The European Court of Justice Approves Lawsuits By The European Community Against Cigarette Companies In U.S. Courts
On September 12, 2006, the European Court of Justice (ECJ) sanctioned the decision of the European Community (EC) and member states to bring actions for damages against certain cigarette manufacturers in United States courts. The decision grew out of the companies' unsuccessful attempt to have the European Court of First Instance preclude any such lawsuits. In connection with its efforts to stem cigarette smuggling into the EC, the European Commission (the Commission) filed two unsuccessful actions in a U.S. federal court in late 2000 against R.J. Reynolds Tobacco Holdings, RJR Acquisition Corporation, R.J. Reynolds Tobacco Company, R.J. Reynolds Tobacco International, Japan Tobacco, and Philip Morris International (the Companies) for compensation resulting from losses allegedly related to cigarette smuggling, specifically in the form of lost customs duties and value added taxes (VAT). As an EC appeal of the federal court's dismissal of the case remained pending, the Companies sought review in the EC judiciary of the Commission's decision to file the lawsuits in the first place.
The Commission approved, on July 19, 2000, "the principle of a civil action, in the name of the Commission, against certain American cigarette manufacturers" and instructed its legal service to examine possible courses of action. The following November, the EC, supported by the Council of the European Union, the European Parliament, Spain, France, Italy, Portugal, Finland, Germany, Greece, and the Netherlands, sued the Companies and other cigarette manufacturers in the U.S. District Court for the Eastern District of New York. In their complaint, the EC and the supporting plaintiff states alleged the Companies' involvement in a system of smuggling aimed at selling cigarettes in EC states. Seeking damages for the loss of supposedly evaded import taxes, the complaint based its claims on the Racketeering Influenced and Corrupt Organizations Act of 1970 (RICO), as well as the common law doctrines of fraud, public nuisance, unjust enrichment, negligence, and negligent misrepresentation. On July 16, 2001, the court, in a decision by Judge Nicholas G. Garaufis of Brooklyn, held that because EC member states' inability to collect cigarette taxes did not, as a matter of law, harm the EC's ability to fund its budget given its access to other forms of taxation and sources of revenue, the EC lacked standing to sue the Companies. He dismissed the case.
The Commission approved "the principle of a new action" against the same defendants only nine days later. In the second action, which was filed on August 6, 2001, against Philip Morris and the R.J. Reynolds affiliates, the EC solely invoked the prior complaint's common law doctrines, while the participating member states again claimed RICO violations. The plaintiffs also filed another complaint against Japan Tobacco and affiliates on January 9, 2002. On February 19, 2002, Judge Garaufis dismissed each action on the basis of the common law revenue rule, which precluded one nation's courts from enforcing other nations' final tax judgments and unresolved tax claims. The Commission and other plaintiffs appealed the judgment to the U.S. Second Circuit Court of Appeals in New York City, which upheld Judge Garaufis's decision on January 14, 2004.
The Companies' legal actions in Europe were commenced on December 19, 2000. Through a series of applications lodged through late 2001 in the Court of First Instance, the Companies sought to annul the Commission's decision to bring the U.S. actions. The Court held that Article 230 of the Treaty on European Union (the Treaty), which established legal principles governing the EC and allowed judicial review of all Commission actions "intended to produce legal effects vis-Ã - vis third parties," did not encompass the Commission's decision to sue the Companies in U.S. courts. Simply put, those decisions to pursue legal action did not produce legal effects, namely changes in rights or obligations in regard to the opposing party, under the meaning of the Treaty.
II) The ECJ Judgment
On appeal, the ECJ considered four general issues: 1) whether the Court of First Instance misinterpreted Article 230; 2) whether the Court's decision infringed the Companies' fundamental right to effective judicial protection; 3) whether the Court's decision misinterpreted applicable case law; and 4) whether the Court's decision infringed on Article 292 of the Treaty, which precludes member states from submitting disputes concerning the interpretation and application of the Treaty to any forum other than those for which the Treaty provides. The ECJ upheld the Court of First Instance's decision on all four grounds.
The ECJ noted settled case law holding that a party could only challenge measures that brought about a "distinct change" in [its] legal position by producing effects "binding on, and capable of affecting [its] interests...." Merely commencing proceedings against a party, therefore, did not definitively alter that party's legal position even though such action sought a binding judgment. Accordingly, the ECJ held, the Court of First Instance appropriately concluded that the Commission's decision to sue the Companies in U.S. courts did not produce binding legal effects in that the lawsuits' filing by itself did not alter the Companies' legal position vis-Ã -vis the Commission and participating EC states.
