Yesterday, the United States Supreme Court reaffirmed and clarified the scope of the presumption against the extraterritorial application of US law. In its decision in RJR Nabisco v. European Community, the Supreme Court held that while the Racketeer Influenced and Corrupt Organizations Act (RICO) may be applied to offenses committed outside of the United States if the alleged predicate acts themselves have extraterritorial scope, to sustain a civil RICO suit, plaintiffs must separately establish the existence of a “domestic injury.”1 The Court’s ruling has two main components. First, the Supreme Court held that RICO applies extraterritorially only to the extent that the “predicate” crimes alleged – meaning, the underlying offenses that make up a pattern of racketeering activity – reach conduct occurring outside the United States; some RICO predicates have such effect, whereas others do not. Second, the Court held that the provision of RICO authorizing private civil suits permits only those claims that are based on a “domestic injury” to the plaintiff’s business or property, rather than those based on a “foreign injury.”
The opinion has several implications for companies that conduct business outside US borders:
- it will allow companies facing civil RICO allegations to defeat such claims in circumstances where private plaintiffs cannot demonstrate a domestic injury;
- it will enable the US Department of Justice to continue bringing RICO cases based on predicate offenses that are either sufficiently domestic or that can occur outside the United States; and
- because the decision offers little guidance regarding the standards that courts should apply in determining whether an offense or an injury should be viewed as foreign or domestic, for purposes of applying federal statutes to transnational conduct, there will be continuing litigation over such questions under RICO and other US laws.
Trends in US law before and after Morrison
In important ways, RJR Nabisco continues a line of recent decisions in which US courts have held that federal statutes do not apply to violations of law allegedly occurring outside the United States. For decades, courts had taken a less restrictive approach by examining the extraterritorial reach of US statutes based on a variety of circumstances presented in each particular case. Applying that approach, courts frequently interpreted federal antitrust, securities, commodities and other laws to reach beyond America’s borders, thus rendering the foreign conduct of foreign defendants actionable in the United States. This jurisprudence created significant uncertainty about potential regulatory and litigation risks faced by businesses operating in an increasingly global economy.
In recent years, however, US courts have sought to limit the circumstances in which US law can be invoked to render foreign conduct actionable in the United States. Starting in Morrison v.
National Australia Bank Ltd, 561 US 247 (2010), the Supreme Court adopted a framework that emphasized the presumption against the extraterritorial application of US law. Thus, as the Court instructed, “when a statute gives no clear indication of an extraterritorial application, it has none.” Applying that principle in Morrison, the Supreme Court held that the Securities Exchange Act of 1934 applied solely to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” In other words, plaintiffs could no longer invoke the Act to claim that they had been defrauded in connection with the purchase or sale of securities, unless those transactions occurred in the United States or involved securities listed on a US exchange. The Supreme Court and lower courts subsequently applied the “presumption against extraterritoriality” to bar civil claims brought under other federal statutes, including the Commodities and Exchange Act, the Bankruptcy Code and the Alien Tort Statute. Such precedent also presented a potential obstacle to government agencies bringing criminal or regulatory enforcement cases based on conduct that had occurred outside the United States.
Since Morrison, plaintiffs have sought alternative ways to pursue civil suits in US courts based on foreign conduct. One such strategy has been to rely upon RICO, a broad and powerful statute that allows private plaintiffs to recover treble damages and other forms of relief. Although originally passed to combat organized crime, RICO’s scope has gradually been expanded to encompass numerous statutory predicates. As a result, plaintiffs have brought civil RICO claims arising from a wide variety of factual settings, even without any alleged connection to traditional organized crime and, increasingly, with limited connection to the United States.
Prior to RJR Nabisco, many businesses justifiably feared that an extraterritorial extension of RICO would provide for an “end run” around earlier rulings that limited the reach of US law.
RJR Nabisco v. European Community
RJR Nabisco involved a long-running civil dispute in which the European Community (EC) and 26 of its member states brought civil RICO claims against RJR and related entities. The EC’s suit was based on allegations that RJR assisted Russian and Colombian criminal gangs in laundering money from illicit drug sales. According to the complaint, “[RJR] directed money-laundering and other criminal activities from their US headquarters, from which they dispatched US citizen-employees to travel abroad to deal directly with criminal elements.” Such conduct allegedly violated five US statutes that are predicate offenses under RICO: mail fraud, wire fraud, money laundering, the Travel Act and providing material support to foreign terrorists.
The plaintiffs alleged that they suffered various injuries as a result of this conduct, including decreased tax revenues, increased law enforcement costs and harms to their markets and financial institutions.
