collection of the arbitration awards.

The Russian Federation opposed the confirmation of the award. It contended that it had neither (1) signed the loan agreements nor (2) taken part in the arbitration proceedings. In its view, the Government of Russia, an organ of the Russian central government, would be the proper party in this case.

The district court denied Noga’s motion to confirm and enforce the arbitral award. It relied on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 53) (the Convention), as implemented in the Federal Arbitration Act (FAA) (9 U.S.C. Sections 201-208). The court did not consider the Russian Federation a proper party because it had taken part neither in the underlying arbitration proceedings nor in the loan agreements. Therefore, the court reasoned, it lacked jurisdiction to confirm the award against the Federation.

The U.S. Court of Appeals for the Second Circuit, however, vacates and remands. Essentially, it holds that, for purposes of this proceeding, the Russian Federation and the Government are the same party.

The Court first points out that the Convention and the Act govern the U.S. enforcement of arbitration awards. “... [T]he principal issue in this appeal is whether the Government is an instrumentality established as a juridical entity distinct and independent from the Russian Federation. [Thus] the [decision in] National City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611 (1983) (Bancec) [that] public international law and federal common law determine the separate juridical status of a Cuban trade bank is of little help to us here. In any event, because we conclude that the answer to this question is the same regardless which of the bodies of law advocated by the parties is applied here, we need not cut the Gordian choice-of-law knot presented to us by the parties. ...” [Slip op. 24]

“The Russian [Federation’s] Constitution provides for a bicameral federal executive consisting of the President of the Russian Federation, who is described as being ‘the head of State,” Konst. RF art. 80(1), and the Government, which shall exercise ‘executive power in the Russian Federation,’ id. Art. 110(1). The Government consists of the Chairman of the Government ... and the Deputy Chairman of the Government and the federal ministers ... Id. arts. 83(a), (e), 110(2), 111(1).”

“The Russian Constitution also enumerates the responsibilities of the Government, which include, among other things: (i) submitting a federal budget to the State Duma; (ii) ‘ensuring the implementation ... of a uniform financial, credit, and monetary policy’; and (iii) ‘exercising any other powers vested in [the Government] by the Constitution of the Russian Federation, [Russian] federal laws, and decrees of the President of the Russian Federation.’ Id. Art. 114(a), (b), (g). ...”

“Plainly, ... that entity is not a sovereign, corporation, or instrumentality separate from the Russian Federation. Rather, the Government is a political organ of the Russian Federation, analogous to the cabinet of the American president. Most significantly, ... the Government ‘is not a juridical person and enjoys no autonomous legal capacity.’ ...”

“Indeed, given the ... Bancec decision, had either the Government or the Russian Federation wanted to shield the latter entity from being the subject of these confirmation proceedings, either could have designated a publicly-owned state corporation or instrumentality as the entity to contract with Noga. At bottom, the Government was performing a quintessential ‘governmental’ function: financing the purchase of massive quantities of basic necessities and infrastructure improvements to provide for the Russian people and paying for those necessities and improvements with the country’s natural resources.”

“Finally, the Russian Federation has not satisfied its burden of proving that the Government is a separate juridical entity that can sue and be sued in Russian courts for obligations that are analogous to the ones set forth in the Loan Agreements or, indeed, for any legal obligations.”

“For example, the Russian Federation could have presented docket entries or court filings from Russian courts indicating that the Government had sued or been sued in this capacity. No such evidence was presented to the District Court, however. Accordingly, we find that, under Russian law, the Government and the Russian Federation should be treated as the same party for the purpose of this confirmation proceeding.” [Slip op. 25-27]

The Court then turns to U.S. federal common law. The issue of whether a federal court will confirm a foreign arbitral award against a sovereign nation, where one of the sovereign’s political organs was a party to the arbitration, is one of first impression. Prior to this, federal courts had only considered confirmation of arbitral awards against foreign sovereigns where the foreign sovereign [had] acted through a corporation. Usually, the legal theories behind it are that the corporation was the alter ego or agent of the foreign sovereign, or that the corporate veil should be pierced.

