Paper Tiger, Hidden Dragon?: Some Thoughts on Smagin v. Yegiazaryan
March 21, 2023
This Term, the Supreme Court will hear a dispute between two wealthy Russians relating to an international arbitration award in London arising out of a failed real estate venture in Moscow. The case pits two competing tendencies of the Justices against one another: (a) their penchant for preventing such seemingly foreign litigation from proceeding in U.S. courts and (b) their pro-arbitration policy, which would ordinarily include promoting the enforceability of arbitral awards. How they choose between these values will further determine whether U.S. courts have become, in the words of Steve Burbank, merely a paper tiger, or whether the possibility of using civil RICO—and its threat of treble damages—to enforce foreign judgments and awards could make U.S. courts a hidden dragon for litigation seeking transnational judgment and award enforcement.
Litigation Isolationism vs. A Pro-Arbitration Policy
Historically, U.S. courts have been notorious for attracting transnational litigation. As the famous English judge Lord Denning wrote in 1983, “As a moth is drawn to the light, so is a litigant drawn to the United States.” U.S. courts were long seen as a popular forum for plaintiff-driven lawsuits, including international human rights suits, with critics like Judge Bork complaining that U.S. courts were engaged in “judicial imperialism.”
A lot has happened in U.S. law since the 1980s, especially in the openness of U.S. courts to transnational litigants. First, the Court has displayed a hostility to litigation in general, raising pleading standards, curbing class actions, limiting discovery, and making summary judgment easier to establish. While these developments have created roadblocks for all kinds of litigation, U.S. courts have raised certain barriers that particularly affect transnational litigation, including by narrowing personal jurisdiction, embracing forum non conveniens, and strengthening the presumption against extraterritoriality. Since I first documented this trend of litigation isolationism in 2015, the Supreme Court has been mostly doubling down on it, including by making it increasingly difficult to establish personal jurisdiction over foreign defendants and to apply U.S. statutes extraterritorially.
At the same time as it has been charting a path of litigation isolationism, the Supreme Court has repeatedly expressed its dedication to the “pro-arbitration” policy it sees embodied in the Federal Arbitration Act. This policy is broadly consistent with the anti-litigation tendencies displayed in other legal developments, for example, when it results in the enforcement of arbitration clauses in consumer contracts that thwart the availability of class actions and other kinds of litigation. But some litigation is also required to support a pro-arbitration policy—including litigation to enforce arbitration awards. I have called this tension the “arbitration-litigation paradox.” I have argued that when the two trends—the Court’s pro-arbitration policy and its anti-litigation and litigation isolationist tendencies—conflict, the Court has consistently favored its anti-litigation policy even if that operates to the detriment of arbitration.
Smagin v. Yegiazaryan
This brings us to the current pending case between two Russian oligarchs in the U.S. Supreme Court. In 2010, after their real estate joint venture in Moscow ran aground, Vitaly Ivanovich Smagin (Smagin) commenced an arbitration against his former business partner, Ashot Yegiazaryan (Ashot), in the London Court of International Arbitration (LCIA). After receiving an $84 million award in 2014, Smagin sought to enforce the award in both Lichtenstein and California. Ashot was, by then, a resident of California, having fled Russia after the Russian government accused him of fraud. Courts in both Lichtenstein and California recognized and enforced the award. In the meantime, however, Ashot (allegedly) sought to avoid having to pay the award via a “complex web of offshore entities.”
Smagin, frustrated by these attempts to avoid payment of the award, turned to the civil RICO statute, which affords successful plaintiffs treble damages. He filed a separate action in California district court against Ashot and his alleged co-conspirators, alleging that their efforts to evade payment constituted a pattern of wire fraud and other RICO predicate racketeering acts. Smagin alleged that he should be able to recover by virtue of 28 U.S.C. § 1964(c), which provides a cause of action for “[a]ny person injured in his business or property by reason of a violation of [RICO’s substantive prohibitions].”
In RJR Nabisco v. The European Community, the Supreme Court applied the presumption of extraterritoriality to interpret the RICO statute in a suit brought by the European Community (EC) against tobacco giant RJR Nabisco for an alleged international money-laundering scheme that included foreign drug traffickers and the sale of cigarettes to Iraq. The EC had also tried to take advantage of some uniquely attractive features of U.S. litigation, including the availability of treble damages for civil RICO suits. The tobacco giant argued, however, that RICO was not meant to apply “extraterritorially” to provide a means for a foreign entity to sue for its foreign injuries.
The Court applied the “two-step” extraterritoriality doctrine it had announced in Morrison v. National Australia Bank. While some of RICO’s predicate offenses may overcome the presumption, the Court said, the provision creating the civil cause of action allowed recovery for only domestic injuries. That is, the focus of the statute—that the person was “injured in his business or property”—must have occurred in the United States. Because the EC’s injury was conceded to be foreign, the Court dismissed the case.
The question in Smagin is the one left open after RJR Nabisco: What qualifies as a domestic injury? The circuits have offered three different approaches, ranging from balancing tests to bright line rules based on the residence of the plaintiff. Here, if the rule is that the location of the injury is where the RICO plaintiff resides, then Smagin, a Moscow resident, loses. On the other hand, if the location of the injury is where the “business or property” is, and the property is the California court judgment that Ashot’s racketeering conspiracy is trying to subvert, then Smagin’s injury might be domestic and his RICO suit can proceed. Applying different tests could generate still other answers. The statutory interpretation questions are tricky, and it is difficult to predict how the Court will choose among these options.
Will Smagin Follow the Trends?
If one were a betting person, one might consider how this case fits into the broader trends of litigation isolationism—where the Court has consistently displayed hostility to transnational litigation—and the Court’s pro-arbitration policy.
On the one hand, allowing this case to proceed, as the Ninth Circuit did, is “pro-arbitration.” The alleged wrongdoing involves attempts to circumvent the binding authority of an LCIA arbitration award as well as a California judgment. One potential issue in the case is whether the California judgment against Ashot is “property” under the RICO statute. But all the courts to have considered the question have agreed that a judgment is intangible property and qualifies under the statute. Therefore, if the case were entirely domestic—between U.S. parties and potentially involving a U.S. arbitration award—the case could proceed without the presumption against extraterritoriality standing in its way. Thus, neither the integrity of arbitration awards nor that of U.S. court judgments is truly at issue.
If the Court allows this kind of transnational RICO suit, it potentially opens the door for substantial, and powerful, litigation supporting the enforcement of foreign court judgments and arbitration awards. The ability to seek treble damages—that is, triple whatever the amount the court or arbitral tribunal awarded—could potentially drive up the amounts that parties settle for. Civil RICO would offer, for these kind of suits, a potential hidden dragon for aggressively going after judgments and awards. Or, in Justice Scalia’s words, this could turn U.S. courts into a “Shangri-La” of litigation for foreign judgment and award enforcement.
On the other hand, this suit is a classic example of transnational litigation. Whatever path the Supreme Court’s analysis follows, it would be consistent with litigation isolationism to deny this foreign plaintiff—and potentially all foreign plaintiffs—the ability to rely on RICO in its efforts to enforce its London arbitration award. Likewise, if the Court’s pro-arbitration policy (here, potentially supporting efforts to enforce arbitration awards) were to conflict with its anti-litigation tendencies (here, efforts to erect barriers to transnational civil RICO suits), the latter is more likely to win out. If the Supreme Court ultimately reverses the Ninth Circuit, and holds that the presumption against extraterritoriality bars the use of the RICO statute to recover in situations such as this, it would reinforce Burbank’s prediction that U.S. courts, rather than being magnets for transnational litigation, have become instead a paper tiger.