United States v. Philip Morris USA

• Court: District Court, District of Columbia
• Decided: March 28, 2011
• Docket: Civil Action No. 1999-2496
• Status: Published

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA, : : Plaintiff, : : Civil Action No. v. : 99-2496 (GK) : PHILIP MORRIS USA, Inc., : et al. : : Defendants. :

MEMORANDUM OPINION

This civil action brought by the United States under the

Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18

U.S.C. §§ 1961-1968, is now before the Court on Plaintiff’s Motion

to Compel Defendant British American Tobacco (Investments)

Limited’s (“BATCo’s”) Compliance [Dkt. No. 5847] and Defendant

BATCo’s Motion for Reconsideration [Dkt. No. 5849]. Upon

consideration of the respective Motions, Oppositions, Replies, and

the entire record herein, and for the reasons stated below,

Plaintiff’s Motion to Compel is granted in part and denied in part

and Defendant BATCo’s Motion for Reconsideration is granted in part

and denied in part.

I. BACKGROUND

On August 17, 2006, this Court issued a lengthy opinion

finding that all Defendants, including BATCo, “(1) have conspired

together to violate the substantive provisions of RICO, pursuant to 18 U.S.C. § 1962(d), and (2) have in fact violated those provisions

of the statute, pursuant to 18 U.S.C. § 1962(c).” U.S. v. Philip

Morris USA, Inc., et al., 449 F. Supp. 2d 1, 26 (D.D.C. 2006). In

particular, the Court held that Defendants “knowingly and

intentionally engaged in a scheme to defraud smokers and potential

smokers, for purposes of financial gain, by making false and

fraudulent statements, representations, and promises.” Id. at 852.1

On May 22, 2009, the Court of Appeals for the District of Columbia

Circuit affirmed this Court’s judgment of liability and affirmed

major provisions in its remedial order.2 U.S. v. Philip Morris USA,

Inc., et al., 566 F.3d 1095, 1150 (D.C. Cir. 2009), cert. denied,

130 S. Ct. 3501 (2010).

Unlike the other Defendants, BATCo is a corporation organized

under the laws of England and Wales with its principal place of

business in England. Although BATCo’s scientists and officials did

1 The extensive factual findings of the Court may be found at Philip Morris, 449 F. Supp. 2d at 34-851. 2 The Court of Appeals remanded the case with directions to (1) evaluate the extent to which Brown & Williams Holdings is reasonably likely to commit future violations; (2) determine which subsidiaries of the Defendants should be included in the remedial order; (3) reformulate the prohibition on the use of health messages or descriptors to exempt foreign activities that have no substantial, direct, and foreseeable domestic effects; and (4) consider the rights of innocent third parties and clarify accordingly the remedial order’s provisions regarding point-of-sale displays. Philip Morris, 566 F.3d at 1150. The Court of Appeals also ordered this Court to dismiss CTI and TI from the suit, as those organizations had dissolved, id., and that has been done. The Court has already addressed the first two issues, in Orders #7 [Dkt. No. 5846] and #13 [Dkt. No. 5877].

2 attend certain meetings with the other Defendants in the United

States, “many of BATCo’s activities and statements took place

outside of the United States.” Philip Morris, 449 F. Supp. 2d at

43, 51-52, 82, 125, 228, 873. Accordingly, this Court held BATCo

liable under RICO because “BATCo’s activities and statements

furthered the Enterprise’s overall scheme to defraud, which had a

tremendous impact on the United States.” Id. at 873.

On December 28, 2010, the United States filed a Motion to

Compel BATCo’s Compliance (“U.S. Mot.”) with the Court’s Final

Order #1015, dated August 17, 2006. On January 21, 2011, BATCo

opposed the United States’ Motion and moved for reconsideration of

the Court’s Final Order #1015 (“BATCo Mot.”). BATCo argues that the

Supreme Court’s intervening decision in Morrison v. National

Australia Bank Ltd., 130 S. Ct. 2869, 177 L.Ed.2d 535 (2010),

rejected the “effects” test for extraterritoriality, thereby

invalidating the basis for BATCo’s liability under RICO. BATCo Mot.