In other contexts, the federal courts have held that the fact of an internal separation of some sort between the sovereign and one or more of its organs was of no legal significance. “The most developed area of federal common law concerning this issue relates to whether, in the context of the [Foreign Sovereign Immunities Act of 1976, as amended, 28 U.S.C. Sections 1602 ff) (FSIA)], a ministry or other political subdivision of a foreign sovereign should be treated either as the foreign state itself or a political subdivision of it (in which case it would be immune from suit), or as an ‘agency or instrumentality’ of the foreign state in which case it would be subject to suit under 28 U.S.C. Section 1605(a)(3).”

“ ... Significantly, in the case at bar, it is clear ... that the Government owns no assets that could be attached to satisfy a judgment confirming the ... Award and, moreover, that all such assets are owned by the Russian Federation.”

“Finally, we note that an issue similar to the one before us has arisen in the federal common law of bankruptcy and set off. Specifically, when monies are owed to an individual by one federal agency and that individual owes a debt to another federal agency, the two federal agencies may set off the debts owned by one of them against the claims of the other. In other words, the agencies are treated as constituent parts of a unitary entity. ...” [Slip op. 31-37]

Neither does international law support the defendant’s distinction between a sovereign and its governmental organs. It attributes the act of a State organ to the State regardless of the State organ’s functions.

For example, in the arbitration over Libya’s nationalization of its oil industry, the arbitrator overruled Libya’s objection that the contracts at issue had been entered into by the Libyan Minister of Petroleum and that Libya (as a State) was not a party to it. See Texaco Overseas Petroleum Co. v. Government of the Libyan Arab Republic, 53 I.L.R. 393 (1975).

Citation: Compagnie Noga D’Importation et D’Exportation S.A. v. The Russian Federation, Nos 02-9237(L) & 02-9272(CON), 2004 WL 504604 (2d Cir. March 16).

JURISDICTION (PERSONAL)

Eighth Circuit reverses jurisdictional dismissal for lack of minimum contacts between French airplane manufacturer’s contacts and Arkansas since its substantial dealings through its local affiliate made personal jurisdiction proper

Beverly Anderson, a flight attendant (plaintiff), suffered injuries during a bumpy descent in a Dassault Falcon business jet owned by Amway Corporation. She sued the jet’s manufacturer, Dassault Aviation of France (defendant) in an Arkansas federal court. Dassault Aviation’s contacts with Arkansas mainly result from its business relationship with Dassault Falcon Jet (DFJ). DFJ operates a large production site in Arkansas where it completes defendant’s jets to individual buyers’ specifications.

On defendant’s motion to dismiss for lack of personal jurisdiction over it, the district court ruled that defendant itself was neither present nor doing business in Arkansas. Moreover, DFJ’s activities there bore on the jurisdictional inquiry as to the French defendant, only if plaintiff could show that she was entitled to “pierce the corporate veil” and show that defendant’s wholly owned subsidiary was actually its “alter ego.”

The district court in Arkansas granted Dassault Aviation’s motion to dismiss and plaintiff noted her appeal. The U.S. Court of Appeals for the Eighth Circuit reverses.

Arkansas’ long-arm statute gives its courts personal jurisdiction over persons and claims to the maximum extent allowed by the due process clause of the Fourteenth Amendment. Thus, the only issue here is whether the due process clause permits an Arkansas court’s assertion of personal jurisdiction over Dassault Aviation.

As the precedents require, the appellate court addresses the extent of defendant’s contacts with Arkansas, as well as the quality and nature of such contacts. “We think that the district court placed undue reliance on the principle of piercing the corporate veil. Determining the propriety of jurisdiction at a particular place always involves applying principles of fairness and reasonableness to a distinct set of facts, and the determination is not readily amenable to rigid rules that can be applied across the entire spectrum of cases. ...”

