Supreme Court Oral Argument in Extraterritorial RICO Case Marked by Confusion
May 1, 2023
The Supreme Court heard oral argument last week in Yegiazaryan v. Smagin and CMB Monaco v. Smagin, two cases testing when civil RICO can be used to help enforce a foreign arbitration award. Because I have described the facts in a previous post, I will be brief here. Smagin and Yegiazaryan are Russian citizens who had a legal dispute over a real estate investment in Moscow. Smagin won a $92 arbitral award against Yegiazaryan in London, and a federal court confirmed the award in California after Yegiazaryan moved there. Smagin alleged that Yegiazaryan engaged in a pattern of racketeering activity to avoid paying the California judgment, including transferring assets to CMB Monaco. Smagin brought a civil RICO claim against Yegiazaryan, CMB Monaco, and others seeking treble damages.
In RJR Nabisco v. European Community (2016), the Supreme Court held that RICO’s criminal provisions apply extraterritorially to the same extent as its underlying predicate acts. For example, because the federal money laundering statute applies extraterritorially if the conduct is by a U.S. citizen, RICO’s criminal provisions would cover a pattern of money laundering by a U.S. citizen abroad. RJR Nabisco further held that RICO’s civil cause of action “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 question before the Court in the Smagin cases is where an injury occurs when a person who lives in California engages in a pattern of racketeering activity to avoid paying a California judgment confirming an arbitration award in favor of a person who resides abroad.
As discussed below, the parties propose different tests for locating the injury. Petitioners argued that the place of injury is the plaintiff’s domicile. Respondent (strangely in my view) argued that the place of injury turns primarily on the place of the defendant’s conduct, and largely ignored the obvious alternative test—that the place of injury is the place where the judgment was issued and can be executed.
Most of the Justices’ questions focused on how these tests would apply to different facts. But the oral argument also revealed worrying confusion about how RICO works. There are two steps to the civil RICO analysis: a civil RICO plaintiff must show (1) a domestic injury to business or property; and (2) a violation of RICO’s criminal provisions. The Justices asked several times about situations in which all the racketeering activity occurred abroad, seeming not to realize the place to account for this is the second step of the RICO analysis—whether RICO’s predicate acts, and therefore its criminal provisions, apply extraterritorially—not the first step, which simply requires a domestic injury. Respondent’s argument that the location of the conduct should be the principal factor in determining the location of the injury did not help the situation.
Arguing for the petitioners Yegiazaryan and CMB Monaco, Vincent Levy (a TLB advisor) proposed a bright line rule to determine the place of injury for purposes of civil RICO: “a civil RICO plaintiff is injured at its domicile” (p. 4), which in Smagin’s case is Russia.
Justice Thomas was skeptical of petitioners’ argument that this test should apply to tangible property as well as intangible property, asking “Isn’t that kind of odd?” (p. 7). Justice Jackson pressed petitioners’ counsel on the same point, asking whether “you might have a different outcome with respect to a foreign plaintiff who has both … tangible property interests and intangible property interests that are put at risk through racketeering activity” (p. 13). But Levy did not concede the point and the argument veered off in another direction.
Location of the Conduct
Several Justices asked whether the location of the racketeering activity, not just the plaintiff’s domicile, might be relevant in determining the place of the injury. Chief Justice Roberts noted that “the plaintiff obtained a California judgment to collect California property against someone living in California based on conduct in California.” “Why can’t we consider,” he asked, “with all those connections, that that’s … a domestic injury?” (p. 8). Justice Jackson also asked about “all of the activities that were allegedly taken … here in the United States to avoid enforcement of the judgment” (p. 11), and Justice Sotomayor asked “why those aren’t the acts that constitute the RICO conspiracy at issue here[?]” (p. 17).
The answer, of course, is that the acts taken to avoid enforcement of the judgment are the acts that constitute the RICO conspiracy. But the existence of a RICO conspiracy was not addressed below and is not the question before the Supreme Court. As noted above, a civil RICO plaintiff must show (1) a domestic injury to business or property; and (2) a violation of RICO’s criminal provisions. The Court granted cert on the first question to decide where the injury occurs in a case like this. Although it is hard to see how the location of the conduct is relevant to the place of injury, the location of the conduct is certainly relevant to the existence of a RICO conspiracy. If the Court holds that there is a domestic injury in this case, the plaintiff will still have to prove a pattern of racketeering activity, which will require proving conduct that falls within the scope of RICO’s predicate acts, such as wire fraud.