1. On February 7, 2011, the United States filed its reply and

opposition [Dkt. No. 5861]. On February 21, 2011, BATCo filed its

reply [Dkt. No. 5868].

II. STANDARD OF REVIEW

The central issue presented by these two motions is whether

BATCo’s Motion for Reconsideration should be granted due to an

intervening change of controlling law. The parties agree that

3 BATCo’s Motion may be considered under Federal Rule of Civil

Procedure 60(b)(5). U.S. Opp’n 1 n. 1, 2; BATCo Mot. 9 n. 5.

Rule 60(b)(5) provides, in relevant part, that a district

court may grant relief from a final order if “applying it

prospectively is no longer equitable.” Fed. R. Civ. P. 60(b)(5)

(2011). The Supreme Court has held that “it is appropriate to grant

a Rule 60(b)(5) motion when the party seeking relief from an

injunction or consent decree can show ‘a significant change either

in factual conditions or in law.’” Agostini v. Felton, 521 U.S.

203, 215, 117 S. Ct. 1997, 138 L.Ed.2d 391 (1997) (quoting Rufo v.

Inmates of Suffolk County Jail, 502 U.S. 367, 384, 112 S. Ct. 748,

116 L.Ed.2d 867 (1992)). The Court went on to explain that “[a]

court may recognize subsequent changes in either statutory or

decisional law.” Agostini, 531 U.S. at 215 (citing Railway

Employees v. Wright, 364 U.S. 642, 652-653, 81 S.Ct. 368, 5 L.Ed.2d

349 (1961) (consent decree should be vacated under Rule 60(b) in

light of amendments to the Railway Labor Act); Rufo, 502 U.S. at

393 (vacating denial of Rule 60(b)(5) motion and remanding so

District Court could consider whether consent decree should be

modified in light of Bell v. Wolfish, 441 U.S. 520, 99 S.Ct. 1861,

60 L.Ed.2d 447 (1979)); Pasadena City Bd. of Ed. v. Spangler, 427

U.S. 424, 437-438, 96 S.Ct. 2697, 49 L.Ed.2d 599 (1976) (injunction

should have been vacated in light of Swann v. Charlotte-Mecklenburg

Bd. of Ed., 402 U.S. 1, 91 S.Ct. 1267, 28 L.Ed.2d 554 (1971))); see

4 also Potter v. District of Columbia, 558 F.3d 542, 554 (D.C. Cir.

2009).3

In its Motion, BATCo erroneously relies on Rule 54(b),

although it suggests that Rule 60(b)(5) could serve as an

alternative procedural vehicle. Rule 54(b) states, in relevant

part, that “any order or other decision, however designated, that

adjudicates fewer than all the claims or the rights and liabilities

of fewer than all the parties does not end the action as to any of

the claims or parties and may be revised at any time before the

entry of a judgment adjudicating all the claims and all the

parties’ rights and liabilities.” Fed. R. Civ. P. 54(b). In order

to meet the requirements of Rule 54(b), BATCo contends that “this

Court’s July 29, 2010 [O]rder entering the D.C. Circuit’s mandate

as the judgment of this Court is not a final judgment, because

3 BATCo argues that its Motion may also be considered under Rule 60(b)(6). Rule 60(b)(6) permits a district court to grant relief from a final order for “any other reason that justifies relief.” Fed. R. Civ. P. 60(b)(6). The Supreme Court has held that only exceptional or extraordinary circumstances can justify relief under Rule 60(b)(6). Ackermann v. United States, 340 U.S. 193, 199-202, 71 S. Ct. 209, 95 L.Ed. 207 (1950). Our Court of Appeals has further cautioned that the Rule “should be only sparingly used.” Twelve John Does v. District of Columbia, 841 F.2d 1133, 1140 (D.C. Cir. 1988) (quoting Good Luck Nursing Home, Inc. v. Harris, 636 F.2d 572, 577 (D.C. Cir. 1980)). Most importantly, “[i]ntervening developments in the law by themselves rarely constitute the extraordinary circumstances required for relief under Rule 60(b)(6).” Agostini, 521 U.S. at 239; see also Acree v. Republic of Iraq, No. 08-5375, 2009 WL 1953503, at *1 (D.C. Cir. Feb. 17, 2009). For these reasons, the Court concludes that Rule 60(b)(6) does not apply in this instance.

