United States: SCOTUS Resolves Circuit Split On How To Assess Domestic Injury Under RICO

Key Takeaways:

• The Supreme Court, building on its holding in RJR Nabisco, Inc. v. European Community, held in Yegiazaryan v. Smagin that courts must apply a context-specific test when analyzing whether a RICO plaintiff has sufficiently pled a domestic injury.
• Applying this new test, the Court found a foreign plaintiff may bring a RICO claim against a defendant who is seeking to avoid the enforcement of an arbitral award through an alleged pattern of racketeering activity.
• This ruling shows RICO is a powerful U.S. tool to combat fraudulent evasion of judgments enforcing arbitral awards that, when combined with other aspects of U.S. litigation (e.g. discovery), could make the U.S. an attractive forum for plaintiffs to seek enforcement.

In Yegiazaryan v. Smagin, the Supreme Court of the United States built upon its decision in RJR Nabisco, Inc. v. European Community, which concerned whether the Racketeer Influenced and Corrupt Organizations Act ("RICO") applies extraterritorially. 579 U. S. 325 (2006). Circuit courts of appeal had split on how to interpret RJR Nabisco. The Court resolved that split in Yegiazaryan v. Smagin by holding that courts must apply a context-specific test when analyzing whether a plaintiff has sufficiently pled a "domestic injury" as required to state a RICO claim. Applying this test in Yegiazaryan, the Court, in a 6-3 decision, determined that a plaintiff living abroad may bring a private claim in the United States, under RICO, against a domestic defendant that is attempting to avoid payment of a U.S. judgment.

Facts & Procedural History

Respondent, Vitaly Smagin, alleged that petitioner, Ashot Yegiazaryan, defrauded Smagin by stealing his shares in a real estate joint venture in Moscow between 2003 and 2009. Yegiazaryan v. Smagin, No. 22-381, slip op. at 2 (June 22, 2023). According to Smagin, Yegiazaryan moved to Beverly Hills, CA in 2010 to avoid criminal prosecution in Russia. Id. A few years later, Smagin, a resident of Russia, obtained an arbitration award, in London, against Yegiazaryan for more than $84 million for misappropriating Smagin's real estate investment ("First Award"). But Yegiazaryan refused to pay Smagin. Id.

To collect, Smagin filed an action to confirm and enforce the First Award in the Central District of California. The District Court issued a preliminary injunction and froze Yegiazaryan's California assets. Id. Around mid-2015, Yegiazaryan allegedly obtained a $198 million award of his own, pursuant to a separate arbitration proceeding involving another Russian businessman ("Second Award"). Id. To circumvent the asset freeze and prevent Smagin from satisfying his judgment enforcing the First Award by reaching funds obtained in the Second Award, Yegiazaryan allegedly engaged in various fraudulent schemes and other unlawful activities. He allegedly accepted the Second Award funds via the London office of a California law firm. Id. at 2-3. He also allegedly attempted to hide those funds with the help of petitioner CMB Monaco (a bank), by establishing several offshore entities, creating a system of shell companies, and directing his friends and family to submit fictitious claims against him outside the U.S, so he could obtain fraudulent judgments. Smagin contended that the purpose of these tactics was to hide Yegiazaryan's assets from creditors, including Smagin himself. Id. at 3.

In 2016, Smagin allegedly learned of Yegiazaryan's scheme to conceal funds, and he moved for summary judgment in the California District Court to enforce the First Award. Id. The court granted Smagin's motion, awarded him $92 million ("California Judgment"), and ordered Yegiazaryan and his accomplices to stop impeding Smagin's attempts to collect the award. Id. Yegiazaryan failed to comply with these orders, even submitting a forged doctor's note to the District Court, and the Court held him in contempt. Id.

In 2020, Sagin filed a civil RICO action in the Central District of California against Yegiazaryan, CMB Monaco, and others. Id. at 4 n.1. Notably, "RICO provides a private right of action to '[a]ny person injured in his business or property by reason of a violation of' RICO's substantive provisions." Id. at 4 (quoting 18 U. S. C. §1964(c)).

Smagin alleged that the defendants, led by Yegiazaryan, impeded Smagin's collection of the California Judgment "through a pattern of wire fraud and other RICO predicate racketeering acts, including witness tampering and obstruction of justice." Id.

Yegiazaryan moved to dismiss Smagin's RICO claims, based on the Court's ruling in RJR Nabisco, Inc. v. European Community, 579 U. S. 325 (2006), arguing that Smagin failed to allege a domestic injury because he lives in Russia. The District Court dismissed the claim. The Ninth Circuit reversed and the Supreme Court granted certiorari. Id. at 4-5.

RJR Nabisco, Circuit Split, and Majority Decision

The Court explained that the "domestic-injury" requirement for private civil RICO suits "stems from" its decision in RJR Nabisco. In RJR Nabisco, the Court was tasked with deciding whether RICO can apply when the acts and injuries at issue occurred beyond the United States border. Id. at 5-6 (some citations omitted) (citing RJR Nabisco, Inc., 579 U. S. at 334). The Justices analyzed the presumption against extraterritoriality, which provides that "[a]bsent clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application." Yegiazaryan, slip op. at 6 (citations omitted). The Court engaged in the following two-step analysis: (1) determine "whether the statute gives a clear, affirmative indication that it applies extraterritorially" and, if so, the presumption is rebutted, and the analysis is over; and (2) if the presumption is not rebutted in step one, determine "whether the case involves a domestic application of the statute, which is assessed 'by looking to the statute's 'focus.'" Id. (citations omitted).