“We agree with Ms. Anderson that neither physical presence in Arkansas nor piercing Dassault Falcon Jet’s corporate veil is required to establish the minimum contacts necessary for the exercise of personal jurisdiction in Arkansas. Dassault Aviation’s establishment of a distribution system in Arkansas, and marketing its products there, are matters that we may appropriately consider in determining whether the assertion of personal jurisdiction in Arkansas comports with due process.”[Slip op. 5-8]

Dassault Aviation has in fact sufficient contacts with Arkansas based on its affiliation with DFJ. “Because the two companies have a closely intertwined business relationship, Dassault Aviation’s nexus with Arkansas and the Little Rock completion center goes well beyond mere ownership of Dassault Falcon Jet stock. This is not a situation in which Dassault Aviation simply placed the jet at issue ‘into the stream of commerce’ which fortuitously swept it into Arkansas. Dassault Aviation bought what is now Dassault Falcon Jet in 1994, and since then has consistently acted to consolidate the image and operations of the two companies.”

“We have stated that ‘a foreign manufacturer that successfully employs one or two distributors to cover the United States intends to reap the benefit of sales in every state where those distributors market.’ ... Dassault Falcon Jet not only marketed and sold products in Arkansas, but it operated the Dassault Aviation Group’s largest production facility there.”

“We conclude that Dassault Aviation ‘purposefully directed its products to the United States,’ and specifically to Arkansas, where most Falcon jets are completed, ‘through the distribution system it set up in this country.’ ...”

“Dassault Aviation clearly intended to reap the benefits of [DFJ’s] substantial presence in Arkansas, as is made clear in the statements from its annual report and the website that it co-operates. Given the central importance of the Little Rock completion center to the success of Dassault Aviation’s worldwide sales of business jets, and Arkansas’ specific and identifiable role in Dassault Aviation’s unified marketing endeavors with [DFJ], it would not violate traditional notions of fair play and substantial justice for an Arkansas court to assert personal jurisdiction in this action.” [Slip op. 11-14]

Citation: Anderson v. Dassault Aviation, No. 03-2422, 2004 WL 393801 (8th Cir. March 4).

THE REVENUE RULE

In multiple RICO actions for damages and injunctive relief filed by European Union and Colombian departments against major tobacco producers for conspiring to smuggle cigarettes into plaintiffs’ territories, Second Circuit holds that common-law “revenue rule” bars lawsuits that directly or indirectly aid plaintiffs to enforce their tax laws

In these multiple, but closely related, civil actions in New York federal court, the plaintiffs are the (1) European Community (EC) representing itself along with most of its Member States and (2) twenty-five constituent Departments of the State of Colombia. The defendants make tobacco products and include Philip Morris, RJR Nabisco, Brown & Williamson Tobacco Corp., British American Tobacco, Japan Tobacco, Inc., and each company’s affiliated entities.

Plaintiffs claimed that the defendants have been violating the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Section 1961 et seq., by contriving several ongoing stratagems to smuggle contraband cigarettes into the plaintiffs’ territories. To achieve these goals, the defendants allegedly conspired to commit mail and wire fraud, money laundering, misrepresentations to customs authorities, and various common law torts. These unlawful activities have caused plaintiffs economic harm mainly in the form of lost tax revenues and increased law enforcement costs.

According to the complaints, defendants directed and facilitated cigarette bootlegging in several ways. They found out more effective smuggling routes, they got in touch with savvy runners and they provided them with cigarettes in packages that allowed the defendants to oversee and control the smuggling process. Defendants would then siphon off the profits as bonuses and kickbacks for their executives. Advancing the smuggling trade also made it possible for the defendants to argue to the public that, by imposing high import taxes, the EC’s Member States were nurturing a black market in cigarettes.

The complaint also averred that the defendants were, or should have been, aware that the smugglers got the money to buy the cigarettes from the sale of illegal drugs in the U.S. After going through a laundering process, these funds would end up in defendants’ coffers.

