2023年7月25日

United States Supreme Court confirms Foreign Plaintiffs may use RICO to enforce Foreign Arbitral Awards

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In June 2023, the United States Supreme Court (the “Supreme Court”), in a 6-3 decision in Yegiazaryan v. Smagin et al1, provided guidance on the private cause of action under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and clarified that the domestic injury requirement is based on a contextual approach considering the circumstances surrounding the alleged injury. This is an important decision which:

(i) means that foreign plaintiffs can rely on RICO to enforce international arbitral awards in US courts; and
(ii) resolved a Circuit split, by expressly rejecting the Seventh Circuit’s rigid residence-based approach, and affirmed the contextual approach adopted by the Third and Ninth Circuits.

In this Legal Update, we take a close look at, and list key takeaways from, the Supreme Court's decision. 

Key Takeaways

  • The Supreme Court’s decision provides welcome relief to foreign plaintiffs who seek enforcement of foreign arbitral awards where the judgment debtor is engaged in fraudulent schemes to conceal assets to prevent enforcement of a confirmed award.
  • The treble damages available under RICO means that a judgment debtor could be liable for up to three times the amount of an award (in addition to attorneys’ fees), with third-party participants potentially jointly and severally liable for that amount as well.  The prospect of such damages should serve as a caution to law firms and banks who assist clients in transferring assets, particularly when the client has been the subject of judgment enforcement actions.
  • Overall, while this decision opens the door to RICO claims being advanced by foreign award creditors, plaintiffs still need to demonstrate the effects of racketeering activity manifested in the US to invoke RICO.
  • The Dissent’s concern that the Majority’s fact-specific analysis does not employ a bright line test or specific list of factors to determine whether a “domestic injury” has been adequately alleged suggests that this issue is likely to be litigated again in the future.  It is also unclear how any such factors are to be weighed against one another, another issue likely to be addressed in future cases.

The Parties and the Facts Underlying the Arbitration

From 2003 to 2009, Ashot Yegiazaryan committed fraud against Vitaly Smagin by stealing Smagin’s shares in a joint real estate venture in Moscow. To avoid criminal indictment in Russia, Yegiazaryan fled to Beverly Hills, California in 2010, where he has since resided. In 2014, Smagin, a resident of Russia, received an LCIA arbitral award in his favor against Yegiazaryan in London (the “Smagin Award”). When Yegiazaryan failed to pay the over $84 million Smagin Award (which ultimately became $92 million, including interest), Smagin filed an enforcement action in the District Court for the Central District of California to confirm and enforce the Smagin Award under the New York Convention.  The District Court confirmed the Smagin Award and entered judgment in Smagin’s favor.

Enforcement of the Arbitral Award in California and Racketeering Activity Preventing Collection of Judgment

While enforcement proceedings were ongoing, Smagin learned of an arbitral award rendered in Yegiazaryan’s favor in an unrelated proceeding in May 2015 in the amount of $198 million (the “Yegiazaryan Award”).  Smagin obtained a preliminary injunction from the District Court which froze Yegiazaryan’s assets in the US, including the proceeds of the Yegiazaryan Award.  The injunction enjoined Yegiazaryan from, inter alia, taking steps to transfer the proceeds from that award to evade Smagin’s collection efforts.

In 2020, Smagin filed a RICO complaint with the same District Court, alleging that Yegiazaryan and the other petitioners including the CMB Bank in Monaco, had taken steps to improperly shield his assets from collection. In particular, he alleged that Yegiazaryan:

  1. accepted the money received pursuant to the Yegiazaryan Award through the London office of an American law firm headquartered in Los Angeles, which was transferred to CMB Bank;
  2. instructed individuals in his inner circle to file fraudulent claims against him in foreign jurisdictions, which he would not oppose, but would encumber the $198 million Yegiazaryan Award;
  3. concealed US assets through shell companies his family members created;
  4. submitted forged evidence to the District Court; and
  5. intimidated a US-based witness.

However, the District Court dismissed Smagin’s complaint, noting that he failed to allege a “domestic injury” as required by the Supreme Court’s decision RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (“RJR Nabisco”). The District Court applied the residence-based approach adopted by the Seventh Circuit noting that the loss or injury from Smagin’s inability to collect on his judgment was experienced in Russia.

On appeal, the Ninth Circuit Court of Appeals reversed the District Court’s decision, finding that Smagin had alleged a “domestic injury” by adopting a contextual approach for the determination of a “domestic injury” under the RICO statute (discussed further below). The Ninth Circuit followed the approach taken by the Third Circuit, which contrasted with the residence-based approach taken by the Seventh Circuit.

