Preview of Supreme Court Argument in Civil RICO Extraterritoriality Case
April 18, 2023
On April 25, the U.S. Supreme Court will hear oral argument in Yegiazaryan v. Smagin and CMB Monaco v. Smagin, which ask how RICO’s private right of action applies to intangible property, in this case a California judgment confirming a foreign arbitral award. The cases have important implications not just for civil RICO but also for international arbitration. If the Court holds that RICO applies in cases like this, parties holding foreign judgments and arbitral awards may gain a powerful new tool for enforcement.
The Question Before the Court
In RJR Nabisco v. European Community (2016), the Supreme Court held that RICO’s civil cause of action requires a plaintiff to plead and prove domestic injury to business or property. The Court noted, however, that “[t]he application of this rule in any given case will not always be self-evident, as disputes may arise as to whether a particular alleged injury is ‘foreign’ or ‘domestic.’” Since then, lower courts have divided on how to determine the location of injury for purposes of civil RICO.
In the cases before the Supreme Court, one Russian citizen (Yegiazaryan) defrauded another (Smagin) in a Moscow real estate deal. After Yegiazaryan was indicted for fraud in Russia, he fled to California. Smagin brought claims against Yegiazaryan before an arbitral tribunal in London and was awarded $84 million. Smagin then brought an action in the federal District Court for the Central District of California to confirm the award. When Smagin learned that Yegiazaryan was concealing assets that could be used to satisfy the award and the confirming judgment, he brought a civil RICO claim against Yegiazaryan for treble damages.
The Ninth Circuit held that the district court judgment confirming the foreign arbitration award was property and that this property was located in California. “The rights that the California Judgment provides to Plaintiff exist only in California,” the court reasoned, “the place where he can obtain a writ of execution against or obtain discovery from [the Defendant].” The court also noted that “much of the conduct underlying the alleged injury also occurred in, or was targeted at, California.” Thus, the court concluded, “the alleged harm to Plaintiff’s rights under the California Judgment constitutes a domestic injury.”
The Ninth Circuit expressly rejected the Seventh Circuit’s domicile-of-the-plaintiff test for determining the location of injury to intangible property. In Armada (Singapore) PTE Ltd. v. Amcol International Corp. (2018), the Seventh Circuit held that a plaintiff suffers injury to intangible property at its domicile. Thus, a Singapore-based company, which alleged that a defendant committed RICO violations trying to avoid paying a U.S. judgment that confirmed a foreign arbitral award, could not satisfy the domestic injury requirement because the company was domiciled outside the United States.
The Arguments of Petitioners and Their Amici
The petitioners, Yegiazaryan and a bank in Monaco to which he transferred some assets, urge the Supreme Court to adopt the Seventh Circuit’s domicile-of-the-plaintiff test for locating injuries under RICO’s civil cause of action. Under this test, the respondent, Smagin, could not show domestic injury to business or property because Smagin lives in Russia.
Petitioners begin with the text of RICO’s civil cause of action, 18 U.S.C. § 1964(c), which says that “[a]ny person injured in his business or property” by a RICO violation may sue for treble damages. He points out that the word “injured” modifies “person” not “property.” They also contrast the phrase “in his business or property” with the phrase “to his business or property,” citing a 1906 Supreme Court antitrust case that distinguished those phrases. Whereas injury “to” property focuses on injury to the property itself, injury to a person “in his property” focuses on economic losses suffered by the person. Congress modeled RICO’s private right of action on the private right of action in U.S. antitrust laws. Because the language of § 1964(c) focuses on the person rather than the property, petitioners argue, the location of the person determines the place of the injury.
Petitioners find further support for their test in the choice of law rules applicable at the time of RICO’s enactment in 1970. Under the first Restatement of Conflicts, the place of the wrong in the case of fraud was the place where the loss was sustained rather than the place where the fraudulent representations were made. Petitioners cite a 1973 Second Circuit decision applying this principle and stating that the economic impact of fraud is generally felt at the place of the plaintiff’s residence.
The domicile-of-the-plaintiff test would also satisfy the Court’s preference for bright-line rules, petitioners argue. Such a rule would be predictable and would respect the sovereignty of other nations by limiting the application of RICO’s civil remedy to foreign plaintiffs.
