It is not uncommon for courts today to adjudicate claims arising outside their territorial jurisdiction. Some jurisdictions, such as the US, stand out more in this regard than others. The extraterritorial application of US law stokes fear that US courts will apply substantive US law whenever acts taking place beyond its shores have some alleged “effect” within the territorial boundaries of the US or areas subject to its jurisdiction and control. This can be an especially vexing problem for corporations looking for some degree of predictability and certainty in an age when so much commerce crosses so many borders.
The presumption against the extraterritorial application of US legislation, rooted in the notion that Congress does not wish to exercise its regulatory power extraterritorially (absent a contrary statement of congressional intent), is a centuries-old legal doctrine aimed at confining the operation and effect of US statutes to the territorial limits of the US. Over the course of the 20th century, however, this presumption lost much of its force, as US courts began applying US laws to foreign conduct having an “effect” within US territory.
Things changed dramatically in 2010, when the US Supreme Court declared the “effects test” dead and reaffirmed the presumption against extraterritoriality in all cases. That year, the nation’s highest court decided Morrison v. National Australia Bank, a securities case, holding that no federal statute has extraterritorial application absent clear indications of congressional intent otherwise.
Since then, federal courts have struggled to apply the Morrison presumption against the extraterritorial application of U.S. statutes of interest to international business, including the Racketeer Influenced and Corrupt Organizations (RICO) statute. Confusion reigns.
In the wake of Morrison, lower federal courts have adopted several distinct approaches to the operation of the presumption against extraterritoriality in the context of RICO claims involving conduct outside of the United States with some element of domesticity. As a consequence, the extent to which RICO liability attaches to extraterritorial events will remain a murky issue for international companies and individuals engaged in commerce involving the United States until one of these cases reaches the Supreme Court.
All that can be said for now with certainty is that absent some territorial hook sufficient to displace the presumption against extraterritoriality, the RICO statute is unlikely to be extended to purely extraterritorial “foreign-cubed” cases, such as those in which alien plaintiffs sue alien defendants for conduct that occurred entirely in foreign territory. This is cold comfort, however, given the global nature of commerce today.
What follows is a brief introduction to RICO liability, a thumbnail sketch of the Supreme Court’s game-changing decision in Morrison, an overview of the divergent approaches being taken by federal courts to extraterritorial application of the RICO statute, and some takeaway points.
The Nature of RICO Liability
RICO, a hybrid criminal and civil statute enacted by Congress in 1970 to protect inhabitants of the territorial US from the pernicious effect of Mafia-like criminal enterprises, has found broad application beyond the sort of hard-core criminal conduct that prompted its passage nearly 50 years ago.
Broadly speaking, this statute prohibits the use of any “enterprise” to pursue a “pattern of racketeering activity,” defined as a series of “predicate acts,” consisting of various offences enumerated in the RICO statute — including, for example, fraud by means of electronic communication or the mails, and (among other things) money laundering. A RICO “enterprise” may by statute include a legal entity, but the concept includes as well various informal associations, including an “association in fact” — in essence, a group of persons acting together in a common course of conduct for a common purpose that violates RICO.
In addition to criminal penalties that the US government might seek to enforce, persons injured by entities that commit proscribed conduct through a pattern of racketeering activity may maintain a civil suit for treble damages and attorney’s fees against any member of the RICO enterprise. Each member of the enterprise may be held liable for actions of other members of the enterprise done in furtherance of the enterprise’s illegal activity. The RICO statute thus has the potential to significantly expand and broaden the liability that corporations might otherwise face under US common-law principles, imposing treble damages, enabling a successful plaintiff to recover attorney’s fees, and imposing vicarious liability on each member of a RICO enterprise for the actions of other members.
Mindful of this leverage, plaintiffs in commercial disputes frequently seek to invoke RICO’s civil liability provisions by reframing garden-variety business and other tort claims (eg, fraudulent inducement to contract or failure to warn) against a “racketeering enterprise” for a pattern of “racketeering activity” based on alleged fraudulent misstatements. In short, where little or none of the conduct in question occurs in the United States, non-US companies may be surprised to find themselves facing the prospect of RICO liability and trebled damages in a US federal court, rather than a standard breach of contract or tort claim in the jurisdiction where the activities took place.
The Morrison Decision
In Morrison v. National Australia Bank (2010), the United States Supreme Court held that certain anti-fraud provisions of the US securities laws do not apply extraterritorially. In so doing, the court rejected the fact-intensive “conduct and effects” test prevalent for decades in the US judicial system and, instead, reinvigorated the general presumption against extraterritorial application of US law. It held that, unless Congress clearly expresses an affirmative intention to give a statute extraterritorial effect, courts must presume that it is primarily concerned with domestic conditions: “When a statute gives no clear indication of an extraterritorial application, it has none.”
