United States: 'Microsoft,' 'RJR Nabisco' And Extraterritorial Reach Of U.S. Law

Two recent decisions—one by the U.S. Court of Appeals for the Second Circuit and one by the U.S. Supreme Court—highlight the extent to which the courts continue to grapple with the question of when to apply a U.S. statute beyond the territorial boundaries of the United States. Given the many cases, both civil and criminal, that involve at least some conduct overseas, how the courts answer this question has the potential to dramatically diminish or extend the impact of U.S. law on people, corporations and other entities around the world.

On July 14, 2016, the Second Circuit issued its decision in In the Matter of a Warrant to Search a Certain E-Mail Account Controlled and Maintained by Microsoft, which arose in the context of a federal narcotics investigation. The government had sought and received from a federal magistrate a warrant, issued pursuant to Section 2703 of the Stored Communications Act, for the content of emails from the account of a Microsoft customer, having shown probable cause to believe that the account had been used in furtherance of narcotics trafficking.

While the warrant was served on Microsoft in the United States, the emails were stored in a facility in Dublin, Ireland, operated by a wholly owned Microsoft subsidiary. A subsequent motion by Microsoft to quash the warrant on the ground that it could not be compelled to obtain emails stored outside of the United States was denied, and Microsoft appealed to the Second Circuit. On appeal, the court reversed, after finding that the SCA did not apply outside the territorial United States and that execution of a warrant pursuant to the SCA in this context did not constitute a domestic application of the statute.

The Microsoft decision has received significant attention, as it is the latest of a series of cases involving the intersection of technology, privacy and the power of law enforcement to access personal information. But, as Judge Gerard Lynch pointed out in an incisive concurrence in the case, the outcome of the case was not so much a result of balancing of the competing interests of law enforcement and the right to privacy, as it was of the application of a framework that has emerged from recent Supreme Court jurisprudence for determining whether a given statute may reach conduct that takes place overseas.

That framework came into sharper focus just three weeks prior to the Microsoft decision, when the Supreme Court decided RJR Nabisco v. European Community, 579 U.S. __, 2016 WL 3369423 (June 20, 2016). In RJR, the court took up the question of whether another statute—the Racketeer Influenced and Corrupt Organizations Act (RICO)—applied outside the United States. RICO is the federal racketeering statute. It is a complex law, but essentially it criminalizes the control or operation of an "enterprise"— which can include, among other things, a corporation, or, less formally, an association of persons or other entities—through a pattern of criminal activity.

RICO was enacted in 1970, as part of the government's effort to combat the infiltration of businesses and labor unions by organized crime. But in the following 45 years, the statute has been applied far beyond this context, to prosecute all manner of corporations, associations and other entities alleged to have engaged in criminal conduct.

In addition to being a powerful tool used by the government to prosecute crime, the RICO statute includes a private right of action, whereby parties injured in person or property as a result of violations of the statute can bring civil suit and seek treble damages. In RJR, the European Community and 26 of its member states brought suit in the Eastern District of New York against RJR Nabisco and related entities, claiming that RJR, working with organized criminal groups in South America and Europe, was involved in a scheme to launder drug trafficking proceeds, violate international sanction regimes and commit other offenses.

The district court granted RJR's motion to dismiss the RICO claims on the ground that the statute did not reach the alleged conduct because it took place outside the United States. On appeal, the Second Circuit reversed and, in a close vote, subsequently declined to grant en banc review. The Supreme Court issued a writ of certiorari to determine whether the RICO statute applied extraterritorially.

Recent Jurisprudence

In answering this question, the Supreme Court reviewed and synthesized its recent jurisprudence on the reach of U.S. law, in particular its decisions in Morrison v. National Australia Bank, 561 U.S. 247 (2010), and Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659 (2013). In Morrison, the court found that Section 10(b) of the Securities Exchange Act, which prohibits fraud in the purchase or sale of securities, did not apply extraterritorially and thus was unavailable to a group of foreign plaintiffs suing an Australian bank whose shares were listed abroad. In Kiobel, the court similarly found that the Alien Tort Statute did not reach the alleged conduct of Royal Dutch Petroleum in a suit brought by Nigerian nationals living in the United States claiming that Royal Dutch had abetted crimes by the Nigerian government committed in Nigeria.