The Colombian plaintiffs made many of the same allegations. In addition, they alleged that defendants were keeping a tight control over the smugglers, were secreting the proceeds in Swiss banks and, at the same time, were lobbying for the reduction of Colombian import taxes.

The plaintiffs stated that the defendants took part in a RICO conspiracy [see 18 U.S.C. Section 1961(4)]. For example, they carried out several predicate acts such as racketeering, along with wire and mail fraud. There was also money laundering arising from both the defendants’ acceptance of the proceeds from narcotics trafficking as payment for cigarettes and their attempts to conceal their bootlegging profits, and violations of the Travel Act, 18 U.S.C. Sections 1952, 1961 (1)(B).

All of the complaints sought similar damages coupled with injunctive relief. The plaintiffs asked for treble damages pursuant to RICO. They claimed that, as a result of the smuggling, “the proper duties and taxes have not been paid on the aforesaid cigarettes,” including customs duties, value‑added taxes, and excise taxes amounting to hundreds of millions of dollars per year. They also claim that they have had “to expend substantial funds to fight against cigarette smuggling.”

In addition, the plaintiffs requested several forms of injunctive relief. For example, they wanted the court to order the defendants to bring their smuggling activities to an end, and to disgorge their tax-free profits. They also asked the court to set up protocols and compliance programs that would enable the plaintiff nations’ law enforcement authorities to make sure that defendants will comply in the future with plaintiffs’ customs and revenue laws.

Plaintiffs began filing these lawsuits in 2000. The following year, the Second Circuit decided Attorney General of Canada v. R. J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103 (2d Cir. 2001) (“Canada” ), cert. denied, 537 U.S. 1000 (2002). In Canada, the court held that the common law “revenue rule” bars claims by foreign sovereigns that rested on alleged violations of their tax laws.

On March 21, 2002, the district court, applying the rule, dismissed the complaints in all three actions. This appeal resulted. The U.S. Court of Appeals for the Second Circuit affirms in part on the revenue-rule issue while vacating and remanding on other issues.

On the merits, plaintiffs admitted that, under Canada, suits to enforce foreign tax laws do implicate the revenue rule. They mainly argued, however, that the legislative history of the Patriot Act, passed in October 2001, shows that congress intended to enable foreign sovereigns to use RICO to sue tobacco companies in American courts to recoup evaded tax revenues.

The Court of Appeals first distinguishes two types of situations. “A suit directly seeks to enforce foreign tax laws when a judgment in favor of the plaintiffs would require the defendants to reimburse them for lost tax revenues. In contrast, indirect enforcement occurs when a foreign state seeks a remedy that would give extraterritorial effect to its tax laws; for instance, a suit seeking damages based on law enforcement costs is an attempt to shift the cost of enforcing the tax laws onto the defendants, and would therefore require the court indirectly to enforce the tax laws.” [130]

A well-established general principle of international choice-of-law is that the courts of one sovereign will not enforce any type of law enacted by another sovereign if the foreign law seriously conflicts with an important public policy of the forum. “Tax laws strongly implicate this principle ... . Accordingly, claims by foreign sovereigns invoking their tax statutes may embroil the courts in an evaluation of the foreign nation’s [political and] social policies, an inquiry that can be embarrassing to that nation and damaging to the forum state.”

“Moreover, because the conduct of foreign relations is primarily the realm of the legislative and executive branches, judicial examination and enforcement of foreign tax laws at the behest of foreign nations may conflict with the other branches’ policy choices with respect to cooperation in tax enforcement, and create the risk that the judiciary will be ‘drawn into issues and disputes of foreign relations policy that are assigned to ‑‑ and better handled by ‑‑ the political branches of government.’” [131]

“In Canada, we undertook an extensive examination of the tax treaties in effect between the United States and other nations, and concluded that their grant of only limited reciprocal tax enforcement assistance reflected the political branches’ continuing recognition of the revenue rule. Thus, the modern revenue rule is rooted in both our perception that the branches of government responsible for conducting foreign affairs wish to uphold the rule, and our reluctance to intrude upon the greater expertise of the political branches by abrogating the rule without evidence that doing so would be consonant with the policies of the other branches.”