5 there has been no final resolution of all the claims and requests

for relief as to all the parties.”4 BATCo Mot. 8-9 n. 5.

BATCo is simply wrong about the scope of Rule 54(b). The

Federal Circuit has held that “Rule 54(b), which concerns the power

of the trial court before appeal, is not applicable” where the

Court of Appeals has affirmed a portion of the judgment. King

Instrument Corp. v. Otari Corp., 814 F.2d 1560, 1563 (Fed. Cir.

1987) (emphasis in original); Nat’l Australia Bank v. U.S., 74 Fed.

Cl. 435, 438 (Fed. Cl. 2006); Home Savings of America, F.S.B. v.

U.S., 69 Fed. Cl. 187, 190 (Fed. Cl. 2005); see also Jones v.

District of Columbia, 646 F. Supp. 2d 42, 46-47 (D.D.C. 2009) (res

judicata applies to claims upon which judgment is affirmed by the

Court of Appeals, even when judgment is reversed as to other

claims).

Therefore, in light of King Instrument Corp., Rule 54(b) has

no applicability to this case, since appeals have been exhausted

and the judgment of liability has been affirmed by the Court of

Appeals. See King Instrument Corp., 814 F.2d at 1563; Jones, 646 F.

Supp. 2d at 46-47.

Consequently, the Court concludes that Rule 60(b)(5), not Rule

54(b), properly governs BATCo’s Motion for Reconsideration.

4 The order BATCo refers to is not, in fact, an order of this Court. Rather, it is the Mandate of the Court of Appeals, entered by the Clerk of that court. See Mandate of USCA, July 29, 2010 [Dkt. No. 5817].

6 III. ANALYSIS

A. Intervening Change of Law Under Rule 60(b)(5)

The dispositive issue presented in both Motions is whether

RICO continues to have extraterritorial reach after the Supreme

Court’s decision in Morrison, 130 S. Ct. 2869. BATCo contends that

“Morrison changed the law concerning the use of the ‘effects’ test

to measure extraterritoriality and invalidated the legal basis for

both the D.C. Circuit’s and this Court’s rulings with respect to

BATCo’s RICO liability.” BATCo Mot. 9. The Government argues that

Morrison applied only to Section 10(b) of the Securities Exchange

Act and not to RICO, because “Morrison did not turn principally on

the presumption against extraterritoriality.” U.S. Mot. 8.

Fortunately, Morrison’s language is clear. “When a statute

gives no clear indication of an extraterritorial application, it

has none.” Morrison, 130 S. Ct. at 2878. “Rather than guess anew in

each case, we apply the presumption in all cases, preserving a

stable background against which Congress can legislate.” Id. at

2881 (emphasis added). That language demonstrates that the Supreme

Court intended the presumption against extraterritoriality to apply

to all statutes, not simply the Exchange Act. This conclusion is

further confirmed by the structure of Justice Scalia’s majority

opinion. In Section IIIA, that opinion sets out the Supreme Court’s

general rule on extraterritoriality, to be applied “in all cases,”

and then in Section IIIB specifically applies that general rule to

7 the Exchange Act. See id. at 2875-2888. The Government’s argument

ignores the plain language of Morrison and ignores its presumption

against territoriality and accompanying rejection of the “effects”

test. Therefore, the Court concludes that the ruling in Morrison

must be applied to RICO.5 Id. at 2880-81.

Two courts––the Court of Appeals for the Second Circuit and

the District Court for the Southern District of New York––have each

considered RICO’s extraterritorial reach in light of Morrison. Both

have held that the RICO statute does not contain evidence of

Congressional intent to apply extraterritorially, and therefore

does not overcome Morrison’s presumption. Norex Petroleum Ltd. v.

Access Indus., Inc., 631 F.3d 29, 32-33 (2d Cir. 2010);6 Cedeno v.