Writing for the court in RJR, Justice Samuel Alito discerned in Morrison and Kiobel a two-step framework that, while not specifically articulated as such, had been used by the court to analyze the statutes at issue in those cases. Noting a long-standing presumption against the extraterritorial application of U.S. law, the court found that courts must first ask whether the statute "gives a clear, affirmative indication that it applies extraterritorially." (Slip. Op. at 9). Only if Congress "has affirmatively and unmistakably instructed that the statute will apply" beyond U.S. borders, can the statute be applied to wholly foreign conduct. (Id. at 7). In Morrison and Kiobel, the court found no such clear indication, and thus concluded that the statutes at issue had only domestic application.

Justice Alito next described the second step in the framework, also foreshadowed in Morrison. Where there is no clear indication in the statute of extraterritorial application, courts must determine whether the conduct at issue has sufficient nexus to the United States, such that it is effectively domestic in nature, and thus reached by the statute. If conduct relating to "the focus of congressional concern" in enacting the statute occurred within the United States, then the statute may be applied to all of the conduct at issue, both foreign and domestic. (Id. at 8).

Applying this two-step approach in RJR, the court found clear indication that Congress intended the criminal RICO statute to apply abroad, as long as the statutes governing the crimes alleged as part of the pattern of racketeering activity themselves had extraterritorial application. However, as to the statute's civil private right of action, the court found no such indication and thus concluded that the presumption against extraterritoriality had not been overcome. With regard to the second step of the framework, the court noted that in the district court the plaintiffs had stipulated that they were waiving any damages claim for injuries sustained in the United States. In the court's view, there was accordingly insufficient domestic nexus and thus the claim had correctly been dismissed by the district court.

The Supreme Court's decision in RJR is important because, building on Morrison and Kiobel, it clarifies the manner in which courts are to assess the international reach of U.S. law, making clear that the two-step analysis is to be applied regardless of the type of statute at issue. A clear framework is crucial given that, over the last several years, prosecutors and plaintiffs have been using the laws of the United States to reach ever further beyond our borders. This is true not solely of statutes explicitly designed by Congress to do so, like the Foreign Corrupt Practices Act, 15 U.S.C. §§78dd-1, et seq., but also of other laws that have historically had primarily domestic application, like the wire fraud statute.

Relatedly, the lines between domestic and foreign conduct have continued to blur, as technology and an integrated global financial system increasingly tie the United States to the rest of the world. It is now commonplace, for example, that a complex financial fraud will involve some conduct overseas, be it money laundering through foreign accounts or sheltering money offshore. Likewise, financial crimes hatched abroad will often have some U.S. nexus, whether through transmission of funds through U.S.- based correspondent accounts, use of U.S.-based email servers and phone lines, or travel through the United States in furtherance of the scheme.

Microsoft Case

Of course, a clearly articulated framework is one thing; the application of that framework to a particular statute and set of facts is another. Indeed, the difficulties lurking in the application of the framework described in RJR were highlighted in the Microsoft case. All three judges on the Second Circuit panel hearing Microsoft agreed that it was clear, under the first step of the framework, that the SCA did not apply extraterritorially.

With regard to the second step, two judges concluded that the focus of the SCA was protecting the privacy of stored electronic communications, and that, in this case, it was clear that the invasion of the customer's privacy interests by execution of the warrant would occur abroad, in Ireland. But Judge Lynch, writing separately, observed with respect to the second step of the framework that distilling a single focus of the SCA "may be impossible" and suggested that endeavoring to do so was not the wisest way to draw the line between domestic and extraterritorial application of a complex statute, like the SCA, that does not merely proscribe conduct, but sets forth the circumstances under which the government may access personal information, among other things. (Slip Op. at 14 (Lynch, J., concurring)). It seems likely that how best to draw that line will continue to vex litigants and courts, and eventually require further explication and refinement by the Supreme Court itself.

Previously published in the New York Law Journal – July 2016

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