On the other hand, in the Court’s view, the revenue rule is not absolute. Even if the substance of a party’s claim does invoke foreign tax laws, the absence of those sovereignty and extraterritoriality concerns that permeate the revenue rule will probably not activate the rule.

“Thus, for example, where the executive branch has ‘expressed its consent to adjudication by the courts,’ the institutional and separation of powers concerns behind the rule are mitigated, because the branch with primary responsibility for conducting foreign relations has indicated that extraterritorial enforcement of the foreign tax laws at issue is in the interests of the United States.”

“In Canada, we suggested that executive consent may be found where the United States itself institutes a prosecution designed to punish those who have defrauded foreign governments of tax revenues, or where the treaties between the United States and the sovereigns at issue provide for broad, reciprocal tax enforcement assistance. [Cites] The executive also might indicate its consent to the suit by other means, such as submitting a statement from the State Department or filing an amicus brief.” [132]

“Absent such [an] indication, ... a claim that triggers the revenue rule is barred unless the plaintiffs establish that superior law, such as the federal statute that provides the applicable right of action, abrogates the rule in the context in which the plaintiffs seek to enforce their tax laws. Because the revenue rule is a longstanding common law rule, and its abrogation in any one situation necessarily impacts foreign relations, a statute or treaty ‘must speak directly to the matter’ in order to abrogate it.”

“We found nothing in RICO’s text that explicitly authorizes foreign nations to use RICO’s civil remedy provisions to enforce their tax laws extraterritorially, and its legislative history did not contain any manifestation of congressional intent to grant such authorization.” [Id.]

“Because Canada holds that the operation of the rule does not depend on the type of conduct alleged, but rather on [1] the substance of the relief sought, [2] the foreign policy concerns raised by the suit, and [3] the identity of the plaintiffs, a mere showing that the plaintiffs’ suit will further the policies embodied in the statute at issue is not sufficient to abrogate the rule. Rather, the statute must provide clear evidence, textual or otherwise, that Congress believes that the revenue rule should not apply.” [133]

Taken as a whole, the Court concludes, the legislative history fails to furnish clear evidence that Congress wished to abrogate the revenue rule when it enacted the Patriot Act. “We cannot find that a few remarks in the legislative history of the recent amendments to RICO, and the deletion of a provision that would have codified Canada, have altered the statute itself, or provided a reliable indicator of congressional intent in the absence of an actual enactment.”

“Were we to treat Congress’s decision not to enact the proposed rule of construction as an explicit abrogation of the revenue rule, we would be privileging the legislative history of the Patriot Act over its enacted language. To do so would turn on its head the rule that any analysis of a statute and Congress’s intent in enacting it must primarily be founded in the text of the statute itself.” [136]

Plaintiffs also give weight to the fact that the United States has not intervened in opposition to this suit. Plaintiffs reasoned that this ‘neutrality’ proves that the executive branch has decided that this lawsuit is not hostile to its foreign policy interests.

“We, however, require more than executive inaction in order to find consent to the suit. Rather, the executive branch must affirmatively ‘express its consent’ or approval, for instance, by bringing suit itself.”

“Because the political branches have chosen to negotiate treaties providing for only limited reciprocal tax enforcement assistance to other nations, absent affirmative consent to a suit by the executive branch, we must assume that a lawsuit seeking general extraterritorial enforcement of foreign tax laws exceeds the bounds of the assistance that the executive branch has decided to give. Moreover, were executive inaction sufficient to render the revenue rule inoperative in a given case, the United States would be required to intervene in every case that might implicate the revenue rule. Such a proposition is clearly untenable.” [137]

Plaintiffs also attempted to elude the revenue rule by focusing on their requests for injunctive relief. They urged that “[i]njunctive relief to enjoin or abate conduct on U.S. soil does not involve foreign tax law in any way.” The Circuit Court is not persuaded.