5 Indeed, it would make particularly little sense to confine Morrison proscription against the “effects” test to the Exchange Act, as RICO’s “effects” test was explicitly borrowed from the Exchange Act context. See, e.g., N. S. Fin. Corp. v. Al-Turki, 100 F.3d 1046, 1051 (2d Cir. 1996) (“Although there is little caselaw in this Circuit regarding the extraterritorial application of RICO . . . guidance is furnished by precedents concerning subject matter jurisdiction for international securities transactions and antitrust matters.”); Philip Morris, 449 F. Supp. 2d at 873 (citing Al-Turki). 6 The Second Circuit did note, “we have no occasion to address––and express no opinion on––the extraterritorial application of RICO when enforced by the government pursuant to Sections 1962, 1963 or 1964(a) and (b).” Norex, 631 F.3d at 33. The United States argues that in cases of civil and criminal enforcement by the Government there is a presumption of extraterritorial application under U.S. v. Bowman, 260 U.S. 94, 27 S. Ct. 655, 51 L.Ed. 956 (1922). See U.S. Mot. 19-27. As Defendants point out, however, Bowman only applied the relevant criminal statute to extraterritorial conduct because the statute was based on “the right of the government to defend itself against (continued...)

8 Intech Group, Inc., 733 F. Supp. 2d 471, 473-74 (S.D.N.Y. 2010).

Indeed, this Court has already ruled that “‘RICO itself is silent

as to its extraterritorial application.’” U.S. v. Philip Morris

USA, Inc., et al., 477 F. Supp. 2d 191, 197 (D.D.C. 2007) (quoting

Poulos v. Caesars World, Inc., 379 F.3d 654, 663 (9th Cir. 2004)).

The Government argues that because some of the predicate acts

which may give rise to a “racketeering activity” prohibited by RICO

are extraterritorial in nature Congress must have assumed that RICO

would have extraterritorial scope in general. U.S. Mot. 20-23. The

question under Morrison, however, is whether Congress intended RICO

to criminalize extraterritorial activity. As Judge Rakoff explained

in rejecting the same argument in Cedeno,

it is plain on the face of the statute that the statute is focused on how a pattern of racketeering affects an enterprise: it is these that the statute labels the “Prohibited activities,” 18 U.S.C. § 1962. But nowhere does the statute evidence a concern with foreign enterprises, let alone a concern sufficiently clear to overcome the presumption against extraterritoriality . . . . RICO is not a recidivist statute designed to punish

6 (...continued) obstruction, or fraud wherever perpetrated, especially if committed by its own citizens, officers, or agents.” Bowman, 260 U.S. at 98 (emphasis added). Bowman distinguished this category from crimes against individuals, which “must, of course, be committed within the territorial jurisdiction of the government.” Id.; see also U.S. v. Gatlin, 216 F.3d 207, 2011 n. 5 (2d Cir. 2000) (explaining that the “Bowman rule” does not apply to crimes against private individuals). As the Defendants’ criminal enterprise does not implicate “the right of the government to defend itself,” Bowman poses no obstacle to the proper application of Morrison here. Bowman, 260 U.S. at 98.

9 someone for committing a pattern of multiple criminal acts. Rather it prohibits the use of such a pattern to impact an enterprise . . . . Thus, the focus of RICO is on the enterprise as the recipient of, or cover for, a pattern of criminal activity.

733 F. Supp. 2d at 473-74. In short, whether or not a criminal

enterprise committed a predicate act with extraterritorial

scope––and, in any case, no such extraterritorial predicate act is

implicated here––there is no evidence that Congress intended to

criminalize foreign racketeering activities under RICO.

The Government next argues that even if RICO does not have

extraterritorial reach, BATCo’s RICO liability may be premised on

its domestic conduct. U.S. Mot. 8-19. The Government points to

communications between BATCo and United States companies and

organizations, visits made to the United States by BATCo scientists

and officials, and BATCo’s involvement with an experimental farm in

North Carolina. Id. at 15-16.