The ECJ also ruled that the Commission's actions did not deny the Companies access to legal remedies. The judgment stressed that Articles 235 and 288 of the Treaty entitle parties damaged by EC institutions or "servants in the performance of their duties" to seek redress in the ECJ if such an action stemmed from a non-contractual theory of liability. The fact that the Companies might be unable to establish unlawful conduct on the part of EC institutions or personnel as a result of having their appeal rejected by EC courts did not signify a denial of effective judicial protection.
The ECJ then addressed the Companies' numerous references to case law, most notably in regard to preparatory activities that did not produce legal effects. Citing to a 1981 ECJ decision, IBM v. Commission, the Companies maintained that case law allowed the ECJ an exception upon which to review the Commission's decision to sue in U.S. courts if the ECJ did in fact conclude that the decision constituted a preparatory act. The IBM decision, as interpreted by the Companies, held that in regard to such preparatory activities, "a judicial review at an early stage may be considered compatible with the system of remedies provided for by the Treaty in exceptional circumstances where the measures concerned lack even the appearance of legality." The Court of First Instance disagreed with this interpretation, reiterating its conclusion that case law did not mandate judicial review of "preparatory activities" that would not result in any legal effects. The ECJ sidestepped this analysis by simply noting that the Commission's decision to sue the Companies did not lack "the appearance of legality," thereby making further examination of the Companies' argument pertaining to this facet of case law unnecessary.
The Companies also argued that "any dispute as to the Commission's competence to bring the proceedings in question in the United States could [potentially] be determined by [an American court]," and not the dispute resolution mechanisms for which the Treaty provided. But the ECJ disagreed, noting that a U.S. court decision could not bind EC institutions to a "particular interpretation of Community law," but only "in relation to the specific proceedings." Finding no merit in the Companies' arguments, then, the ECJ dismissed their appeal.
The ECJ ruling certainly poses implications for cross-border litigation in the form of the Commission or EC member states filing suit in US courts against American or other entities. No longer will any such potential defendant be able to preclude any such action at its outset through the EC judicial system on the grounds of legal protections guaranteed them by EC law, if the mere act of filing an action does not by itself alter any legal obligations. This decision, then, could lead to litigation in U.S. courts by the Commission or any EC state against any American resident entity that causes damages to either of those potential plaintiffs anywhere in the world.
A likely scenario resulting from this development may entail renewed litigation against tobacco companies similar to that involving U.S. states suing for the Medicaid costs of treating smokers some years ago. Increasingly, European countries have followed the American lead in restricting smoking in public areas and cigarette advertisements. With the increased ambivalence of European policymakers toward cigarette smoking and its effects, this ECJ decision may yet open a new round in the litigation onslaught against cigarette companies, with EC states suing such companies in U.S. courts to recoup the costs incurred by socialized health care systems in paying for the care of citizens suffering from smoking-related ailments.
Ernesto J. Sanchez is an ASIL member and law clerk at the U.S. Court of Federal Claims in Washington D.C. All views expressed in this paper are the author's and in no way reflect those of the U.S. Court of Federal Claims or its staff.
 Case C-131/03, Reynolds Tobacco And Others v. Comm'n ("Reynolds Tobacco"), available at http://curia.europa.eu (last visited October 17, 2006).
 Id., para. 1.
 Id., para. 2.
 Id., para. 3.
 Id., para. 4.
 European Cmty. v. RJR Nabisco, Inc., 150 F. Supp. 2d 456 (E.D.N.Y. 2001).
 Reynolds Tobacco, para. 7, 9.
 European Cmty. v. Japan Tobacco, Inc., 186 F. Supp. 2d 231 (E.D.N.Y. 2002).
 European Cmty. v. RJR Nabisco, Inc., 355 F.3d 123 (2d Cir. 2004).
 See generally Reynolds Tobacco.
 Id., para. 35.
 Id., para. 49-73.
 Id., para. 82-84, citing Treaty of Amsterdam Amending The Treaty On European Union, the Treaties Establishing The European Communities And Related Acts, art. 235, 288, Nov. 10, 1997.
 Id., para. 16. See also Case T-377/00, Philip Morris Intl., Inc. et al. v. Comm'n ("Philip Morris") (European Court of Justice - Court of First Instance), para. 48, 88, available at http://curia.europa.eu (last visited October 28, 2006).
 Philip Morris, para. 88.
 Reynolds Tobacco, para. 93.
 I d., para. 98, 102.
 See, e.g. Elaine Sciolino, Smoking No Longer TrÃ¨s Chic In France, N.Y. Times, October 6, 2006, at 4; Pfizer's Anti-Smoking Pill Champix (RR) Approved In Europe, PRNewswire, September 29, 2006.