Supreme Court Clarifies the Extraterritorial Reach of RICO

Why it matters: On June 20, 2016, the Supreme Court decided RJR Nabisco, Inc. v. The European Community, in which the Court clarified the extraterritorial scope of the Racketeer Influenced and Corrupt Organizations Act (RICO) and held that RICO can, under certain circumstances detailed in the opinion, apply to conduct that occurs outside of the United States. As with the Foreign Corrupt Practices Act, the decision bolsters the ability of federal prosecutors to pursue cases based on foreign misconduct under RICO’s criminal provisions. However, the decision also limits the ability of private RICO plaintiffs—such as the European Community in this case—to pursue their civil RICO claims if they can’t prove a domestic (U.S.) injury.

Detailed discussion: On June 20, 2016, the Supreme Court decided RJR Nabisco, Inc. v. The European Community, in which the Court clarified the extraterritorial scope of the Racketeer Influenced and Corrupt Organizations Act (RICO, found at 18 U.S.C. Section 1961 et seq.). The Court reversed and remanded the Second Circuit and held that a violation of RICO can be based on a pattern of racketeering that includes predicate offenses committed abroad, so long as each of those offenses violates a predicate statute that is itself extraterritorial. However, the Court limited its holding with respect to RICO plaintiffs bringing a private civil right of action (as opposed to the government bringing a criminal prosecution), finding that such private plaintiffs must allege and prove a domestic (U.S.) injury.

First, a brief recap of the relevant facts in this long-running 16-year-old case: The European Community and 26 of its member states (collectively, the EC) filed suit in 2000 against RJR Nabisco, Inc. and related entities (collectively, RJR) under RICO, alleging that RJR participated in a global money-laundering scheme in association with various organized crime groups pursuant to which drug traffickers smuggled narcotics into Europe and sold them for euros that—through transactions involving black-market money brokers, cigarette importers, and wholesalers—were used to pay for large shipments of RJR cigarettes into Europe. The EC’s complaint alleged that RJR violated RICO by engaging in a pattern of racketeering activity that included numerous predicate acts of money laundering, material support to foreign terrorist organizations and wire fraud, to name a few. The Eastern District of New York judge granted RJR’s motion to dismiss on the grounds that RICO does not apply either to racketeering activity occurring outside the United States or to foreign enterprises. The Second Circuit reinstated the EC’s claims in 2014, concluding that RICO did apply extraterritorially to the same extent as the predicate acts of racketeering that underlie the alleged RICO violation, and that certain predicate acts alleged in the case expressly applied extraterritorially. The Second Circuit further held, in a supplemental opinion issued after denying rehearing the first time, that a private plaintiff such as the EC doesn’t have to show a domestic (U.S.) injury in order to bring a RICO civil right of action and is permitted to recover for a foreign injury caused by the violation of a predicate statute that applies extraterritorially (the Second Circuit later denied rehearing en banc). RJR filed a petition for writ of certiorari with the Supreme Court, which agreed to review the question presented of “[w]hether, or to what extent, the Racketeer Influenced and Corrupt Organizations Act (‘RICO’) applies extraterritorially.”

Numerous opinions, dissents and partial joinders among the Justices reflected a lack of consensus but ultimately translated to (1) a unanimous holding by the Court that RICO can apply to conduct that occurs outside the United States to the extent that the predicate acts alleged in a particular case themselves apply extraterritorially; and (2) a majority holding by the Court that private RICO plaintiffs (which the EC was found to be in this case) bringing a civil right of action must allege and prove that they have been injured domestically (i.e., in the U.S.). The first holding was considered a win for the EC, but the second holding was a loss for the EC that ultimately determined the outcome of the case: because the EC’s domestic injury RICO claims had been waived and dismissed with prejudice at the district court level and its sole remaining RICO claims alleged foreign injury, the Court ruled they must be dismissed.

First unanimous holding: The Court held that “[a] violation of §1962 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.”

