Supreme Court Approves Using Civil RICO to Help Enforce Arbitral Awards
June 26, 2023
Last week, the Supreme Court held in Yegiazaryan v. Smagin that civil RICO can be used to help enforce foreign arbitral awards. Specifically, the Court held that concealing assets to avoid paying a U.S. judgment that confirmed a foreign arbitral award could satisfy civil RICO’s “domestic injury” requirement, allowing the award-creditor to pursue a claim for treble damages against the award-debtor and others who helped him conceal assets, including a foreign bank. The decision provides a new tool to enforce foreign arbitral awards and court judgments. It also potentially exposes those who help debtors conceal assets—such as banks and law firms—to significant liability as RICO conspirators.
Civil RICO
RICO is the federal racketeering statute. RICO makes it a criminal offense to engage 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 wire fraud and money laundering. 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.
Importantly, one of RICO’s criminal provisions reaches conspiracies. It is a criminal offense to conspire to violate any of RICO’s other criminal provisions. The Supreme Court has held that defendants can be held liable for a RICO conspiracy, even if they commit no predicate offenses, as long as they “knew about and agreed to facilitate the scheme.” If a RICO conspiracy is proved, “[a]ll conspirators are liable for the acts of their co-conspirators.”
RICO also creates a private right of action in § 1964(c) for “[a]ny person injured in his business or property by reason of a violation of [RICO’s criminal provisions],” allowing the injured person to recover treble damages and attorney’s fees. In RJR Nabisco, the Court held that a RICO plaintiff must “allege and prove a domestic injury to business or property.” The lower courts split over how this “domestic injury” requirement applies to intangible property, specifically court judgments.
The Smagin Case
The complaint alleges that the defendant Ashot Yegiazaryan defrauded the plaintiff Vitaly Smagin in a Moscow real estate venture. To avoid criminal prosecution, Yegiazaryan fled to California. In 2014, Smagin won an arbitration in London against Yegiazaryan and was awarded more than $84 million. Seeking to enforce the arbitral award, Smagin filed an action against Yegiazaryan to confirm the award in federal district court in California.
In 2015, Yegiazaryan received $198 million in settlement of another, unrelated arbitration, which he tried to conceal from Smagin. Yegiazaryan accepted the money through the London office of a U.S. law firm and transferred it through a series of offshore entities to an account with CMB Monaco. After Smagin learned of the transfer, he filed a civil RICO action against Yegiazaryan, CMB Monaco, and several other defendants, alleging that they engaged or conspired in a pattern of racketeering activities, primarily wire fraud.
The Supreme Court’s Decision
In their briefs and at oral argument, the petitioners Yegiazaryan and CMB Monaco urged the Supreme Court to adopt a bright-line test that a person is injured by a RICO violation wherever that person resides. Because Smagin lives in Russia, he could not prove domestic injury under this test. The respondent Smagin, on the other hand, argued for a context-specific test that takes account of the location of the defendants’ conduct.
By a vote of 6-3, the Supreme Court agreed with Smagin and the Ninth Circuit that a “context-specific inquiry” was required. “In this suit,” Justice Sotomayor wrote for the majority, “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.”
Justice Sotomayor defended this approach as “most consistent with RJR Nabisco.” She noted that the majority opinion in that case, written by Justice Alito, said that the domestic injury rule “does not mean that foreign plaintiffs may not sue under RICO” and that the application of the 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.’” These statements were consistent with a context-specific approach and inconsistent with petitioners’ proposed test, which would have barred foreign residents from bringing civil RICO actions.
The Court was not convinced by petitioners’ argument that Congress had adopted a common-law principle reflected in the first Restatement of Conflicts (1934) that people suffer economic injuries to intangible property at their places of residence. Justice Sotomayor relied on an amicus brief filed by TLB advisor George Bermann, who noted that by the time Congress passed RICO many states had already moved away from the first Restatement’s approach. She also cited TLB advisor Aaron Simowitz’s article Siting Intangibles to show that application of the principle that locates intangible property at the owner’s residence had taken “many twists and turns.”
