Ninth Circuit Applies New Supreme Court Interpretation of RICO’s Geographic Scope
August 23, 2023
On August 11, 2023, the Ninth Circuit became the first lower court to apply the new test for “domestic injury” under RICO that the Supreme Court announced in Yegiazaryan v. Smagin (2023). In Global Master International Group, Inc. v. Esmond Natural, Inc., the Ninth Circuit held that a Chinese company stated a valid civil RICO claim against a U.S. company that delivered “fraudulently non-conforming” goods in California for export to China. RICO’s requirement of a domestic injury was satisfied, the court held, because the Chinese company took delivery of the goods in the United States.
The Global Master decision is significant in that it holds that Yegiazaryan’s test for “domestic injury” applies to tangible as well as intangible property. It also provides another example of the creative ways that civil RICO is being used in transnational litigation—in this instance to convert a breach of contract claim into a claim for treble damages.
The Geographic Scope of Civil RICO
RICO is the federal racketeering statute. RICO makes it a criminal offense to engage in a pattern of racketeering activity in connection with an enterprise. Racketeering activity consists of certain predicate offenses under federal and state law, including mail fraud and wire fraud. In RJR Nabisco v. European Community (2016), the Supreme Court held that RICO’s criminal provisions apply extraterritorially to the same extent as RICO’s predicate offenses, but that its civil cause of action requires an additional showing of “domestic injury” to business or property.
In Yegiazaryan, the Supreme Court adopted a “context-specific inquiry” for determining whether the alleged injury “arose in the United States.” Writing for the Court, Justice Sotomayor explained: “that means looking to the nature of the alleged injury, the racketeering activity that directly caused it, and the injurious aims and effects of that activity.” The Court rejected an alternative test adopted by the Seventh Circuit and favored by three dissenting Justices that would have looked exclusively at the plaintiff’s place of residence to determine where the alleged injury arose.
The Global Master Case
Global Master Corporation (GMC) is a Chinese company that purchased nutritional supplements from a California company, Esmond Natural, and resold them to consumers in China. After ending its relationship with Esmond in 2017, GMC uncovered a fraudulent scheme in which Esmond allegedly filled GMC’s orders with supplements that were of lower strength or entirely different from those promised. GMC brought a civil RICO claim against Esmond, alleging predicate acts of mail and wire fraud.
The district court granted summary judgment for Esmond, finding that GMC had not suffered any “domestic injury” because its alleged injury was felt mainly in China. The Ninth Circuit stayed the appeal until the Supreme Court decided Yegiazaryan.
The Ninth Circuit’s Decision
The Ninth Circuit began by extending Yegiazaryan’s context-specific test to tangible property. Yegiazaryan itself involved injury to intangible property—a court judgment that the defendant tried to avoid paying. The Second Circuit had held that, in cases of tangible property (like a bank account), injury was suffered wherever the tangible property was located.
The Ninth Circuit reckoned that Global Master also involved injury to tangible property, specifically the nutritional supplements that turned out to be non-conforming, but this did not change the test to be applied. Because the Supreme Court’s opinion in Yegiazaryan did “not make such a distinction” between tangible and intangible property, the court of appeals “read its holding and definition of ‘domestic injury’ to apply uniformly.”
Nevertheless, the Ninth Circuit gave great weight to the location of the property. GMC’s purchase orders allegedly specified that the supplements should be delivered “F.O.B., Los Angeles.” Under an F.O.B. (“free on board”) term, title to goods passes at the named place of delivery, so GMC assumed ownership of the supplements in California.
Esmond argued that the supplements’ ultimate shipment to China should be considered part of the context too, establishing that the injury arose abroad. But the Ninth Circuit reasoned that such an approach would effectively adopt the Seventh Circuit’s residency test that the Supreme Court rejected in Yegiazaryan. “That GMC owned its injured property in the United States,” the court of appeals concluded, “establishes that its injury was domestic.” The court added that GMC ordered the supplements in the United States and that Esmond made them in the United States, but these factors seem like afterthoughts. It was the fact that GMC took title to the non-conforming goods in the United States that established domestic injury.
A Few Concerns
In an earlier post, I worried that lower courts might manipulate Yegiazaryan’s context-specific test to reject RICO’s application by emphasizing foreign factors and minimizing domestic ones. In a case like this, I would have worried that a court might reason as follows:
Although Esmond is a U.S. company and the supplements were delivered to GMC in Los Angeles, the context of these transactions makes clear that the injury arose abroad. The supplements were immediately shipped to China, it is Chinese consumers who received supplements of inferior quality, and China is where GMC suffered injury to its reputation. Examining the entire context, as the Supreme Court has instructed, we find that the injury in this case is predominantly foreign.
Obviously, the Ninth Circuit did not manipulate the facts to reach such a result in this case. But Global Master is just one case, and I continue to be concerned about the manipulability of Yegiazaryan’s context-specific text for domestic injury.
RICO’s New Frontiers
In my earlier post, I also worried (perhaps less explicitly) about RICO’s application in a new context. In Yegiazaryan, the new frontier was the enforcement of foreign arbitral awards. The plaintiff won an arbitration award in London and obtained a judgment in California confirming the award. The defendant allegedly engaged in a pattern of wire fraud and other RICO predicate acts to hide his assets and avoid paying the judgment. By holding that the plaintiff could bring a civil RICO claim, the Supreme Court authorized a powerful new tool for use against judgment debtors who engage in fraud to avoid payment—a RICO claim for treble damages.
I have similar concerns about the result in Global Master. From the facts, this seems like a routine (if serious) case of breach of contract. The plaintiff placed orders and the defendant delivered non-conforming goods. The remedy in such a case (regardless of whether the contract is governed by California law, Chinese law, or the CISG) would normally be expectation damages and (possibly) consequential damages if these could be proved with reasonable certainty. By bringing a civil RICO claim based on alleged acts of mail and wire fraud, however, the plaintiff may be able to recover treble damages—three times the amount of actual damages.
To be clear, the problem here is not with RICO’s extraterritorial application but rather with the application of RICO to situations for which it was likely not intended: the enforcement of arbitral awards and the delivery of non-conforming goods. Cases like Yegiazaryan and Global Master show that transnational litigation is not immune from RICO’s expansion.