United States: Important Decisions Regarding Arbitration, Judgment Enforcement And Sovereign Immunity

In observance of US Independence Day, we are bringing you our SCOTUS Edition of the First Tuesday Update on Wednesday. The (usually) First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement.

We thought of no better way to celebrate the Fourth of July than taking in the annual late-June slate of new Supreme Court decisions. This month we look at several recent Supreme Court decisions relating to international and domestic arbitration and how three rulings on sovereign immunity will affect the Court's Foreign Sovereign Immunities Act (FSIA) jurisprudence. In addition, the Supreme Court ruled by a narrow 5-4 majority that a Pennsylvania law that requires a corporation to submit to the general jurisdiction of Pennsylvania courts as a condition of doing business in Pennsylvania complies with due process. Mallory v. Norfolk Southern Ry. Co., No. 21-1168, 600 U.S. ___ (2023). The Court's decision could have an impact on personal jurisdiction jurisprudence and will be discussed in a subsequent update.

First, the United States Supreme Court issued its decision in Yegiazaryan v. Smagin, No. 22-381, 599 U.S. ___ (2023), holding that a party can assert a RICO claim to enforce foreign arbitral awards where the circumstances around the alleged injury arose in the United States. Second, the Supreme Court issued a decision in Coinbase, Inc. v. Bielski, No. 22-105, 599 U.S. ___ (2023), holding that a district court must stay proceedings while an interlocutory appeal on the question of arbitrability is pending.

In addition to these two major Supreme Court rulings on arbitration, the Supreme Court addressed when and how sovereign immunity can be abrogated in three distinct contexts: Turkiye Halk Bankasi A.S. v. United States, No. 21-1450, 598 U.S. ___ (2023); Financial Oversight & Mgt. Board for Puerto Rico v. Centro de Periodismo Investigativo, Inc., No. 22-96, 598 U.S. ___ (2023); and Lac Du Flambeau Band of Lake Superior Chippewa Indians et al. v. Coughlin, No. 22-227, 599 U.S. ___ (2023). Taken together, these cases suggest that an earlier ruling by the Court, which has referred to the FSIA as the "sole basis" for jurisdiction over foreign sovereign entities, cannot be read so literally. Rather, Congress can abrogate foreign sovereign immunity via other statutory provisions irrespective of the FSIA.

Yegiazaryan v. Smagin – SCOTUS Blesses RICO Claim to Enforce an International Arbitral Award

On June 22, the Supreme Court ruled that RICO (US racketeering law) may be used to enforce foreign arbitral awards, adding a new potential tool for judgment creditors whose collection efforts have been thwarted by debtors that hide assets. Yegiazaryan v. Smagin, No. 22-381, 599 U.S. ___ (2023). Previously, we covered the Supreme Court's oral argument, see here.

As discussed in our earlier update, Smagin asserted that Yegiazaryan and others defrauded him of shares in a joint real estate venture in Russia. Yegiazaryan and his brother fled to California after being indicted for fraud in Russia. Smagin initiated arbitration proceedings against Yegiazaryan in London and prevailed, obtaining an $84 million award. The arbitral award was confirmed as a $92 million judgment in California pursuant to the New York Convention.

To avoid Smagin's collection on the $92 million judgment, Yegiazaryan allegedly created various offshore entities and implemented other methods to hide his assets from the jurisdiction of the California district court. In response, Smagin filed a new suit in the United States District Court for the Central District of California alleging that Yegiazaryan's actions to hide assets "injured" his property—the California judgment—by delaying and preventing execution of the judgment. Smagin alleged these actions constituted wire fraud and other RICO predicate acts such as witness tampering and obstruction of justice. Under the RICO statute, an individual has a right of action when that individual's business or property is injured by the violation of a substantive RICO provision. Successfully pleading and proving RICO claims can be a challenge, as the plaintiff must show "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity (known as 'predicate acts') (5) causing injury to plaintiff's business or property."¹ RICO does not apply to foreign injuries and therefore a plaintiff must demonstrate the injury to its business or property was domestic in nature. Faced with a motion to dismiss on various grounds, Smagin's suit was dismissed on the basis that Smagin did not assert a domestic injury. The District Court did not reach the other elements. On appeal, the Ninth Circuit reversed.