“Because of the contextual nature of the inquiry,” Justice Sotomayor wrote, “no set of factors can capture the relevant considerations for all cases.” But in this case, she held, the facts made clear that the injury arose in the United States.
In sum, Smagin’s interests in his California judgment against Yegiazaryan, a California resident, were directly injured by racketeering activity either taken in California or directed from California, with the aim and effect of subverting Smagin’s rights to execute on that judgment in California. On the Court’s contextual approach, those allegations suffice to state a domestic injury in this suit.
Justice Alito’s Dissent
Justice Alito dissented, joined in full by Justice Thomas and in part by Justice Gorsuch. He faulted the majority for failing to give sufficient guidance to the lower courts. Although the majority considered the petitioners’ domestic conduct and the rights conferred by the California judgment, Justice Alito complained that “it gives no indication of the relative import of each of these factors.” He also criticized the Court for ignoring other factors that might have been considered under an “all-factors-considered approach,” including “the history and location of the underlying dispute, where any relevant business relationships were formed, Smagin’s residence, and the existence of the London arbitral award.”
In a part of his dissent joined only by Justice Thomas, Justice Alito went on to accuse the majority of threatening “the uniformity of our case law.” “A thrust of our international-comity jurisprudence,” he wrote, “is that we should not lightly give foreign plaintiffs access to U.S. remedial schemes that are far more generous than those available in their home nations.” Justice Alito also argued that the Court’s extraterritoriality decisions had emphasized “workability,” and he was not convinced that there was good reason to forgo a bright-line test in the context of RICO’s domestic injury requirement.
Trading Places
It is interesting to see Justice Sotomayor invoking Justice Alito’s words in RJR Nabisco to justify a case-by-case approach to extraterritoriality with which he clearly disagrees. Justice Sotomayor did not participate in RJR Nabisco because she served on a panel of the Second Circuit that heard an earlier argument in that case. Because of Justice Scalia’s death, a seven-Justice Court decided RJR Nabisco, and on the “domestic injury” requirement, the Court divided 4-3. Had Justice Sotomayor participated in that case, I suspect she would have joined Justice Ginsburg’s partial dissent, in which case the Supreme Court would have affirmed without opinion (because equally divided) the Second Circuit’s holding that RICO’s private right of action extended as far as its criminal provisions. In other words, had Justice Sotomayor participated, there would have been no “domestic injury” requirement for civil RICO at all. Although she could not undo this requirement, her opinion in Smagin does manage to soften it a bit.
Justice Alito’s dissent is striking for its conception of international comity as restricting the application of overly generous U.S. laws. One sees here a strand of the hostility to transnational litigation that TLB advisor Pam Bookman has called “litigation isolationism.” Writing at TLB after the oral argument in Smagin, Pam noted that this case pitted two tendencies of the current Court against each other: litigation isolationism versus pro-arbitration policy.
Although I have no sympathy for Justice Alito’s litigation isolationism, I do have some sympathy for his criticism of the majority’s context-specific approach and his preference for bright-line tests. It would have been easy for a differently inclined court to give Smagin’s facts a foreign gloss rather than a California one. Take another look at Justice Sotomayor’s summary paragraph quoted above and compare it to the following hypothetical alternative:
In sum, one foreign national is here suing another foreign national based on an underlying dispute that arose entirely outside the United States. Smagin obtained a California judgment confirming an arbitral award, but that judgment is entirely derivative of an award that was rendered in London and based on injuries in Russia. Although some of Yegiazaryan’s alleged racketeering conduct occurred in the United States, the alleged scheme principally involved the transfer of assets from London to Monaco. On the Court’s contextual approach, those allegations do not suffice to state a domestic injury in this suit.
I do not suggest that this summary is the right way to view the facts alleged in this case. But it is certainly one way of viewing those facts. Unfortunately, the context-specific approach adopted in Smagin gives lower courts—perhaps more isolationist than the Smagin majority—the option of playing with the facts of future cases in just this way.
