High Court Limited Reach of RICO

By Jeremy K. Robinson, CaseyGerry — as Published in the Daily Journal

Growing globalization of both legitimate and illegitimate enterprises has increasingly raised the question: can a private entity bring civil claims under the Racketeer Influenced and Corrupt Organizations Act (RICO) for illegal acts and injuries that happened outside the U.S.?

Monday, in RJR Nabisco v. European Union, the high court ruled in a 4-3 decision (Justice Sotomayor did not participate) that private civil RICO claims must involve a domestic injury in order to be actionable. Justices Ginsburg, Kagan, and Breyer concurred in the first three parts of the opinion, dealing with the extraterritorial reach of RICO predicate act statutes, but dissented on the domestic injury requirement.

This decision provides some clarity to attorneys and companies dealing with potential RICO claims, but also leaves several important questions unanswered.

In RJR Nabisco, the plaintiffs—the European Community and 26 of its member states—claimed RJR Nabisco and other entities ran a convoluted global money-laundering scheme involving Columbian and Russian drug traffickers, black markets, and large shipments of RJR cigarettes into Europe. In other variations of the scheme, RJR allegedly violated international sanctions by selling cigarettes to Iraq. Ultimately – because of an elaborate and illegal enterprise — the European Community lost billions in tax and customs revenues.

In 2000, the plaintiffs brought several suits in federal court in New York, alleging civil RICO violations. RJR Nabisco denied any suggestion that it had been involved in smuggling. Sixteen years later, the lone remaining case, after having traveled up and down the federal appellate system, reached the Supreme Court.

In a majority opinion written by Justice Alito on Monday, the High Court upheld the district court’s dismissal of the complaint as being impermissibly extraterritorial, reversing the Second Circuit. The Court framed the two key issues as: (1) do RICO’s substantive provisions—the various predicate acts prohibited by RICO—apply to conduct that happens in foreign countries; and (2) does RICO’s private right of action apply to injuries sustained in foreign countries. Answering those questions, the Court said, “it depends,” and “no.”

All seven justices agreed on the issue of the extraterritorial reach of RICO’s predicate act statutes. The high court unanimously held that a foreign RICO predicate act was actionable if “the predicates alleged in a particular case themselves apply extraterritorially.” Justice Alito gave as obvious examples RICO’s prohibitions on assassinating government officials, taking hostages, or killing a United States national outside the country.

But, the Supreme Court was able to duck the issue of whether much more common RICO predicate acts like mail and wire fraud could apply extraterritorially because the case did not required resolution of those questions. Nevertheless, the court’s holding strongly suggests mail and wire fraud will need to have at least some domestic connection for civil RICO liability.

The Supreme Court also rejected the argument by RJR that RICO required a domestic “enterprise,” in the process overruling a minority of lower courts who had framed the issue in terms of the location of the RICO enterprise rather than the predicate acts. This is the most sensible result given the purpose of civil RICO claims, and Justice Alito noted that a domestic enterprise test “would lead to difficult line-drawing problems and counterintuitive results.”

The justices parted ways on the domestic injury requirement. The majority held that a private civil RICO plaintiff “must allege and prove a domestic injury to business or property” (italics in original). This, the Court ruled, flowed primarily from concerns of comity and “international friction,” given that RICO’s treble damages provision is unique in international law. The majority also declined to factor in RJR Nabisco’s status as a United States corporation, eschewing a case-by-case analysis that depends on the location of the defendant.

Ginsburg, Kagan, and Breyer dissented from this part of the majority holding, with Justice Ginsburg arguing that the majority “reads into [RICO] a domestic-injury requirement for suits by private plaintiffs nowhere indicated in the statute’s text.”Justice Ginsburg also noted the holding produces an anomalous result because “this case has the United States written all over it.”

While RJR Nabisco v. European Communities may have effectively shut the litigation door for most foreign plaintiffs pursuing civil RICO claims, it left open several issues for domestic plaintiffs. Does a predicate act that does not have an express extraterritorial reach have to be entirely domestic? Suppose, for example, a foreign defendant sends fraudulent emails to a domestic corporation in furtherance of a RICO enterprise. Is that actionable wire fraud? Or perhaps a domestic actor engages in acts domestically that are only rendered fraudulent by events happening overseas. RJR Nabisco does not speak to that.

Justice Alito himself recognized that “disputes may arise as to whether a particular alleged injury is ‘foreign’ or ‘domestic[,]’” and he is no doubt correct. But, perhaps more importantly, there are still substantial questions about RICO’s treatment of predicate acts that involve both a foreign and domestic component. As Judge Beth Freeman from the Northern District of California recently wrote in Petroleos Mexicanos v. Hewlett Packard Co., “[c]ourts across the country have grappled with just how much conduct is necessary to show a domestic pattern under RICO” (italics in original). So while the high court’s decision in RJR Nabisco shows the need for domestic injury, it does not provide much clarity as to what level of domestic contact is necessary for a predicate act to fall under RICO.

Finally, the court, by implication, suggested its holding would not apply to criminal RICO prosecutions, since the injury to business or property element is not a part of those cases. One thing is certain: given today’s ever-increasing globalization, these are all issues that will find their way to the courts sooner rather than later.

Jeremy K. Robinson is a partner with San Diego-based Casey Gerry Schenk Francavilla Blatt and Penfield, LLP, and chair of the firm’s Motion and Appellate Practice