The Supreme Court held that Smagin could bring his RICO claim, agreeing with the Ninth Circuit that Smagin successfully pleaded a domestic injury under the RICO statute. Justice Sotomayor, writing for the Court, applied the Ninth Circuit's "context-specific approach," which requires courts to analyze the circumstances around the alleged injury to determine whether the injury arose in the US. Slip. Op. at 8. The Court explained the context-specific approach is "most consistent" with the Court's decision in RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (2016), which provided a two-part test to determine whether the RICO statute applies extraterritorially, but did not define "domestic injury." Id. at 6-7, 9.

The Court declined to adopt a specific set of factors or a bright-line rule to guide future courts in determining whether the circumstances in a given case constitute a "domestic injury." Id. at 10. With respect to Smagin, the Court concluded that his allegations demonstrated a "domestic injury." Generally, Smagin's allegations were that (1) the injury was the inability to collect the judgment in California; (2) Yegiazaryan, a California resident, developed a scheme that largely occurred in the US; and (3) the impact of this alleged wrongdoing was felt in the US.

Justice Alito (joined by Justice Thomas and Justice Gorsuch in part) dissented, arguing that the context-specific analysis will create more confusion and the majority should have articulated specific factors that should be considered.

The Court's decision to allow judgment creditors with foreign arbitral awards to pursue RICO claims in the US provides judgment creditors with another avenue to enforce judgments against recalcitrant debtors. Access to RICO claims is also significant because civil liability under the statute offers treble damages and the awarding of attorneys' fees. While this decision provides judgment creditors with another tool for relief, pleading and proving a RICO claim will remain difficult.

Coinbase Inc. v. Bielski – District Court Litigation Stayed During Appeal of Arbitrability Ruling

On June 23, the Supreme Court ruled that litigation in the District Court is automatically stayed during an appeal of the denial of a motion to compel arbitration, reversing the Ninth Circuit and resolving a circuit split. Coinbase Inc. v. Bielski, No. 22-105, 599 U.S. ___ (2023). Before this ruling three Courts of Appeal left the decision to the discretion of the District Court and six Courts of Appeal automatically stayed the lower court litigation.

In a 5-4 decision written by Justice Kavanaugh, the Supreme Court noted that under Section 16(a) of the Federal Arbitration Act, parties may file an interlocutory appeal when a district court denies a motion to compel arbitration. However, the statute does not explicitly require lower court proceedings to be stayed while the appellate court considers the issue of arbitrability.

The Court reasoned that although Section 16(a) of the Federal Arbitration Act does not explicitly require the district court to stay its proceedings, Congress enacted the statute "against [the] clear background principle" that "[a]n appeal, including an interlocutory appeal, 'divests the district court of its control over those aspects of the case involved in the appeal.'" Slip Op. at 3 (quoting Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982)).

Additionally, the Court explained that the "common practice" is for a district court to stay proceedings while the decision on arbitrability is being considered. Id. at 5. Without the stay, benefits of arbitration – i.e. lower cost and more efficient proceedings – would be lost. Moreover, parties may be "forced to settle" to avoid high litigation costs. Id. at 6.

Justice Jackson (joined by Sotomayor, Kagan, and Thomas in part) dissented and argued the majority's decision to impose a mandatory stay of lower court proceedings is contrary to the "traditional approach" that provides trial courts with discretion over imposing a stay and that allows trial courts to maintain control over the portion of the case that is not subject to an interlocutory appeal. The dissent argues that the Court's decision will result in "perpetually favoring...defendants seeking arbitration" because defendants will be entitled to a mandatory stay even if the particular facts of the case or equitable considerations do not indicate a stay is justified.

As the Court's opinion highlighted, this decision will greatly reduce litigation costs—especially by staying discovery—for defendants waiting for a decision on arbitrability, and can allow for the arbitration to proceed ahead of the court case.