Petitioners’ counsel found the right response to this line of questioning later in the argument when Justice Kagan asked what happens “if the plaintiff is domiciled in the United States but all the relevant conduct is abroad?” (p. 27). “If the plaintiff is domiciled in the United States,” Levy replied, “then he or she passes the … requirement of having a domestic injury.” “[W]hether the conduct is within the scope of RICO,” he continued, “turns on whether the substantive provisions apply extraterritorially.” This response is exactly right. Unfortunately, it did not seem to eliminate the Justices’ confusion, because Justice Sotomayor was still asking Levy about the location of conduct at the end of his argument (p. 34).
How Many Debts?
Justice Thomas appeared confused about a different point, seeming to question whether there is a debt in the United States at all. Petitioners’ counsel noted that the initial debt was created by the London arbitral award and that there were court judgments confirming the award both in California and in Lichtenstein, so “there are a number of debts that are one and the same” (p. 32). “So, if you have one debt in Lichtenstein and one in the Central District of California,” Justice Thomas asked, “how many debts do you have?” Levy responded, “Well, you can only collect on those once,” to which Justice Thomas retorted “Well, so then both can’t be debts.”
This is simply wrong. As Levy patiently explained, “the law looks at all of them as debts, but you can only collect on them once.” Justice Thomas, however, would not accept this. “[M]y point,” he said, is “that the debt is actually the award” and the “judgment is a way … to collect on a debt in the United States. So I don’t know how it could be a debt” (pp. 33-34).
Justice Gorsuch attacked petitioners’ domicile test in a different way. “[W]hen we think about extraterritoriality,” he observed, “we’re thinking about comity and ensuring that our laws don’t interfere with other countries’ laws.” “But, here,” he continued the question is whether foreign plaintiffs can have the same opportunities as domestic plaintiffs …. [I]f there were a comity issue, it might be by denying access to our courts for things that happen here to foreign individuals on equal terms with domestic persons” (p. 24). Justice Gorsuch also noted “that the U.S. Government, which has great interest in comity and extraterritorial application of our laws …, chose not to participate in this case” (p. 25).
Petitioners’ counsel replied that the presumption against extraterritoriality and prescriptive comity (p. 25) are different interpretive canons. This is true. But there are many doctrines of U.S. law based on international comity, of which the presumption against extraterritoriality is one, as petitioners’ counsel ultimately conceded (p. 26). “As far as the application of comity to this case,” Levy explained, the Court had already considered the question “in RJR, which looked at the comity concerns and said that there are independent concerns arising not just from applying our laws to conduct occurring overseas but also to allowing foreign plaintiffs to sue” (p. 26).
Arguing for the respondent, Nicholas Kennedy suggested a test that “looks at the location of the injurious conduct and the location of the injured property” (p. 36), noting that in this case “[t]he RICO violations occurred in California” and those violations “target[ed] a California judgment against California debtors that confers rights only in California” (pp. 36-37). From the discussion above, the reader will see that respondent’s argument collapses two separate questions—the domestic injury requirement and the substantive RICO claim—into one.
Location of the Conduct
Justice Kagan asked, “suppose there was no other conduct in the United States …, that the only U.S. connection is the … California judgment itself…. Would you still have a claim?” (p. 40). Remarkably, respondents’ counsel said that he would not “because RJR Nabisco teaches us that … [t]he conduct that is the focus of the statute must occur in the U.S.” (p. 41).
In fact, that is not at all what RJR Nabisco teaches. It is true that early in that opinion, the Supreme Court referred to “conduct relevant to the statute’s focus occur[ing] in the United States.” But when the Court came to apply step two of its presumption against extraterritoriality framework to RICO’s civil cause of action, the Court made no mention at all of requiring conduct in the United States. RICO, the Court said, “requires a civil RICO plaintiff to allege and prove a domestic injury to business or property and does not allow recovery for foreign injuries.”
Justice Kagan tried to correct respondents’ counsel, suggesting that “RJR indicate[s] that the primary focus is on property rather than conduct” (pp. 41-42). But Kennedy pushed back. “[T]he presumption against extraterritoriality,” he maintained, has “always been conduct-focused” (p. 42). Again, this is simply not true. As I have explained at length elsewhere, the versions of the presumption that the Supreme Court applied from 1909 to 1949 and from 1991 to 2010, were conduct based. But since 2010, the Supreme Court has applied a new presumption against extraterritoriality. Morrison held that the focus of a provision could be something other than conduct, and RJR Nabisco held that the focus of RICO’s civil cause of action was injury.
Kennedy’s focus on conduct led Justice Alito to ask “if there was conduct without the judgment, would you still win?” (p. 45). Yes, he replied, “sufficient domestic conduct … would establish domestic injury and allow the presumption against extraterritoriality to be overturned” (p. 45). Justice Kavanaugh seemed perplexed by this. “If there’s no California judgment,” he asked, “where would the domestic injury be there?” (p. 46). Justice Barrett followed up by asking again whether a California judgment without California conduct would be sufficient to allow respondent to sue (p. 53). Again, he said no. “I do agree,” he said that the conduct’s primary, the location of the judgment is secondary. So, in your hypothetical, the judgment would not be enough” (p. 54).