“... [T]he requested injunctions would have the effect of extra-territorially enforcing plaintiffs’ tax laws just as directly as would their claims for damages, as plaintiffs would have the court order the defendants to cease their smuggling operations, disgorge their profits, and put into place measures that would allow foreign customs officials to ensure that they are complying with those nations’ revenue laws.” [138]

Finally, the Court rejects the plaintiffs’ contention that the revenue rule is a purely discretionary doctrine. When triggered, it allows the district court to ponder the foreign relations implications and domestic law enforcement interests at stake before deciding whether to “abstain” from hearing the claims.

As the Court sees it, however, Canada rules out this argument. The case clearly lays down that, once the substance of a plaintiff’s claims brings into play those sovereignty and separation of powers concerns that underlie the revenue rule, a court may not entertain those claims absent its proper abrogation.

Citation: The European Community v. R.J.R. Nabisco, Inc., 355 F.3d 123 (2d Cir. 2004).

SOVEREIGN IMMUNITY

In sexual harassment action by Japanese civil servant against Governor and Municipal Government of Tokyo, Second Circuit rules that defendants are immune from suit even though their U.S. activities promote commercial interests of Japanese companies and their products

Yuka Kato works for the Tokyo Municipal Government (TMG) in Japan. After her transfer to TMG’s New York office in 1998 as a standard rotation of employment, the TMG transferred her back to Japan in 2000. She returned later on to New York on medical leave. While there, she sued TMG and Shintaro Ishihara, the Governor of Tokyo (defendants) in federal court.

The complaint alleged sexual harassment and retaliation by defendants during her employment at TMG that breached Title VII of the Civil Rights Act of 1964 [42 U.S.C. Section 2000e], as well as New York State and local human rights laws. The district court later granted TMG’s motion to dismiss plaintiff’s complaint based on sovereign immunity under the Foreign Sovereign Immunities Act of 1976 (FSIA) [28 U.S.C. Section 1602ff]. Plaintiff then filed a timely appeal. The U.S. Court of Appeals for the Second Circuit, however, affirms.

The FSIA codifies the “restrictive theory” of sovereign immunity under which foreign sovereigns and their agencies and instrumentalities enjoy immunity subject to a few, enumerated exceptions. For example, sovereigns have no immunity from suits “based upon ... commercial activity carried on in the United States ...” 28 U.S.C. Section 1605(a)(2).

There is no dispute here that TMG and the Governor constitute a “foreign state” for purposes of the FSIA. The question then boils down to whether TMG’s activities in New York were of a “commercial” nature. The Act, however, leaves it to the courts to apply the “commercial activity” exception to the facts of each case.

Plaintiff’s job focused on promotional activities for TMG, such as working at TMG’s booths at trade shows and doing marketing reports. She thus argues that her employment with TMG was “commercial” rather than “governmental” in nature. The Court disagrees.

“[T]he fact that a government instrumentality, TMG, is engaged in the promotion of commerce does not mean that the instrumentality is thereby engaged in commerce. The promotion abroad of the commerce of domestic firms is a basic – even quintessential – government function.”

“For example, the United States Department of Commerce is charged by statute with the ‘duty ... to foster, promote, and develop the foreign and domestic commerce ... of the United States.’ Indeed, many agencies of the United States have some role in the direct or indirect promotion of American commerce overseas. ... Agencies of foreign governments do not undertake ‘commercial activit[ies]’ merely by engaging in these basic and routine trade promotional activities.”