The problem with the Government’s argument is that BATCo’s

domestic conduct was not the basis for its RICO liability in this

case. At trial the Government never argued that BATCo’s domestic

activity provided an adequate basis for RICO liability.

Accordingly, this Court found,

While it is true that many of BATCo's activities and statements took place outside of the United States, they nevertheless had substantial direct effects on the United States. First, many of BATCo's statements and policies at issue in this case concerned U.S. subsidiary/affiliate Brown & Williamson and

10 potential litigation in the United States. Second, and most importantly, BATCo's activities and statements furthered the Enterprise's overall scheme to defraud, which had a tremendous impact on the United States, as demonstrated in the Findings of Fact.

Philip Morris, 449 F. Supp. 2d at 873. Moreover, the Court of

Appeals affirmed on the same rationale, namely “that BATCo’s

participation had substantial, direct, and foreseeable effects in

the United States.” Philip Morris, 566 F.3d at 1131.

Further, isolated domestic conduct does not permit RICO to

apply to what is essentially foreign activity. As the Supreme Court

stated, “it is a rare case of prohibited extraterritorial

application that lacks all contact with the territory of the United

States” and “the presumption against extraterritorial application

would be a craven watchdog indeed if it retreated to its kennel

whenever some domestic activity is involved in the case.” Morrison,

130 S. Ct. at 2884; see also Norex, 631 F.3d at 33 (“slim contacts

with the United States . . . are insufficient to support

extraterritorial application of the RICO statute”); Cedeno, 733 F.

Supp. 2d at 473 (rejecting the argument that alleging predicate

acts of money laundering involving transfers in and out of the

United States overcomes the prohibition against extraterritorial

application).

In conclusion, the Supreme Court, in crystal clear language,

rejected the “effects” test for extraterritorial application.

Morrison, 130 S. Ct. at 2881. In rejecting that test, the Supreme

11 Court invalidated the sole basis for BATCo’s liability.7 Philip

Morris, 449 F. Supp. 2d at 873; Philip Morris, 566 F.3d at 1131.

Therefore, applying the Court’s Final Order #1015 against BATCo

“prospectively is no longer equitable.” Fed. R. Civ. P. (60)(b)(5).

B. Application of Rule 60(b)(5)

Our Court of Appeals has made clear that “an order of judgment

may be modified under [the relevant] portion of Rule 60(b)(5) only

to the extent that it has ‘prospective application.’” Twelve John

Does, 841 F.2d at 1138. The “standard we apply in determining

whether an order or judgment has prospective application within the

meaning of Rule 60(b)(5) is whether it is ‘executory’ and involves

‘the supervision of changing conduct or conditions.’” Id. at 1139.

There is no question that the injunctive relief contained in

Order #1015 is “executory” and/or involves “the supervision of

changing conduct or conditions.” Id. at 1139. However, Order #1015

also requires Defendants to “pay the appropriate costs of the

prevailing party, which is the Government.” Order #1015, at ¶ 21.

Our Court of Appeals has ruled that money damages do not have

“prospective application.” Twelve John Does, 841 F.2d at 1138.

Although the requirement to pay costs does not constitute “money

damages,” neither does it involve “the supervision of changing

7 The Government has raised a number of arguments as to why Morrison does not control. Parties can be assured that the Court considered them in detail, but firmly believes that Morrison dictates the outcome in this case.

12 conduct or conditions.” Id. at 1139. There is therefore no basis in

Rule 60(b)(5) to modify ¶ 21 of Order #1015. Accordingly, BATCo is

no longer subject to the provisions of Order #1015 with the

exception of ¶ 21. BATCo must contribute to the payment of the

Government’s costs.

IV. CONCLUSION

For the reasons set forth above, Plaintiff’s Motion to Compel

is granted in part8 and denied in part and Defendant BATCo’s Motion

for Reconsideration is granted in part and denied in part.9

An Order will issue with this opinion.

/s/ March 28, 2011 Gladys Kessler United States District Judge

Copies to: counsel of record via ECF

8 The Court is referring to the requirement that BATCo contribute to payment of the Government’s costs. 9 See supra note 8.