A Bright Line Rule?
Justice Kagan asked respondent’s counsel whether “[his] test is harder to apply than [petitioner’s]” (p. 48). “I do agree,” he answered, “that a test that … is context-specific … is slightly harder to apply than a bright-line test” (p. 48). But “while bright-line rules are easier,” Kennedy continued, “this Court … and … lower courts have been doing extraterritoriality analysis with a similar test that looks at conduct for decades now” (p. 48).
Respondent’s counsel could have offered a bright line rule of his own—that the location of the injury to a court judgment is the place where the judgment was issued and can be executed. This would not only have avoided the problems he encountered trying to explain why his client would lose if he had a California judgment but no domestic conduct and would win if he had domestic conduct but no California judgment. It would also have provided a better answer to Justice Kagan’s question about a test that is easy to apply. By relentlessly trying to tie the location of the injury to the location of the conduct, respondent’s counsel created a series of problems for his client.
How Many Debts?
In questioning respondent’s counsel, Justice Thomas came back to whether the debt in this case is the California judgment or the arbitral award (pp. 38-39). Justice Alito soon picked up the same line of questioning. “[Y]our argument is in part that the California judgment constitutes a property interest that is separate from the debt that was incurred as a result of the original fraud?” (p. 49). Kennedy agreed. “Well, then … would you agree,” Justice Alito asked, “that you couldn’t collect on the judgment in Lichtenstein and then turn around and try to collect on the judgment in California?” (p. 49). Kennedy again agreed. “[D]oesn’t it seem strange that your collecting on the debt in Lichtenstein extinguishes … the property interest in California” (pp. 49-50). As petitioners’ counsel had earlier, respondent’s counsel patiently explained that this is not strange at all. The New York Convention contemplates parallel enforcement proceedings in different jurisdictions. Judgments recognizing a foreign arbitral award are separate from the award, but full payment of the debt extinguishes the other obligations (pp. 50-51).
A little later, Justice Barrett made the important point that the RICO claim, based on “the illegal shenanigans and fraud that happened in California to hide assets” is a separate “cause of action for which you can get treble damages that’s unrelated to whatever underlying debt you’re owed from the arbitration” (p. 63). “It’s … getting at different conduct, different things, different injuries,” she continued (p. 64). Respondent’s counsel naturally agreed.
Justice Alito returned to the question of comity that Justice Gorsuch raised with petitioners’ counsel. “[D]o you think that the availability of treble damages under RICO, Justice Alito asked, “is a basis for the comity concern that might be expressed?” (p. 64). In other cases, he noted, “foreign nations have filed briefs here in extraterritoriality cases” and said that “it violates principles of comity to allow [conduct within their borders] to be adjudicated under the U.S. legal system, which is very unlike that of most other countries in the world in allowing such a thing as treble damages under a statute like the RICO statute” (pp. 64-65). While agreeing that RICO is unique, respondent’s counsel noted that “there ha[ve] been no foreign amicus briefs here,” that “we’re not talking about foreign conduct here,” and “that’s why I don’t think we get to the prescriptive comity issue” (p. 65).
It is odd that neither the United States nor foreign governments filed amicus briefs in this case. Perhaps for that reason, there was no discussion at oral argument of the impact that allowing RICO claims like this might have on the New York Convention’s system for enforcing foreign arbitral awards. As I noted in a prior post, Professor George Bermann (a TLB advisor) filed an important amicus brief arguing that applying RICO in a case like this would be perfectly consistent with the New York Convention. But surely there is something to say on the other side.
What is most concerning, however, is the Court’s confusion over how the location of the conduct relates to the location of the injury. To repeat, a civil RICO plaintiff must show (1) a domestic injury to business or property; and (2) a violation of RICO’s criminal provisions. Only the first question is currently before the Supreme Court.
One could determine the location of the injury by looking to the domicile of the plaintiff, as petitioners argue, or by looking to the location of the judgment, as respondent should have argued. The location of the racketeering activity seems to have little to do with the location of the injury, despite the attempts of respondent’s counsel to link them. But the location of the racketeering activity is critical to the second step of the civil RICO analysis. If a plaintiff has shown a domestic injury, it must still show a violation of RICO’s criminal provisions, which means showing that the defendants engaged in a pattern of racketeering activity that falls within the geographic scope of one or more of RICO’s predicate acts. Yes, the location of the conduct matters; it just does not matter for the purposes of locating the injury.