“We therefore hold that TMG was not involved in a ‘commercial activity’ under the FSIA when it provided general business development assistance, including product promotion, to Japanese businesses seeking to engage in commerce in the United States. Accordingly, we reject plaintiff’s argument that her involvement in such activities on TMG’s behalf rendered her employment ‘commercial’ under the FSIA.” [Slip op. 16-18]

Citation: Kato v. Ishihara, 360 F.3d 106 (2d Cir. 2004).

Federal court overturns large patent infringement award to U.K. company. In 1997, a British company owned by Frederic Goldstein and trading as “Group One,” filed a patent infringement action in Kansas federal court against Hallmark Cards, Inc., a privately-held U.S. company. It dealt with plaintiffs’ patents on a device that creates curled, cascading ribbons to decorate gift packages. One of Hallmark’s defenses was that Group One’s claimed invention failed to meet two general standards ‑ “novelty” and “nonobviousness.” After a trial, the jury came in with an $8.9 million verdict in September 2003, declaring that Hallmark had willfully infringed Group One’s patents. Five months later, however, the trial judge set aside the verdict as a matter of law on the grounds that the Group One patents were invalid. According to the judge, the two patents granted to Goldstein were “obvious” as defined by patent law. He cited a number of previously issued patents which the U.S. Patent and Trademark Office should have examined more carefully. An appeal by Group One is expected. Citation: The Associated Press (online), Kansas City, Missouri; filed Thursday, February 26, 2004, 17:43:50 GMT.

EU anti-trust enforcers crack down on Microsoft. On March 15, 2004, the EC Commission’s competition watchdogs obtained unanimous approval from Member State regulators of its draft ruling against Microsoft Corp. It had concluded that the giant company has abused its Windows monopoly in the European market. Specifically, the Commission wants to see to it that Microsoft makes available to computer firms an edition of Windows that leaves out its own Media Player. This would allow competitors like RealNetworks Inc. to secure a better chance at getting onto the desktops of European consumers. The Commission would also require Microsoft to free up more basic Windows code, thus helping to achieve “interoperability” with rival networking software made by Sun Microsystems and others. Microsoft’s legal team, however, is still striving to avoid a far-reaching order that might lead to a fine of as much as $3 billion. According to a New York Times report, the fine imposed on March 23 may be about $613 million. Citation: The Associated Press (online), Brussels, Belgium; filed Monday, March 15, 2004 at 7:38 a.m. ET; The New York Times, Tuesday, March 22, 2004, Section C, page 1.

U.S. will block visas to willing actors in Cuban “show trials.” On March 18, one year ago, the Cuban government came down hard on independent journalists, economists, trade unionists and human rights advocates by mass arrests and prosecutions. Hundreds of people willingly took part in their show trials, e.g., as witnesses, judges or prosecutors. For the “crime” of speaking honestly about the Castro regime, the Cuban courts sentenced 75 dissidents to terms averaging about 20 years in prison. A U.S. State Department official declares that: “As part of our response to regime repression, we are holding answerable those who abetted the regime in this miscarriage of justice. If visa applications are received from persons who participated in the trials, we will henceforth seek to deny them using legal means appropriate to the case. ... By taking this step today, we are also making clear to all Cubans that there is, and will be, a cost associated with participating in, or facilitating, repressive acts.” Citation: U.S. Department of State, Press Statement by Adam Ereli, Deputy Spokesman, Washington, D. C., Thursday, March 18, 2004.

White House extends Zimbabwe sanctions. On March 3, 2004, the U.S. President extended the imposition of economic sanctions directed at the President of Zimbabwe, Robert Mugabe, and dozens of his top officials into its second year. The order freezes the U.S. assets of these individuals and precludes Americans from taking part in any transactions with them. In the President’s view, Mugabe et al. are trying to undermine democratic institutions in their country and to use violence to crush any opposition. Western countries have been strongly criticizing Mugabe for allegedly rigging an election in 2002, for oppressing his political enemies and for seizing white-owned farms to be given to landless blacks. Economic sanctions hope to convince the Mugabe government to end political persecutions and to dialogue with the opposition to address the serious problems that beset Zimbabwe. Citation: Reuters Ltd. (online), Washington, D. C., Thursday, March 4, 2002 at 4:06 a.m. ET.

