Foreign Holders of Arbitral Awards May Add a RICO Claim to Their Enforcement Arsenal

On June 22, 2023, in a 6–3 decision authored by Justice Sotomayor, the United States Supreme Court held that a foreign national-holder of a foreign arbitration award, which was recognized in the United States, can assert a RICO¹ claim in the United States against the judgment debtor who was accused of impairing enforcement of the judgment by alleged racketeering activity that largely occurred in or was directed from and targeted a U.S. state.² In so doing, the Supreme Court overruled the Seventh Circuit’s “bright line” rule that for civil RICO’s purposes a party experiences an injury³ to its intangible property (i.e., a right to enforce an award) at the party’s residence. Instead, the Supreme Court adopted a “context-specific” inquiry to determine if a “domestic injury” has been suffered.

As we previously reported on the decision, in the underlying dispute a Russian national, Vitaly Smagin, claimed his former business partner, Ashot Yegiazaryan, damaged him in connection with a real estate venture in Russia. In 2014, Smagin, secured an $84 million arbitration award against Yegiazaryan and filed a successful action in California (where Yegiazaryan established residence) to enforce the award under the New York Convention. Smagin later filed a civil RICO action in California against Yegiazaryan and others, including CMB Monaco, a Monaco-based bank. He alleged Yegiazaryan and his associates conducted an enterprise designed to prevent him from collecting on his California judgment. Yegiazaryan’s alleged scheme involved creating shell companies in the United States, having his associates file fraudulent judgments against Smagin, submitting forged documents to the district court, and establishing foreign trusts, companies, and bank accounts. One of those bank accounts was at CMB Monaco. Smagin alleged CMB Monaco knew about Yegiazaryan’s illegal scheme but accepted the deposit anyway. The district court dismissed the complaint for lack of a domestic injury. The Ninth Circuit reversed, holding that the location of the intangible property turns on a “context specific” approach, particularly the purpose the intangible property serves, and that Smagin suffered an injury in California because Yegiazaryan’s acts were alleged to subvert Smagin’s rights in California.

In affirming the Ninth Circuit, the Supreme Court stated that a “context-specific inquiry is most consistent with … the Court’s decision in RJR Nabisco” because an assessment needs to be made whether an injury was suffered outside the United States (in which case, it is not actionable under RICO) or in the United States (in which case it is actionable under RICO). The Supreme Court rejected the bright-line rule from the Seventh Circuit barring RICO standing to a foreign national for injury to an intangible property, citing a passage from RJR Nabisco that “’application of [the domestic-injury] rule in any given case will not always be self-evident, as disputes may arise as to whether a particular alleged injury is ‘foreign’ or ‘domestic.’”⁴ The Court directed the lower courts to “engage in a case-specific analysis that looks to the circumstances surrounding the injury.”⁵ To whomever seeks further clarity, the Supreme Court somewhat unhelpfully stated that “no set of factors can capture the relevant considerations for all cases.”⁶ The only two factors the majority pointed to in their opinion were (1) the alleged racketeering conduct in the United States and (2) the rights conferred by the California judgment to enforce the foreign award against the assets held by the judgment-debtor in California.

Justice Alito filed a dissenting opinion, in which Justice Thomas joined, and Justice Gorsuch joined as to Part I (that the Court should have dismissed the writ of certiorari as improvidently granted). In Part I, Justice Alito stated that the Seventh Circuit’s decision contains little analysis as to why a party sustains injuries to its intangible property at its residence, and the Third Circuit and the Ninth Circuit did not coalesce around any common set of factors to guide the civil RICO domestic-injury inquiry for intangible-property claims. Justice Alito criticized the majority for offering virtually no guidance to the lower courts on whether the two factors cited are both necessary or whether either is sufficient, what weight the factors should have, whether additional factors are relevant (and, if so, what are they?), and whether the nature of the intangible property itself is relevant. In Part II, Justice Alito wrote that the Court “should not lightly give foreign plaintiffs access to U.S. remedial schemes that are far more generous than those available in their home nations” and that prior Court precedent has placed premium on workability in extraterritorial-application cases.⁷

Conclusion

The Supreme Court provided foreign nationals-holders of foreign arbitration awards a very powerful tool in their arsenal to enforce foreign awards in the United States. That said, lower courts will have to assess each case separately to determine if the circumstances point to plaintiff suffering a domestic injury. Nothing in the Smagin decision, of course, changes the substantive pleading requirements for a RICO claim. Given the potency of a RICO claim, if one survives a motion to dismiss, we expect the U.S. courts will continue to examine them closely at the pleadings stage, whether the claim arises from actions to impede enforcement of a recognized foreign arbitration award or otherwise.

———————————————-

¹18 U.S.C. § 1964(c).

²Smagin v. Yegiazaryan, 599 U.S. __, No. 22-381 (U.S. June 22, 2023), together with No. 22-383, CMB Monaco, fka Compagnie Monesgasque de Banque v. Smagin et al.,

³Under RJR Nabisco, Inc. v. European Community, 579 U.S. 325, 334 (2016), a RICO plaintiff must allege a “domestic injury.”

⁴Smagin, No. 22-381, Slip. Op. at 9 (quoting RJR Nabisco, 579 U.S. at 353, n.12).

⁵Id. at 9-10.

⁶Id. at 10.

⁷Id. at 5 (Alito, J., dissenting).