The district court dismissed the complaint, finding that RICO did not apply to extraterritorial conduct. On appeal, the Second Circuit reversed, concluding that RICO applies extraterritorially so long as the alleged predicate offenses have such reach. The Second Circuit further held that because the money laundering and material support for terrorism statutes expressly applied to extraterritorial conduct, a civil RICO claim could be based on foreign violations of those laws. Although the Second Circuit determined that Congress did not provide for the extraterritorial application of the wire fraud, mail fraud or Travel Act laws, it concluded that those predicate offenses, as alleged in the EC’s complaint, were sufficiently domestic and thus could still form part of the EC’s civil RICO claim against RJR. The Supreme Court granted certiorari to determine whether, or to what extent, RICO applies extraterritorially.
Key elements of the Court’s decision
In its opinion, the Supreme Court followed the approach it adopted in Morrison, beginning with the premise that federal statutes do not apply extraterritorially unless Congress has provided a clear indication overcoming that presumption. Significantly, the Court applied that principle both to the provisions of the statute that define prohibited conduct and to the provisions that authorize a private cause of action.
In relation to RICO’s prescriptive or “substantive” terms, the Supreme Court unanimously held that “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.” It further emphasized that the extraterritorial application of some RICO predicates, such as money laundering, should not imply the extraterritorial application of all predicate offenses. In this context, the Supreme Court did not reexamine, and thus left undisturbed, the Second Circuit’s conclusion that certain RICO predicates – including wire fraud, mail fraud and violations of the Travel Act – do not have extraterritorial reach. Moreover, the Supreme Court made clear that the geographic location of the alleged RICO enterprise was not relevant to this analysis.
Continuing, however, the Court (through a majority of four Justices) concluded that RICO’s “civil remedy [set forth in 18 USC. §1964(c)] is not coextensive with §1962’s substantive provisions,” and therefore required separate consideration. Quoting from a prior opinion, the Court noted that “a private right of action raises issues beyond the mere consideration whether underlying primary conduct should be allowed or not, entailing, for example, a decision to permit enforcement without the check imposed by prosecutorial discretion.” The Supreme Court further observed that enabling private plaintiffs to pursue claims for foreign injuries under civil RICO, including treble damages, presents a “danger of international friction.” For those reasons, the Supreme Court examined §1964(c) and concluded that it did not overcome the presumption against the extraterritorial application of US law. To sustain future civil RICO claims, plaintiffs will therefore have to allege and prove a domestic injury.
The Supreme Court’s ruling has several implications for companies that conduct business outside the United States, but it also fails to address several important questions.
The first noteworthy feature of the Court’s decision is its analytical framework. Rather than assessing the extraterritorial applicability of RICO in its entirety, or based solely on the “substantive” terms of the statute that prohibit specified unlawful conduct, the Supreme Court separately considered the scope of each statutory provision. In analyzing each relevant section or subsection, the Supreme Court applied a two-step analysis outlined in Morrison, first determining whether Congress clearly provided for the statute’s extraterritorial application and, where it did not, assessing whether a case was based on a domestic application of the law. This approach may create additional opportunities for defendants to challenge the geographic reach of US statutes, especially in civil litigation. Such efforts should not focus solely on whether a law prohibits foreign violations but should also address other relevant components of any complex statutory scheme – including terms authorizing causes of action, other enforcement mechanisms or remedies.
More immediately, the RJR Nabisco ruling supports two related strategies for companies seeking to resist RICO liability. First, the decision confirms that RICO only applies extraterritorially to the extent that alleged predicate offenses have such reach. As the number of such predicates is limited, the ability of plaintiffs to bring civil RICO claims based on such predicates will likely be limited as well. Second, as discussed above, the decision makes clear that, for private plaintiffs, applicable predicate offenses are necessary but not sufficient components of a viable RICO claim. Plaintiffs must now also plead that they suffered domestic injuries to their business or property. If they cannot do so, their cases cannot proceed. The Supreme Court, however, provided no guidance as to what is or is not a “domestic injury,” leaving that question open for future litigation. This area may well prove to be particularly important in the context of business disputes involving multinational companies, many with US subsidiaries, where there may be significant room to dispute whether the alleged injury occurred in the United States or elsewhere.
This decision will have less impact on US prosecutors bringing criminal RICO cases. Indeed, the Court’s ruling is consistent with the position that the Justice Department advanced in its amicus brief. It is likely, however, that prosecutors will be significantly more restrained, as compared to private plaintiffs, in their use of RICO to target conduct occurring outside the United States, especially in cases that focus on the commercial affairs of legitimate businesses. Moreover, to the extent that criminal RICO cases are based on predicate offenses occurring beyond US borders, courts will have to determine whether the statutes prohibiting such conduct apply extraterritorially, just as in the civil context. Perhaps even more importantly, courts will have to continue considering whether the offenses alleged in civil or criminal cases call for the extraterritorial application of particular statutes or whether, alternatively, plaintiffs and prosecutors have alleged offenses that are sufficiently domestic. Litigation surrounding these issues will therefore continue and will not subside until the courts, or Congress, provide greater clarity.