The Court began its analysis by reviewing at length the law of extraterritoriality and the principle of “the presumption against extraterritoriality” (i.e., “[a]bsent clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application”) as interpreted by the courts. With these “guiding principles in mind,” the Court found that, in this case, the presumption against extraterritoriality with respect to RICO “has been rebutted—but only with respect to certain applications of the statute.” The Court said that the “most obvious textual clue” to such rebuttal is that “RICO defines racketeering activity to include a number of predicates that plainly apply to at least some foreign conduct … includ[ing] the prohibition against engaging in monetary transactions in criminally derived property, which expressly applies, when ‘the defendant is a United States person,’ to offenses that ‘tak[e] place outside the United States.’ ” The Court went on to state that:

We agree with the Second Circuit that Congress’s incorporation of these (and other) extraterritorial predicates into RICO gives a clear, affirmative indication that §1962 applies to foreign racketeering activity—but only to the extent that the predicates alleged in a particular case themselves apply extraterritorially. Put another way, a pattern of racketeering activity may include or consist of offenses committed abroad in violation of a predicate statute for which the presumption against extraterritoriality has been overcome.

The Court emphasized the important limitation that “foreign conduct must violate ‘a predicate statute that manifests an unmistakable congressional intent to apply extraterritorially,’ ” and, with specific reference to RICO, the Court pointed out that analysis will have to be made on a case-by-case basis because “[a]lthough a number of RICO predicates have extraterritorial effect, many do not. The inclusion of some extraterritorial predicates does not mean that all RICO predicates extend to foreign conduct.” (Emphasis in original.)

Last, the Court rejected RJR’s argument that, even if RICO may apply to foreign racketeering, the statute does not apply to foreign enterprises, stating that, “based on RICO’s text and context, … Congress intended the prohibitions in [the RICO statute] to apply extraterritorially in tandem with the underlying predicates, without regard to the locus of the enterprise.” The Court cautioned, however, that “[a]lthough we find that RICO imposes no domestic enterprise requirement, this does not mean that every foreign enterprise will qualify.” The Court said that the foreign enterprise “must engage in, or affect in some significant way, commerce directly involving the United States—e.g., commerce between the United States and a foreign country. Enterprises whose activities lack that anchor to U.S. commerce cannot sustain a RICO violation.”

Second majority holding: The Court held that “Section 1964(c) [RICO’s private civil right 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 Court explained that “[i]rrespective of any extraterritorial application of §1962, we conclude that §1964(c) does not overcome the presumption against extraterritoriality.” The lack of a clear indication of legislative intent, as well as issues of foreign sovereignty (e.g., the need to protect against individuals from one country bringing civil suits in other countries solely to take advantage of more generous laws), appeared to govern the Court’s reasoning here:

Allowing recovery for foreign injuries in a civil RICO action, including treble damages, presents … danger of international friction.... This is not to say that friction would necessarily result in every case, or that Congress would violate international law by permitting such suits. It is to say only that there is a potential for international controversy that militates against recognizing foreign-injury claims without clear direction from Congress. Although “a risk of conflict between the American statute and a foreign law” is not a prerequisite for applying the presumption against extraterritoriality…, where such a risk is evident, the need to enforce the presumption is at its apex.

The Court noted that, as the answer will not always be self-evident, factual disputes may arise as to whether an injury is “foreign” or “domestic” that a court will have to resolve. The Court said, however, that it need not reach such a determination in the case before it because the EC, found to be a private civil RICO plaintiff, had waived its damages for domestic injuries in the district court proceedings, and the judge had subsequently dismissed those claims with prejudice. The Court therefore concluded that, as the EC’s remaining RICO claims rested entirely on foreign injuries, those claims must be dismissed. The Court reversed the Second Circuit and remanded to the district court for further proceedings consistent with the Court’s opinion.

See here to read the Supreme Court’s 6/20/16 opinion in RJR Nabisco, Inc. v. The European Community.



pursuant to New York DR 2-101(f)

© 2022 Manatt, Phelps & Phillips, LLP.

All rights reserved