United States: Supreme Court: RICO Has Extraterritorial Reach But Requires Domestic Injury

Nicholas Melzer and Vince Farhat are Partners and Michael Boardman is an Associate in Holland & Knight's Los Angeles office

HIGHLIGHTS:

• The Supreme Court's June 20, 2016, ruling firmly establishes that certain "predicate acts" committed abroad may result in RICO liability.
• However, though a RICO claim may be predicated on foreign conduct, a private civil plaintiff must plead "domestic injury."

The Supreme Court issued an important opinion on June 20, 2016, regarding the extraterritorial reach of the Racketeering Influenced and Corrupt Organizations Act (RICO) that may have real-world implications for companies operating abroad. In RJR Nabisco, Inc. v. European Community, et al., No. 15-138 (June 20, 2016), 2016 WL 3369423 (RJR Nabisco), the Court held that some foreign conduct may be actionable under RICO and that private civil plaintiffs may predicate RICO claims on certain foreign conduct if they allege "domestic injury" resulting from those foreign acts.

The Court's ruling is a double-edged sword for multinational companies. While it generally prevents plaintiffs, including foreign governments, from bringing civil RICO claims for conduct that does not cause injury in the United States, the decision also may provide an additional avenue for private plaintiffs to seek treble damages for conduct that occurred solely in other countries.

RICO's Broad Reach

RICO makes it unlawful (and provides a private right of action) for "any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity ..." 18 U.S.C. §1962(c). The statute defines "racketeering activity" very broadly to include activities — referred to as "predicate acts" — normally associated with organized crime, such as "murder, kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled substance or listed chemical," but it also includes more common predicate acts, such as mail and wire fraud. 18 U.S.C. §1961(1). Civil RICO claims have become a favorite of the plaintiffs' bar in recent years due to their stigma as "quasi-criminal," the Supreme Court's prior admonition that "RICO is to 'be liberally construed,'" and the statute's provision for treble damages and attorney's fees. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 497-98 (1985); 18 U.S.C. 1964. Until last week, it was unclear to what extent foreign conduct could create RICO liability.

RJR Nabisco in the Lower Courts: Mixed Answers on RICO's Extraterritorial Reach

The facts of RJR Nabisco are complicated and its procedural history is long. Greatly simplified, the European Community (EC), on behalf of 26 of its member states, filed a civil suit against RJR Nabisco, Inc. and various related entities (collectively, RJR) in 2000, alleging that RJR had been engaged in a complex money laundering scheme in violation of RICO. RJR Nabisco, No. 15-138 at 4. The scheme had multiple parts and involved allegations that Colombian and Russian organizations smuggled illegal narcotics into Europe and sold those narcotics in Europe in exchange for euros. Those euros were then sold by money brokers to cigarette importers at discounted rates. The importers then purchased cigarettes from wholesalers, who had purchased cigarettes from RJR Nabisco, and then delivered them into the European Union. The money brokers then used the proceeds from the sale of the euros to help finance further importation of narcotics and continue the money laundering cycle. The EC claimed that this conspiracy harmed its members in various ways, including through competitive harm to their state-owned cigarette businesses, lost tax revenue from black-market cigarette sales, harm to European financial institutions, currency instability and increased law enforcement costs.

Since its filing in 2000, the case has wound its way up and down the federal court system at the pleadings stage. In 2011, the District Court dismissed the EC's Second Amended Complaint — "a structureless morass of allegations, devoid of any sequential description of events" — on the grounds that RICO does not apply to extraterritorial acts. European Community v. RJR Nabisco, Inc., 2011 WL 843957 at 2, 7 (E.D.N.Y. 2011). The District Court reasoned that because "RICO is silent as to extraterritorial application," and the "'enterprise'. . . [is] the 'focus' of the statute," "a RICO 'enterprise' must be a 'domestic enterprise'" in order for RICO to apply. Thus, the District Court held that the EC's RICO claims were extraterritorial and must be dismissed because the complaint "strongly suggests that the money laundering [conspiracy] was directed by South American and European criminal organizations." The Second Circuit rejected the District Court's reasoning and reversed, holding that even though RICO is silent as to its extraterritorial application, its predicate acts are not. European Community v. RJR Nabisco, Inc., 764 F.3d at 139. The Court of Appeals held that "RICO applies extraterritorially if, and only if, liability or guilt could attach to extraterritorial conduct under the relevant RICO predicate," and, because the complaint alleged predicate acts with extraterritorial reach, including money laundering and material support for terrorism, it was dismissed in error. In contrast, the Ninth Circuit had recently held that RICO does not apply extraterritorially. United States v. Chao Fan Xu, 706 F.3d 965, 974–975 (9th Cir. 2013).

The Supreme Court's Answer: RICO Claims May Be Predicated on Some Extraterritorial Acts, But Only Where There is Domestic Injury

The Supreme Court reversed and remanded the Second Circuit's decision on June 20, 2016. RJR Nabisco, No. 15-138. Justice Samuel Alito, writing for a four-justice majority, partially agreed with the Second Circuit and held that "a violation of §1962 [RICO] may be based on a pattern of racketeering that includes predicate offenses committed abroad, provided that each of those offenses violates a predicate statute that is itself extraterritorial." Thus, RICO applies to all "patterns of racketeering," "regardless of whether they are connected to a 'foreign' or 'domestic' enterprise." For example, though "[t]he inclusion of some extraterritorial predicates does not mean that all RICO predicates extend to foreign conduct," "a violation of §1962 could be premised on a pattern of killings of Americans abroad in violation of §2332(a) — a predicate that all agree applies extraterritorially — whether or not any domestic predicates are also alleged." Additionally, however, the court held that even when a RICO claim is permissibly predicated on foreign conduct, "a RICO enterprise must engage in, or affect in some significant way, commerce directly involving the United States." Therefore, "[a] private RICO plaintiff . . . must allege and prove a domestic injury to its business or property." RICO "does not allow recovery for foreign injuries." Justices Ruth Bader Ginsburg, Stephen Breyer and Elena Kagan concurred in the Court's ruling regarding the extraterritorial application of RICO, but dissented from the Court's ruling requiring domestic injury. Justice Sonia Sotomayor took no part in the consideration or decision of the case.

Potential RICO Liability for Foreign Conduct Reinforces the Need for Effective International Compliance Programs

The Court's decision provides much-needed clarity regarding the extraterritorial reach of RICO. It generally prevents plaintiffs, including foreign governments, from bringing civil RICO claims in the U.S. for conduct abroad that injures their interests abroad. But, at the same time, the decision also clears a path for private plaintiffs to bring civil RICO claims in the U.S., and seek treble damages, for conduct that occurred solely in other countries. The overall impact of this decision remains uncertain, but it is possible that companies will see an increase in civil RICO cases based on foreign conduct. Given the size and scope of many multinational companies and organizations, effective international compliance programs remain essential to reduce the risk of civil RICO liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.