When Congress passed RICO in 1970, petitioners assert, it did not intend that statute to function as a tool for enforcing foreign arbitral awards and judgments. Plaintiffs already have a number of tools for enforcing such awards and judgments. It makes no sense to supplement those tools with a treble damages remedy. Congress intended RICO to address economic harm from criminal infiltration of legitimate enterprises, not allegedly fraudulent nonpayment of a judgment.
Two amicus briefs were filed in support of petitioners. Three private international law scholars from Europe offer a comparative perspective on the remedies available in other countries. There is no private cause of action akin to RICO in the United Kingdom or in EU countries, they note, and treble damages are not available. Indeed a U.S. treble damages judgment would generally be refused enforcement in Europe on grounds of public policy. The Washington Legal Foundationadds that civil RICO is already prone to abuse, and weakening the domestic injury requirement would only make matters worse.
The Respondent’s Arguments
Respondent also begins with the text of § 1964(c). He emphasizes that the cause of action extends to “[a]ny person,” not just U.S. residents. “Petitioners’ parsing of the words “in” versus “to,” respondent argues, “takes the search for textual guidance too far.”
Respondent urges the Court to adopt a case-by-case approach to the question of domestic injury that would review “the alleged conduct that is the focus of the statute, as well as the specific business or property of the plaintiff that is at issue.” “While bright-line rules are favored,” respondent argues, “this Court routinely rejects proposed bright-line rules where, as here, the proposed rule conflicts with the text of the applicable statute or otherwise distorts well-settled legal doctrines.”
Respondent repeatedly argues that “the focus of the [RICO] statute (and RJR Nabisco) is conduct.” This is an odd claim because RJR Nabisco clearly determined that the focus of RICO’s private right of action is injury rather than conduct. That is why the Court, applying step two of its two-step framework, held that “Section 1964(c) requires a civil RICO plaintiff to allege and prove a domestic injury to business or property and does not allow recovery for foreign injuries.”
The Court need not adopt petitioners’ test to avoid a “parade of horribles,” respondent suggests. First, foreign plaintiffs will bring actions to confirm arbitral awards in the United States only if the award-debtor is located or has assets in the United States. Second, RICO’s substantive requirements must still be met, including proving a pattern of racketeering activity.
Professor Bermann’s Amicus Brief
An amicus brief filed by Professor George A. Bermann (a TLB advisor and contributor) in support of respondent provides a more powerful response to petitioners’ position. Rather than try to convince the Supreme Court to adopt a case-by-case approach that would consider all the circumstances, Professor Bermann offers an alternative bright-line rule: that the place of injury is the place of the judgment. “Smagin’s injury consisted of his inability either to collect on a judgment rendered in his favor by a court in California, or to have that judgment executed against Yegiazaryan’s California assets,” he explains. “Because the injury complained of is an injury to those rights, the place of injury is California.”
Professor Bermann also questions the relevance of choice-of-law principles to locating an injury under civil RICO. But assuming that such principles are relevant, he argues that a court should apply current choice-of-law principles rather than those of the first Restatement, which he calls “shockingly outdated.” Although the Restatement (Second) of Conflicts was not published until 1971, the year after RICO’s enactment, Bermann notes that it reflected the choice-of-law revolution that occurred during the 1950s and 60s. Thus, “the choice-of-law principles espoused by the First Restatement were anything but ‘settled’ at the time of RICO’s enactment.” Were the Restatement (Second) to be consulted, Bermann concludes, the place of the injury would be California not Russia.
Professor Bermann notes that RICO contains no carve-out for claims arising from an arbitration context. Moreover, “[t]here is nothing in the New York Convention, or international arbitration more generally, to suggest that, in a case like this one, recourse of an award and judgment creditor to RICO is improper.” Article III of the New York Convention requires contracting states to enforce arbitral awards in accordance with their own rules of procedure, whereas Article VII allows a party seeking enforcement to avail itself of any remedy available under domestic law.
“Although RICO was certainly not established for the specific purpose of ensuring that arbitral awards are enforced and judgments of enforcement executed,” he writes, “if the requirements of the RICO statute are satisfied, a Civil RICO claim represents one such means of enforcement under U.S. law within the meaning of Article VII.” Indeed, the availability of a RICO remedy supports the purposes of the New York Convention by discouraging parties from refusing to pay awards against them. Coming from the Chief Reporter of the American Law Institute’s Restatement of the U.S. Law of International Commercial and Investor-State Arbitration, these observations about the interaction of civil RICO and international arbitration should carry significant weight.
TLB will report on the oral arguments in these cases as soon as possible after April 25. One can expect the Court’s decision in late June.