The court recognised, however, that the presumption often “is not self-evidently dispositive” and “requires further analysis,” because “it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States.” To keep the presumption from becoming a “craven watchdog” that “retreat[s] to its kennel whenever some domestic activity is involved in the case,” it instructed lower courts to determine “the objects of the statute’s solicitude” or “focus.” In applying that presumption to the anti-fraud provisions of US securities laws, the Supreme Court found that their focus was “not upon the place where the deception originated, but upon purchases and sales [of securities] in the United States,” which plaintiffs could not allege or prove — leading to nonsuit.
In different words, the Morrison presumption applies where the “focus” of the federal statute at issue is on either domestic acts or events. If the events in question occur primarily outside the United States, the statute does not apply absent clear congressional intent to the contrary. Morrison’s “focus” test, however, which operates to restrict what can be deemed territorial or domestic, can be difficult to apply to statutes like RICO that lack a single “focus” or do not regulate discrete “transactions,” like the US securities laws at issue in that case.
Divergent Approaches to RICO Extraterritoriality Post-Morrison
In the wake of Morrison, lower federal courts have diverged (both within and between jurisdictions) in their analysis of the RICO statute’s “focus,” with different courts coming away with different ideas on that subject after plumbing the depths of that law’s text and structure.
One line of cases looks for the existence of a domestic “racketeering enterprise,” reasoning that RICO proscribes unlawful “enterprises,” which are the centrepiece of each element of civil RICO liability. Another line, guided by the belief that RICO is aimed chiefly at “racketeering activity,” looks for evidence of a domestic “pattern of racketeering activity” (ie the series of unlawful predicate acts committed in furtherance of a RICO enterprise). Led by the country’s influential Second Circuit, a third approach, arguably turning Morrison’s “focus” analysis on its head, holds that the geographic reach of the RICO statute is exactly coterminous with that of the various statutes defining the predicate offences pleaded in support of a civil RICO action, which could be literally almost anything in the circumstances given the breadth of that part of the RICO statute.
Domestic Racketeering Enterprise
In Cedeno v. Intech Group (2010), decided in the immediate aftermath of Morrison, a federal district court in the Southern District of New York held that RICO “does not apply where … the alleged enterprise and the impact of the predicate activity upon it are entirely foreign.” Addressing a claim by a Venezuelan citizen that he was wrongly imprisoned at the behest of various Venezuelan persons and entities allegedly involved in a conspiracy to launder money through New York banks, the court held that such claims were outside the scope of RICO. Observing that “nowhere does the [RICO] statute evidence any concern with foreign enterprises,” and that “the focus of RICO is on the enterprise,” the court held that RICO does not apply where the alleged enterprise is entirely foreign in nature.
The reality, however, is that a RICO enterprise often lacks a clear location. Among other things, RICO enterprises may include ad hoc “associations in fact” spanning multiple jurisdictions and lacking any clear organisational structure. In determining the location of a RICO enterprise, therefore, courts following the Cedeno approach tend to concentrate on the “nerve centre” of the alleged enterprise — the situs of its “brains,” the place (or places) where the “decisions effectuating the relationships and common interest of [the enterprise’s] members” are made.
In many cases, the “nerve centre” of a RICO enterprise may be relatively clear, as where a criminal organisation’s leadership principally operates in a particular non-U.S. jurisdiction, and any U.S. activity in furtherance of the enterprise is incidental and clearly directed from the enterprise’s non-US centre of gravity. Because, however, a RICO enterprise may have more than one “nerve centre,” in many cases it may be quite difficult as a practical matter to determine whether, for purposes of RICO’s regulatory proscriptions, the “enterprise” is foreign or domestic in nature.
Domestic Racketeering Activity
The US Court of Appeals for the Ninth Circuit — the federal appeal court responsible for California and other Western states — has followed an alternative approach to delineating the territorial scope of RICO. In United States v. Chao Fan Xu (2013), this court rejected Cedeño’s focus on finding a domestic “racketeering enterprise,” holding instead that the RICO statute applies whenever the “pattern of racketeering activity” occurs in the United States, regardless of whether the “racketeering enterprise” is foreign or domestic.
The enterprise alleged in Chao Fan Xu involved a scheme centred in Asia to divert funds from a Chinese bank, but a number of acts alleged to have furthered the scheme occurred in the United States — including real estate purchases and fraudulent marriages to circumvent US immigration laws. Concluding that the “heart of any RICO complaint is the allegation of a pattern of racketeering,” the Ninth Circuit held that RICO’s applicability is determined by the place where the alleged predicate acts are committed, rather than the “nerve centre” of the RICO “enterprise.”
The court reached this conclusion after finding it unlikely that Congress would have intended foreign RICO “enterprises” to escape liability for violations of the RICO statute occurring within the United States. Reasoning that a US corporation would be liable under the “enterprise” or “nerve centre” approach for orchestrating a RICO conspiracy involving extensive unlawful activity in the US, while a non-US corporation in the same situation would escape liability — while stressing that a “pattern of racketeering activity” is the essence of a RICO claim — the Ninth Circuit held that RICO reaches domestic “racketeering activity,” even if the “racketeering enterprise” is located outside US territory. One district court in New York — within the Second Circuit — has endorsed this approach, albeit prior to the Second Circuit’s recent decision adopting a different test.