There was a bright-line option available to the Supreme Court that would have held for Smagin but provided more guidance (or perhaps less discretion) to the lower courts. The Court could have held that injury to intangible property in the form of a judgment occurs wherever the domestic judgment was rendered—here, California. Such a rule would have made only one factor (the place of the judgment) relevant to locating the injury in cases like this, though of course the location of the racketeering activity would still be critical in establishing a pattern of racketeering activity covered by RICO. Unfortunately, none of the parties in this case argued for such a rule.
Implications for the Enforcement of Foreign Arbitral Awards (and Judgments)
The most important result of the Smagin decision is likely to be increased use of civil RICO to help enforce foreign arbitral awards. This also applies to foreign court judgments, which can similarly be recognized by U.S. courts, creating U.S. judgments. After Smagin, award- and judgment-debtors, who engage in patterns of racketeering activity (and those who help them) to conceal assets or otherwise avoid having to pay, may find themselves subject to RICO liability for three times the amount of the original award or judgment.
Of course, a civil RICO claim will not follow automatically from non-payment of a foreign judgment or award. The defendants must have engaged in a pattern of racketeering activity that violates RICO’s criminal provisions. And the predicate offenses that constitute the pattern may be subject to geographic limitations under the presumption against extraterritoriality. In Smagin, much of the alleged racketeering activity consists of wire fraud. The Ninth Circuit has held that the federal wire fraud statute applies to the domestic use of wires in a scheme to defraud even if the scheme itself was centered abroad.
It is also possible that, under Smagin’s context-specific approach, other factors might outweigh the U.S. location of the judgment confirming a foreign award or recognizing a foreign judgment. As noted above, the Smagin Court did not adopt a bright-line test that turns on the location of the rendering court. Perhaps the defendant in a future case might not be a U.S. resident, or might have engaged in less U.S. conduct, in which case a court might find that RICO’s “domestic injury” requirement is not met. But a fair number of cases are likely to fit Smagin’s mold, in which the award- or judgment-debtor lives in the United States and tries to conceal assets from here.
RICO’s conspiracy provision, § 1962(d), should also give pause to entities such as law firms and banks that might be asked to help award- or judgment-debtors move their money around. As mentioned above, the Supreme Court has held that a person need only have known about and agreed to facilitate a scheme to violate RICO’s other criminal provisions. A bank or law firm that agrees to help an award-debtor conceal assets, knowing that the debtor will engage in a pattern of wire fraud, could well find itself liable for three times the amount of the award. Smagin puts a whole new spin on the notion that banks should know their customers.
Conclusion
Although Smagin is practically important, it does not add much to our understanding of the presumption against extraterritoriality. The more important case in that regard is likely to be Abitron Austria GmbH v. Hetronic International, Inc., which is yet to come down. Doctrinally, Abitron presents the question of the geographic scope of the federal trademark statute. But that case also raises questions about whether the presumption against extraterritoriality requires conduct in the United States even when the focus of a provision is not conduct (I submitted an amicus brief on this question), as well as the stare decisis effect of decisions under an older approach to extraterritoriality.
Smagin did not telegraph the outcome in Abitron, but it did leave some tea leaves for those who want to try reading them. In describing the second step of the Supreme Court’s two-step approach to the presumption against extraterritoriality, Justice Sotomayor’s majority opinion omitted RJR Nabisco’s reference to “conduct relevant to the statute’s focus.” Instead, she simply wrote: “step two asks whether the case involves a domestic application of the statute, which is assessed ‘by looking to the statute’s “focus”’” (quoting RJR Nabisco). I certainly hope this indicates that the Court will drop RJR’s reference to domestic conduct from step two of the presumption analysis.
Justice Alito’s dissent also seemed to refer to Abitron in broaching the possibility that different types of intangible property might be subject to different rules. “[P]erhaps,” he wrote parenthetically, “there could be a rule that injuries to trademark rights should be sited in the country that provided the trademark.” It is harder to know how to read this aside. It could preview the approach that the majority will adopt in Abitron. Or it could be the grumblings of a Justice who lost the extraterritoriality fight in that case too. The end of the Supreme Court’s term is fast approaching, and we could find out the answers in Abitron as soon as tomorrow.