Worldwide: United States Supreme Court Clarifies Extraterritorial Reach Of Racketeering Statute

On 20 June, the United States ("US") Supreme Court ruled that the European Community and its member states cannot claim damages from RJR Nabisco for alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The ruling, which comes after 16 years of litigation between the parties, limits the ability of private plaintiffs to recover damages for RICO claims based on conduct outside of the US where that conduct does not give rise to a "domestic injury." The judgment continues a trend of US Supreme Court decisions which have limited the extraterritorial effect of US statutes.

Background

RICO was enacted in 1970 to target organised and white-collar crime. Originally aimed at Mafia groups, the statute has been used extensively not only in criminal prosecutions but also in civil claims involving companies and individuals with no connections to traditional organised crime. The RICO statute prohibits various ways by which an "enterprise" can be controlled, operated or funded by a "pattern of racketeering activity". The statute contains numerous federal and state crimes, known as predicate acts, that qualify as racketeering activity. The long list of predicate acts includes bribery, fraud, extortion, money laundering, embezzlement, copyright infringement, obstruction of justice, murder, kidnapping and terrorism offences. Private plaintiffs can recover up to three times their actual damages if they can prove they suffered an injury to their business or property by reason of a RICO violation.

The European Community's claim

The European Community alleged that RJR Nabisco and related entities participated in a complex global money-laundering scheme in which funds from illegal narcotics shipments into Europe were used to pay for shipments of RJR Nabisco cigarettes. This conduct, the European Community alleged, resulted in competitive harm to state-owned cigarette businesses, lost tax revenue from black-market cigarette sales, harm to certain European financial institutions, currency instability and increased law enforcement costs.

The Court's ruling

The Court adopted a two-stage approach to determine whether private civil actions under RICO can be based on foreign conduct.

First, the Court considered whether the substantive RICO violation could have extraterritorial effect. It held that a "pattern of racketeering activity" can include foreign conduct where the predicate acts forming the pattern of racketeering activity violate statutes that apply extraterritorially. Therefore, some RICO predicate acts (such as those involving offences against US citizens abroad) have extraterritorial effect while others do not. The Court held that the predicate acts alleged by the European Community – money laundering, support of foreign terrorist organisations, mail and wire fraud and violations of the Travel Act – were prohibited by statutes with extraterritorial application such that it was possible to show a violation of RICO.

The Court unanimously rejected RJR Nabisco's submission that RICO cannot apply to foreign enterprises, holding that a "domestic enterprise requirement would lead to difficult line-drawing problems and counter-intuitive results." Such a requirement would exclude the conduct of foreign enterprises and individuals operating within the US, conduct which the Court considered fell well within what Congress intended to capture when it enacted RICO.

At the second stage, having found that a RICO violation can be based on foreign conduct, the Court considered whether the private right of action provision had extraterritorial effect. It considered that providing a private civil remedy for foreign conduct created the potential for international friction. The Court referred to the ability for private plaintiffs in the US to recover triple damages for anticompetitive conduct and repeated findings from a previous judgment in which it observed that the application of this remedy to conduct occurring abroad had generated "considerable controversy."

A majority of the Court (4:3) held that the RICO private civil action provision does not displace the usual presumption that statutes do not have extraterritorial effect. Private plaintiffs must therefore prove that the alleged RICO violation caused a domestic injury to their business or property. As the European Community earlier waived any claim to domestic damages, it could not establish a domestic injury. The Court did not elaborate on what constitutes a "domestic injury", an issue which will fall to be decided in future litigation.

It remains to be seen what effect this decision will have on future private civil RICO claims involving foreign conduct, particularly when the meaning of "domestic injury" remains an open question. The decision does not affect the ability of the US Government to enforce RICO cases based on foreign conduct, so long as the predicate acts which are alleged to form the pattern of racketeering activity have extraterritorial effect.

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