Supreme Court Makes Civil RICO Available Against Fraudulent Domestic Efforts to Avoid International Arbitration Award Enforcement
The U.S. Supreme Court held that a foreign plaintiff can sue a domestic U.S. judgment-debtor under the Racketeer Influenced and Corrupt Organizations Act ("RICO") for the debtor's fraudulent domestic efforts to avoid collection on a U.S. judgment confirming a foreign arbitral award.
On June 22, 2023, the U.S. Supreme Court, in a 6-to-3 decision in Yegiazaryan v. Smagin authored by Justice Sotomayor, held that foreign plaintiffs can bring a civil RICO action when "the circumstances surrounding the alleged injury" arose in the United States. This decision clarified the scope of the "domestic-injury" requirement adopted by RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (2016), which held that "[a] private RICO plaintiff … must allege and prove a domestic injury to its business or property" to overcome the presumption against extraterritoriality. In Smagin, the Court rejected petitioners' bright-line rule that would locate a foreign plaintiff's injury at the plaintiff's residency—typically, in a foreign jurisdiction—and thus preclude foreign plaintiffs from suing under RICO on extraterritoriality grounds. Instead, the Court emphasized that RICO is "notoriously expansive in scope" and its application to foreign plaintiffs "requires a more nuanced approach."
This dispute involved Vitaly Smagin, a Russian national, and Ashot Yegiazaryan, a California resident, who allegedly stole Smagin's shares in a venture in Moscow. Smagin was awarded $84 million in arbitration in London and obtained a federal court judgment in California confirming and enforcing the award under the New York Convention. Smagin, however, did not recover on the judgment because Yegiazaryan had allegedly hidden his assets from collection through domestic and foreign entities. Yegiazaryan also directed his co-conspirators to file fraudulent claims against him in foreign jurisdictions, which he would not oppose, to obtain sham judgments that encumbered his assets and blocked Smagin's access.
Smagin sued Yegiazaryan and his co-conspirators under civil RICO. The district court explained that Smagin's residence is in Russia; thus, he "experiences the loss from his inability to collect on his judgment in Russia." Because Smagin failed to plead a domestic injury, the presumption against exterritoriality barred the suit. The Ninth Circuit reversed, holding that the intangible property's location should be determined using a "context-specific" approach.
The Supreme Court affirmed, holding that the "context-specific" inquiry is most consistent with the Court's extraterritoriality precedents. "[I]n assessing whether there is a domestic injury, courts should engage in a case-specific analysis that looks to the circumstances surrounding the injury," and "[i]f those circumstances sufficiently ground the injury in the United States, such that it is clear the injury arose domestically, then the plaintiff has alleged a domestic injury." Applying this approach, the Court held that Smagin's injury was sufficiently grounded in California: (i) Yegiazaryan lived in California; (ii) much of Yegiazaryan's alleged racketeering activity occurred in California, including Yegiazaryan's attempts to avoid collection on a federal court judgment in California; and (iii) the alleged RICO scheme thwarted the rights conferred on Smagin by the California judgment. Under the "contextual approach," "those allegations suffice to state a domestic injury in this suit."
Justice Alito, joined by Justice Thomas and by Justice Gorsuch in part, dissented, criticizing the "contextual approach" for offering little guidance to lower courts as to when intangible-property injuries were sufficiently domestic. Justice Alito also expressed concern over the Court "lightly giv[ing] foreign plaintiffs access to U.S. remedial schemes that are far more generous than those available in their home nations."
This decision confirms the availability of RICO—including its grant of treble damages and attorneys' fees—to foreign arbitration award creditors where there are sufficient allegations to state a domestic injury.
Jones Day represented RJR Nabisco in RJR Nabisco, Inc. v. European Community, 136 S. Ct. 2090 (2016).
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