Geographic Reach of the Predicate Offences
More recently, the US Court of Appeals for the Second Circuit — the federal appeals court with jurisdiction over several states, including New York — has adopted yet a third approach, holding that the RICO statute applies extraterritorially so long as Congress intended the statutes prohibiting the particular RICO predicate acts in question to apply beyond US borders. See European Community v. RJR Nabisco Inc. (2014).
European Community involved claims that RJR Nabisco and related entities participated in an alleged European money-laundering scheme in which the proceeds of drug sales were allegedly laundered through a complex process, including (at one of its stages) the use of illicitly derived funds to purchase and resell cigarettes. The district court — whose decision the Second Circuit overturned — followed Cedeno, dismissing the claims upon concluding that the Morrison presumption precluded application of RICO, on the grounds that the alleged enterprise and its “nerve centre” were located in Europe, outside the territorial boundaries of the US.
The Second Circuit declined to follow either Cedeno’s domestic-enterprise approach, or Chao Fan Xu’s domestic racketeering-activity approach, taking aim instead at the intent of Congress in enacting the predicate-act statutes forming the basis for RICO liability (separate from and, in many instances, predating RICO’s enactment). In so doing, it reasoned that by incorporating various predicate-act statutes into the RICO statute that by terms apply beyond U.S. borders, Congress “clearly communicated its intention that RICO apply to extraterritorial conduct to the extent that extraterritorial violations of those statutes serve as the basis for RICO liability.”
On this basis, the court held that RICO claims predicated on alleged money-laundering and actions in material support of terrorism could proceed, even though the acts in question occurred beyond the territorial boundaries of the U.S. and the RICO “enterprise” at issue clearly was not located there.
The Future of RICO Extraterritoriality
Territorial limits on the application of the RICO statute to relationships and events beyond US borders are the subject of broad disagreement in the federal court system. Clarity and certainty in this regard is likely to remain elusive until the US Supreme Court weighs in on the operation of the Morrison presumption against extraterritoriality in the context of the RICO statute. Each of the current approaches is vulnerable to critique on various grounds, and it is difficult to predict how the high court will resolve the issue. Notably, none of the RICO cases decided to date addresses the key question of the amount and type of domestic conduct necessary to overcome the presumption against extraterritoriality for purposes of triggering RICO liability.
The European Commission approach, if more widely adopted, may substantially complicate efforts to achieve clarity in determining the territorial scope of civil RICO claims. A large number of federal, state and common-law offences may qualify as valid RICO predicates, and courts are likely to disagree on their extraterritorial scope, if any. To the extent the territorial scope of RICO depends on the scope of a slew of underlying predicate offences, RICO plaintiffs are likely to attempt to plead around limits on RICO extraterritoriality by recharacterising the acts in question as violations of RICO predicate statutes with extraterritorial reach — rendering the presumption against extraterritoriality a virtual dead letter.
In addition, the European Commission approach infers extraterritorial congressional intent from that body’s enactment of various predicate act statutes with express extraterritorial intent, at other times and for reasons largely distinct from those that animated enactment of RICO — which is not necessarily the same thing. Given that RICO creates new and distinctive forms of liability, Congress may not have intended the geographic reach of RICO liability to be coterminous with that of the various RICO predicate offences.
The Cedeno approach, focusing on the location of the RICO “enterprise,” is perhaps truest to Morrison’s teaching in its orientation towards Congress’ focus in regulating RICO enterprises, as opposed to racketeering activity per se; but as lower courts in a variety of cases attempt to divine the location of frequently amorphous RICO enterprises, it is likely to prove difficult to reliably or predictably determine the “nerve centre” of informal RICO associations-in-fact or enterprises that lack an identifiable operational centre.
The advantage of the Chao Fan Xu approach, which focuses on the prevalence of domestic racketeering activity (or predicate offences), is that it is often easier to determine where particular acts took place, than to determine where a shadowy and informal enterprise is principally located. Focusing on predicate acts to the exclusion of the enterprise, however, arguably gives short shrift to the RICO statute’s distinctive focus on racketeering enterprises over patterns of unlawful activity per se. Such an approach may also in practice devolve into the sort of “conduct-effects” test that the Supreme Court rejected as “judicial-speculation-made-law” in Morrison.
Given the potential for application of civil RICO to various business and other torts by enterprising plaintiffs, the unsettled limits of RICO’s applicability outside the territorial limits of the US will continue to generate uncertainty and risk for non-US business interests engaged in activities that touch and concern the United States in some way until the US Supreme Court takes up the question.
A version of this article was published in the White Collar, Securities, Banking, California, New York and Appellate sections of Law 360’s website: http://www.law360.com/articles/601225/3-different-approaches-to-rico-extraterritoriality.