U.S. lifts curbs on travel to Libya. On February 26, 2004, the White House announced that the U.S. has canceled its twenty-three-year-old curbs on Americans’ travel to Libya, a state long stamped as a sponsor of terrorism. An important factor in this change of policy is that Moammar Gadhafi’s government has admitted that it was responsible for the bombing of Pan Am flight 103 over Scotland in 1988 which killed 270 persons including 181 Americans. On its official web site, Libya declared that it had assisted in the trials of two bombing suspects “and accepts responsibility for the actions of its officials.” Citation: Associated Press (online), Washington, D. C., Thursday, February 26, 2004, at 14:18:46 GMT (byline of Terence Hunt, AP White House Correspondent).

Importation of Honduran archeological materials restricted by U.S. The U.S. Department of the Treasury and the Department of Homeland Security have issued a final rule to protect pre-Colombian (approximately 1200 B.C. to 1500 A.D.) archeological materials from Honduras (19 C.F.R. Part 12). It amends the Customs and Border Protection Regulations and rests on a recent agreement between the U.S. and Honduras entered into under the authority of the Convention on Cultural Property Implementation Act (19 U.S.C. Section 2601). The Act in turn comports with the UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property [823 U.N.T.S. 231 (1972)][Editors’ Note: As of January 1, 2003, there were 95 parties to this Convention.]. The rule specifically lists items such as ceremonial ceramic vessels, bowls, and jars with particular designs as “controlled items.” Citation: 69 Federal Register 12267 (March 16, 2004); Media Note of U.S. Department of State (March 16, 2004) [See also U.S.-Honduran Agreement to Protect Pre-Colombian Archeological Material]. For further information, see “exchanges.state.gov/education/culprop.”

EU Parliament approves anti-piracy Directive. On March 9, 2004, 63% of the 520 members of the European Parliament present approved a compromise piracy Directive. It aims to standardize and toughen national laws against the unauthorized copying of copyrighted or patented products on a commercial scale. The Directive covers a wide range of items, e.g., soccer shirts, video games, music downloaded from the Internet, illegally copied DVDs or CDS along with beneficent medicinal products such as Viagra. Though the Parliament had dropped criminal penalties from an earlier draft, Member State courts will still be able to impose major civil remedies against adjudged counterfeiters such as seizure of property. Between 1998 and 2001, piracy may have leached the EU’s lawful economy of as much as US$9.9 billion each year. Some Member States also report having lost billions of dollars in sales taxes and thousands of jobs. According to the EU Consumer Affairs Commissioner, organized crime and possibly terrorist groups are seemingly the main exploiters of pirated products. The Member States will have two years within which to transpose the Directive into binding national law. Citation: The Associated Press (online), Brussels, Tuesday, March 9, 2004 at 15:11:41 GMT (byline of Constant Brand, AP Writer).

Human rights provisions added to Chinese Constitution. On March 14, 2004, China’s 2,900-member Parliament approved 13 amendments to the Constitution. Drafted by the governing Communist party last fall, they address private property and human rights in general terms but would not limit the government’s power to crack down on protests. For example, one change says that “the state respects and preserves human rights.” Another proclaims that “citizens’ lawful private property is inviolable,” and that the State will compensate property owners when it confiscates their property. According to Chinese legal experts, the courts seldom test the validity of statutes and government decisions for compliance with the Constitution. Professor He Weifang of the Beijing University law school explains that, “[t]he new constitutional provisions are very vague, and won’t mean much unless laws are revised to conform with them; they’re more important symbolically rather than legally.” Rather than laying down an effective legal right, he noted, the private property amendment mainly signals the increasing influence of private business in China. Citation: The New York Times (online), Beijing, Monday, March 15, 2004 (byline of Chris Buckley.)