Civil RICO claims are often brought by private litigants seeking treble damages for otherwise ordinary business disputes – garden-variety torts and contracts cases. As such, the scope of RICO's applicability to non-U.S. persons, enterprises and activities is important to non-U.S. companies seeking to limit and manage the risk of U.S. litigation.
In a case of far-reaching significance, the United States Court of Appeals for the Second Circuit has denied rehearing of a decision issued last year by a three-judge panel of that court in European Community v. RJR Nabisco, Inc., which adopted a novel approach for determining when the U.S. Racketeer Influenced and Corrupt Organizations ("RICO") statute reaches conduct occurring outside the United States. We summarized that panel's decision, and its potential implications for non-U.S. persons and businesses, in an earlier bulletin. See Three Different Approaches to RICO Extraterritoriality, HSF E-Bulletin (Dec. 4, 2014).
RICO's Long Reach
On the first go in this case, a three-judge panel allowed RICO claims brought by the European Community against various U.S. defendants – for alleged money laundering and other activities connected to bulk cigarette sales outside the United States – to stand notwithstanding that most of the conduct at issue occurred beyond the territorial boundaries of the U.S. In reaching this conclusion, the court held that RICO can be applied extraterritorially if the specific statute prohibiting an alleged predicate act itself applies extraterritorially.
Defendants then unsuccessfully sought en banc rehearing of that decision by all the Circuit's active judges. Five of thirteen judges voted to rehear the case en banc, and wrote opinions dissenting from the April 2015 order denying en banc rehearing.
A Pryrrhic Victory for the EU?
The dissenters argued that the decision is in tension both with the U.S. Supreme Court's decision in Morrison v. National Australia Bank (2010) – which substantially curtailed extraterritorial application of U.S. statutes – and the Second Circuit's own prior decisions on RICO extraterritoriality. Judge Cabranes' dissenting opinion characterized the European Commission's victory as a "pyrrhic" one that "the Community's constituents may have cause to regret in the years ahead," insofar as the decision makes "its citizens, natural and corporate, [t]he likely targets of future RICO actions" based on conduct outside the U.S.
RICO Extraterritoriality Three Ways
With this decision, the lower federal courts in the U.S. are applying at least three distinct tests for purposes of determining the territorial scope of RICO liability. As elaborated in greater depth in our earlier bulletin:
- Courts taking the "enterprise" approach apply RICO only when the RICO "enterprise" is located in the U.S., regardless of where the "pattern of racketeering activity" by which the affairs of the "enterprise" are conducted occurs;
- Those adopting the "pattern of activity" approach apply RICO when the "pattern of racketeering activity" required to state a viable RICO claim occurs in the United States, regardless of where the "enterprise" is located (i.e. foreign or domestic); and
- A smaller number, now led by the Second Circuit, follows a "predicate act" approach, giving the RICO statute extraterritorial reach to the same extent Congress intended the RICO predicate offenses at issue in a particular case to apply to actions or events abroad.
Obviously, none of these approaches is particularly straightforward. How, for instance, under the first two approaches, does one pinpoint the location of an "enterprise" or a "pattern of activity" in a world where people and events so commonly cross and straddle national borders (both literally and virtually)? And in terms of the Second Circuit's "coextensive predicate act" test, must the extraterritorial predicate act alleged be one of the two predicate acts a claimant is required to prove in order to establish RICO liability, as Judge Maggi wonders in her separate dissenting opinion in European Community?
Clear as Mud
These are vexing questions of consequence, and the Second Circuit's denial of rehearing only further deepens the mystery and uncertainty in the lower federal courts over the proper test for determining whether a RICO claim involves extraterritorial application of a U.S. statute. This increases the likelihood that the U.S. Supreme Court will review theEuropean Commission case, or another case involving similar issues, in order to resolve the different approaches being taken by lower federal courts in the wake of its supposedly clarifying Morrison decision. Until then, the territorial limits of RICO liability will continue to be unsettled, causing considerable ambiguity for non-U.S. businesses engaged in activities that touch or concern the U.S. in some way.