The Supreme Court granted certiorari to resolve the Circuit split, affirmed the Ninth Circuit’s judgment, and remanded the case for further proceedings.

The Supreme Court’s Decision

The question before the Supreme Court was whether RICO applies extraterritorially and if Smagin's status as a foreign resident prevented him from being able to prove a "domestic injury." The Supreme Court addressed the issue of what constitutes a "domestic injury" given that the RJR Nabisco Court did not do so based on the facts of that case.

The Supreme Court Adopts the Contextual Approach to “Domestic Injury”

The Supreme Court rejected the bright-line, residence-based approach adopted by the Seventh Circuit. Yegiazaryan argued: (i) any injury cognizable under §1964(c) is necessarily suffered at the Plaintiff’s residence because the private cause of action remedies only economic injuries, which are necessarily suffered at the residence where the economic injury is felt; and (ii) alternatively, that this case involves intangible property, and common law principles locate intangible property at the Plaintiff’s place of residence.

In rejecting both of Yegiazaryan’s arguments, and agreeing with Smagin’s assertion that a contextual approach, as applied by the Third and Ninth Circuits, was appropriate, the Supreme Court determined that courts should look to the circumstances surrounding the alleged injury to assess whether it arose in the US. This means looking at the nature of the alleged injury, the racketeering activity that directly caused it, and the injurious aims and effects of that activity. The Supreme Court noted this approach is consistent with RJR Nabisco, in which the Supreme Court clarified that the domestic injury requirement does not mean that foreign plaintiffs are barred from asserting RICO claims. Yegiazaryan’s position would make the Plaintiff’s residence determinative, thereby barring all foreign plaintiffs from bringing suit, contrary to the holding in RJR Nabisco.

The contextual approach also comports with RJR Nabisco’s two-step determination to rebut the presumption against extraterritoriality namely: (i) if the statute gives a clear, affirmative indication that it applies extraterritorially then the presumption against extraterritoriality is rebutted; and if not, then (ii) one must look to the focus of the statute and determine whether the case involves a domestic application of the statute.

As to the second step considering the focus of the statute, the Supreme Court held that injury is not determined in isolation, but as a product of the racketeering activity. If those circumstances sufficiently ground the injury in the US, making it clear the injury arose domestically, then the plaintiff has alleged a "domestic injury".

In this case, the Supreme Court observed that most of the racketeering activity occurred in the US, including Yegiazaryan’s creation of shell companies to conceal US assets. Even the wrongful acts that occurred overseas, such as the transfer of funds received to satisfy an arbitral award in his favor to a bank in Monaco, had the central purpose of frustrating the enforcement of the Smagin Award through the California judgment. Furthermore, the Supreme Court determined that the injurious effects of the racketeering activities largely manifested in California—the judgment was obtained there; the rights that the judgment provided existed only in California, including post-judgment discovery; the right to seize assets was in California; and the right to seek other appropriate relief was from the District Court for the Central District of California.

Based on the foregoing, the Supreme Court affirmed the Ninth Circuit’s decision and held that Smagin’s interests in the California judgment against Yegiazaryan were directly injured by racketeering activity either conducted in or directed from California with the aim and effect of subverting Smagin’s rights to execute on the judgment in California.

Concerns raised by the Dissent

Justice Alito submitted a dissenting opinion to which Justice Thomas joined, and Justice Gorsuch joined as to Part I regarding whether the Majority’s decision sufficiently resolved the Circuit split. The Dissent asserted that the Majority’s opinion offers virtually no guidance to lower courts, and in fact, risks sowing confusion in extraterritoriality precedents. The Dissent contended that the Third and Ninth Circuits did not present a common set of factors to guide the civil RICO domestic injury inquiry for intangible property claims, and no appellate court even broached the possibility that different types of intangible property may have different rules, such as trademarks. It also noted that, while the Majority appears to envision a long list of factors, it focuses only on the Petitioners’ domestic racketeering conduct and the California rights conferred by the California judgment.

The Dissent was also concerned that the decision risked significant harm to the uniformity of the Supreme Court’s case law, unduly broadened access to domestic remedial schemes to foreign plaintiffs and could result in the elimination of plaintiff’s residence as a factor in the civil RICO extraterritoriality inquiry.

Further Information

The authors and the wider International Arbitration Team are well-placed to advise on the issues arising from the Supreme Court’s decision and on enforcement of arbitral awards more generally.

1 Yegiazaryan v. Smagin, 2023 WL 4110234 (2023)

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