A Pattern Emerges – Three Recent Sovereign Immunity Decisions and the Future of FSIA Jurisprudence

"The FSIA is the 'sole basis' for jurisdiction over foreign sovereign" has become a familiar refrain for foreign sovereigns litigating in American courts since the Supreme Court's ruling in Amerada Hess v. Argentine Republic, 488 U.S. 428, 439 (1989). But, three decisions this term cast considerable doubt on whether the Court's earlier precedents should be read so literally. While decided in three distinct contexts, all three cases point in the same direction—the FSIA is not necessarily the sole basis for abrogating sovereign immunity where Congress clearly evidences its intent to abrogate sovereign immunity via another statute. We discuss each case below:

• Turkiye Halk Bankasi A.S. v. United States, No. 21-1450, 598 U.S. ___ (2023): In Turkiye, the Supreme Court explained that its "sole basis" language is "general language in [a] judicial opinion" and must be considered in the context of the circumstances before the Court. Thus, "general grants" of jurisdiction to federal courts might still be subject to the FSIA. But, a more specific statutory grant of jurisdiction—there, 18 U.S.C § 3231's grant of criminal jurisdiction—is not subject to the FSIA's requirements for abrogating sovereign immunity. See our prior update covering this decision.
• Financial Oversight & Mgt. Board for Puerto Rico v. Centro de Periodismo Investigativo, Inc., No. 22-96, 598 U.S. ___ (2023): The Court found that the Puerto Rico Oversight, Management, and Economic Stability Act, 48 U.S.C. § 2101 et seq., did not abrogate any sovereign immunity that a Puerto Rician agency might enjoy under federal law. In doing so, the Court explained that there are two avenues by which Congress can abrogate sovereign immunity. It can do so expressly. And, it can also do so by creating a cause of action that "authorizes suit against a government on th[e] claim." While the FSIA was not specifically at issue, the Court's analysis strongly suggests that a statute can abrogate sovereign immunity, irrespective of the FSIA, so long as it meets the requirements of one of the two avenues.
• Lac Du Flambeau Band of Lake Superior Chippewa Indians et al. v. Coughlin, No. 22-227, 599 U.S. ___ (2023): The Supreme Court ruled that the Bankruptcy Code's abrogation of sovereign immunity extends to Indian tribes as a "governmental unit," 11 U.S.C. § 106(a), even though the Code does not reference tribes when defining "governmental unit." While the decision was made in the context of tribal immunity, the Court's analysis confirmed that the Bankruptcy Code's abrogation of sovereign immunity for governmental units would also extend to foreign governments. Thus, Coughlin reinforces that: (1) the FSIA is not the "sole basis" for jurisdiction over foreign sovereigns where there is a specific, statutory grant of jurisdiction; and (2) there is no "magic-words requirement" to abrogate sovereign immunity.

It may not take long to see how this emerging pattern will play out in the lower courts. Our team at Steptoe is actively litigating a case before the DC Circuit Court of Appeals where we expect some of these issues to be considered. In particular, on behalf of our client, Exxon Mobil, Steptoe has argued that the Helms-Burton Act authorizes lawsuits against agencies and instrumentalities of foreign states that "traffic" in property that was wrongly confiscated from its rightful owner by the Cuban state. Thus, Helms-Burton itself, irrespective of the FSIA, abrogates sovereign immunity against foreign agencies and instrumentalities. See Exxon Mobil Corporation v. Corporación CIMEX, S.A. (Cuba) et al., No. 21-7127 (D.C. Cir.).

We are available to answer questions or offer help on any of these issues.

Footnote

1. Smagin v. Compagnie Monegasque De Banque, No. 220CV11236RGKPLA, 2021 WL 2124254, at *2 (C.D. Cal. May 5, 2021), rev'd and remanded sub nom. Smagin v. Yegiazaryan, 37 F.4th 562 (9th Cir. 2022), cert. granted, 143 S. Ct. 645 (2023), cert. granted sub nom. CMB Monaco v. Smagin, 214 L. Ed. 2d 382, 143 S. Ct. 646 (2023), aff'd and remanded, No. 22-381, 2023 WL 4110234 (U.S. June 22, 2023).

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