GOVERNMENT TO APPEAL CASE AGAINST TOBACCO SMUGGLING

OTTAWA July 28, 2000 -- The Government of Canada today filed a notice of appeal in the United States Federal Court in its anti-smuggling lawsuit against RJR-Macdonald Inc., R.J. Reynolds Tobacco Holdings Inc., several related companies and the Canadian Tobacco Manufacturers Council (CTMC).

Canada will not tolerate smuggling schemes that undermine this country's tobacco control policies and programs. The Government of Canada is determined to pursue this case to a successful conclusion. This appeal is a necessary step in that process.

On June 30, 2000, the United States District Court dismissed Canada's case on points of law, citing the Revenue Rule as the reason for dismissal. The District Court's decision did not address the factual merits of the case. The Court dismissed the case based on a rule of law that has been called into question by several U.S. courts and which the Government of Canada believes does not apply in any event.

The Government is not seeking to enforce Canadian tax laws through the U.S. Courts. The Government's allegation is that the defendants broke U.S. racketeering law by their participation in the tobacco smuggling scheme.

In its decision dealing with the Revenue Rule, an 18^th century common law rule that permits a court to decline to enforce another country's tax laws, the District Court said that the origin of the Rule and whether it should continue to apply are subject to "serious question". The decision stated, "Were the Court writing on a clean slate … it would be inclined to find the Revenue Rule to be outdated…." However, the District Court felt bound by precedent set in higher courts. Canada's appeal provides the opportunity for the higher court to declare that the Revenue Rule does not apply to this case.

The Government initiated this action in December 1999 by alleging that the tobacco companies and CTMC violated United States racketeering laws by conspiring to defraud Canada through an international smuggling scheme. Massive cross-border smuggling frustrated the Government's strategy to reduce tobacco consumption, especially among young people, and in 1994 forced the Government to significantly reduce excise taxes.

The Government's lawsuit alleges that the defendants and their co-conspirators made hundreds of millions of dollars in profits from smuggled tobacco products. The Government also alleges that the Canadian Tobacco Manufacturers Council was used to throw the Government of Canada off the smuggling trail by blaming organized crime. At the same time, the Canadian government suffered over one billion dollars in damages, including lost revenues and enforcement costs incurred to combat this smuggling operation.

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Ref.:

Gordon Bourgard
Counsel
Department of Justice
(613) 957-4207