$1 billion tobacco lawsuit thrown out

By MARK MacKINNON

July 6, 2000 Web posted at: 11:09 AM EDT (1509 GMT)

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OTTAWA, Ontario (Toronto Globe & Mail Online) -- The federal government's landmark $1 billion (U.S.) smuggling lawsuit against one of the country's tobacco giants has been thrown out as a breach of U.S. law.

The lawsuit, one of the largest ever launched by the federal government, charged that Toronto-based RJR-Macdonald ran a smuggling ring that brought massive amounts of cigarettes into Canada in the early 1990s, a charge to which an affiliate of the company pleaded guilty in 1998 and was fined $15 million.

However, in a decision released yesterday, a New York district court ruled that Canada's attempt to recoup the tax money it says it lost due to the smuggling was fundamentally flawed.

District Judge Thomas McAvoy found the lawsuit contravened a U.S. law that says U.S. courts are not responsible for enforcing foreign tax matters.

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The federal government has already spent more than $4 million on legal fees on the case through the first five months of the year, a record for legal expenditures in a single year on one case by Ottawa. This decision, which the Justice Department says it will review before deciding what to do next, means the bill will continue to mount.

At the time the suit was launched, Justice Minister Anne McLellan said the action had to take place in the United States because many of the defendants, witnesses and documents are there.

Also, under the U.S. racketeering law, which Canada invoked in its case, a U.S. court would have been required to award triple the amount of proved damages, raising the possibility of a $3 billion award, far higher than would be possible in Canadian courts.

Canadian courts may now be the only place where the government can pursue the lawsuit.

In his 51-page ruling, Judge McAvoy also found that Canada failed to explain adequately what injury the country, as a commercial entity, suffered as a result of increased tobacco consumption. He ruled that once foreign tax matters were excluded from consideration, the Canadian government was a third party to any harm done.

"Any harm sustained by Canada as a result of increased and/or continued tobacco use is entirely derivative of the harm suffered by its citizens as a result of using tobacco products," he wrote.

Despite Judge McAvoy's rejection of the case, Justice Department lawyer Gordon Bourgard said the government would look for ways to resurrect the suit.

"It's a very complicated decision, and we need to analyze the judge's ruling before we decide what direction we can take," he said.

"The court did not address the factual merits of the government's case. Rather, it dismissed the lawsuit based on a rule of law that has been called into question by several courts," he said.

The ruling was made public after regular business hours last night, and no one from RJR Macdonald could be reached for comment.

The civil lawsuit also named the Canadian Tobacco Manufacturers Council, accusing the tobacco maker of breaking U.S. anti-racketeering laws, and sought compensation for the lost tax revenue.

"The case is nonsense," Robert Parker, president of the Tobacco Manufacturers Council, told the CBC yesterday. "It's a political folly and has been from the outset. It's part of the government's campaign to try to demonize the tobacco manufacturers, and it has failed."

It's the second legal setback for the Canadian government in recent months as it attempts to follow the lead of several U.S. states by suing big tobacco companies. In February, a lawsuit launched by British Columbia against Canada's three main tobacco manufacturers (RJR Macdonald, Imperial Tobacco and Rothmans, Benson and Hedges) in an attempt to recoup health-care costs was declared unconstitutional. Ottawa has not sued the tobacco companies for health-care costs.

British Columbia has since rewritten an offending law and relaunched its suit, and several other provinces are considering similar action.

Rob Cunningham, senior policy analyst for the Canadian Cancer Society, urged Ottawa to find a way to pursue the lawsuit.

"It's bad news, but maybe it's correctable. Maybe they can appeal," he said.

Despite the setback, Mr. Bourgard defended the high-profile U.S. law firm Ottawa hired to argue the case. He said the judge's decision was somewhat expected, and that Chicago-based Bartlit Beck was already examining the decision to analyze what can be done next.

"This lawsuit was filed only after a substantial investigation persuaded the Canadian government it had a strong and meritorious case," Mr. Bourgard said.

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