The Court in RJR Nabisco determined that RICO "does not overcome the presumption at step one because there is no 'clear indication that Congress intended to create a private right of action for injuries suffered outside of the United States.'" Id. at 7 (citations omitted). Regarding the second step, the Court concluded that "[a] private RICO plaintiff . . . must allege and prove a domestic injury to its business or property" when it brings a private RICO action, but it did not decide what constitutes a "domestic injury." Id. In Smagin's case, the District court had to determine whether he had alleged a "domestic injury" in assessing whether he could assert his RICO claim.

Since RJR Nabisco, circuit courts of appeal have disagreed on how to evaluate whether a RICO plaintiff alleges a domestic injury. The Seventh Circuit "'adopted a rigid, residency-based test for domestic injuries involving intangible property,' such as a judgment." This test "locates an injury to intangible property at the plaintiff 's residence" which essentially meant foreign-resident litigants like Smagin could not claim a "domestic injury" because they live outside of the United States. Id. at 5 (some citations omitted) (citing Armada (Sing.) PTE Ltd. v. Amcol Int'l Corp., 885 F. 3d 1090, 1094 (7th Cir. 2018)). The Second, Third, and Ninth Circuits adopted a "context specific" approach. Id. (some citations omitted) (citing Smagin v. Yegiazaryan, 37 F.4th 562, 568-70 (9th Cir. 2022)); Bascuñán v. Elsaca, 874 F. 3d 806, 809 (2d Cir. 2017); Humphrey v. GlaxoSmithKline PLC, 905 F. 3d 694, 696 (3d Cir. 2018).

The Supreme Court rejected the Seventh Circuit's approach and sided with the Ninth Circuit. Yegiazaryan, slip op. at 7-8. The Court held that "determining whether a plaintiff has alleged a domestic injury [for purposes of RICO] is a context-specific inquiry that turns largely on the particular facts alleged in a complaint." Id. at 8. This means that district courts must consider the "circumstances surrounding the alleged injury to assess whether it arose in the United States." Id. "If 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." Id. at 9-10. Notably, because the analysis is contextual and "the range of predicate acts" for RICO is quite expansive, "no set of factors can capture the relevant considerations for all cases." Id. at 10.

To assess Smagin's RICO claim, the Court "look[ed] to the nature of the alleged injury, the racketeering activity that directly caused it, and the injurious aims and effects of that activity." Id. at 8-9. The Court acknowledged that, to an extent, Smagin felt the economic harm from Yegiazaryan's actions in Russia. Id. at 10. But the Court noted that if it focused strictly on Smagin's residence, it would miss critical features of the alleged injury. Id. In the Court's view, the circumstances of the injury that Smagin alleged made clear that it arose in the United States, for multiple reasons.

First, "[m]uch of the alleged racketeering activity that caused the injury occurred in the United States" because "Yegiazaryan took domestic actions to avoid collection, including allegedly creating United States shell companies to hide his United States assets, submitting a forged doctor's note to a California District Court, and intimidating a United States-based witness." The Court stressed that these wrongful actions were committed in, and aimed at, Los Angeles, CA, with the primary purpose of impeding Smagin's ability to collect the California Judgment. Id.

Second, "the injurious effects of the racketeering activity largely manifested in California." Id. at 11. The Court emphasized that the California Judgment could only be enforced in California because that is where Yegiazaryan resides and where Smagin could vindicate his rights (e.g., the right to obtain post-judgment discovery or other relief from the District Court). Yegiazaryan allegedly interfered with these rights in California. Id.

In sum, the Court held "Smagin's interests in his California judgment against Yegiazaryan, a California resident, were directly injured by racketeering activity either taken in California or directed from California, with the aim and effect of subverting Smagin's rights to execute on that judgment in California." Accordingly, Smagin sufficiently alleged a "domestic injury" in pleading his RICO claim. Id.

Dissent

Justice Alito, joined by Justice Thomas and, in part, by Justice Gorsuch, dissented. Justice Alito was reluctant to provide foreign plaintiffs with the option to use RICO in the context of arbitral award enforcement. He believed the Court should have dismissed certiorari as "improvidently granted" and waited for the lower courts to consider these issues further before weighing in. Yegiazaryan, slip op. at 2-3, 5 (Alito, J. dissent) (explaining "that "[a] thrust of our international-comity jurisprudence is that we should not lightly give foreign plaintiffs access to U. S. remedial schemes that are far more generous than those available in their home nations.").

Potential Implications of the Supreme Court's Decision

The Supreme Court's decision should help guide district courts dealing with the extraterritorial application of RICO. The Court explained how district courts should assess whether RICO applies to cross-border disputes involving conduct that occurred both domestically and overseas. The Court rejected a bright line approach. Instead, it adopted a context-specific "domestic injury" test, whereby private RICO actions may proceed only if, after considering the circumstances that gave rise to the alleged injury, the injury is found to be grounded in the United States (assuming all other relevant RICO requirements are met).

The Court's decision makes the powerful tool that is RICO available to non-United States plaintiffs for going after defendants who engage in a pattern of racketeering activity to escape payment of an arbitral award. When combined with other components of United States litigation, such as discovery and well-developed precedent, this decision could make the United States a hotspot for litigants—particularly foreign plaintiffs in Smagin's position—seeking to enforce arbitral awards. At the same time, because the Court underscored that each RICO case must be evaluated in a context-specific manner, it is left to be determined how trial and appellate courts will interpret this decision.

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