Supreme Court RICO Ruling Helps Clarify Cross-Border Arbitration

In a case closely watched by cross-border litigators, the US Supreme Court held June 23 in Yegiazaryan v. Smagin that a context-specific test is needed to determine whether a foreign private plaintiff has pleaded a “domestic injury” necessary to sustain a civil claim for damages under the federal RICO statute.

The decision added some welcome clarity to the court’s 2016 decision, RJR Nabisco, Inc. v. European Community, which held that a “domestic injury” is a required element of a Racketeer Influenced and Corrupt Organizations Act civil suit brought by a private plaintiff. But it provided almost no guidance on how to determine whether an injury is foreign or domestic.

By rejecting an easy to administer bright-line approach, the court, however, introduced unpredictability to future cross-border RICO cases, which may give plaintiff lawyers potent leverage to drive an early settlement.

Going forward, legal practitioners know that a RICO case will not be dismissed simply based on plaintiff’s foreign residence. But it’s difficult to predict under the court’s case-by-case approach whether a particular foreign plaintiff has sufficiently alleged a domestic injury.

History of Case

Smagin stemmed from a business dispute between Russian oligarchs. Ashot Yegiazaryan allegedly stole money from a joint real estate venture in Moscow that he operated with his business partner, Vitaly Smagin.

Invoking an arbitration provision in the joint venture agreement, Smagin ultimately won an $84 million arbitration award in London against Yegiazaryan. It’s not unusual for sophisticated professionals in an emerging economy to designate a trustworthy foreign venue to arbitrate future disputes.

Yegiazaryan refused to pay and fled to a mansion in Beverly Hills, Calif., asserting that he faced politically motivated prosecution in Russia. Smagin filed a petition in California federal court, which ultimately recognized the London award.

Yegiazaryan then allegedly undertook a ]worldwide campaign to frustrate the California district court’s judgment, creating shell companies in the US to hide his assets, and intimidating witnesses from providing information to Smagin.

Yegiazaryan also allegedly submitted a forged medical note to avoid complying with a court order related to judgment enforcement. Outside the US, Yegiazaryan used the London office of a US law firm to accept payment of $198 million from a lawsuit unrelated to his dispute with Smagin.

He then created “a complex web of offshore entities to conceal the funds” from Smagin. Yegiazaryan also directed associates to file collusive and unopposed lawsuits against him in foreign jurisdictions to encumber the $198 million to Smagin’s detriment.

Smagin filed a civil complaint against Yegiazaryan in December 2020, alleging his actions——specifically wire fraud, witness tampering, and obstruction of justice—constituted RICO violations.

RICO is a powerful weapon because a successful plaintiff is entitled to recover three times their actual damages caused by the defendant’s racketeering conduct, plus legal fees. In other words Smagin would win $250 million plus fees from Yegiazaryan if successful.

Yegiazaryan claimed the RICO case couldn’t go forward under RJR Nabisco because, as a Russian citizen and Russian resident, Smagin hadn’t suffered the requisite domestic injury in the US. The district court agreed and dismissed Smagin’s complaint. But the Ninth Circuit reversed that ruling, creating a circuit split on the issue.

High Court Test

Justice Sonia Sotomayor, writing for the court,rejected the argument that, because a court judgment is intangible property, the plaintiff’s residence would determine where the injury was suffered. Under this “rigid, residency-based test,” embraced by the Seventh Circuit, Smagin couldn’t bring a civil RICO action as a resident of Russia. The justices held that the appeal of such a bright-line rule “cannot displace congressional policy choices.”

The high court read the text of the RICO statute and the RJR Nabisco decision to mean that if “circumstances sufficiently ground the injury in the United States, such that it is clear the injury arose domestically, then the plaintiff has alleged a domestic injury.” Therefore, a case-specific inquiry was needed to determine the location of the injury.

The justices rejected Yegiazaryan’s reliance on the Restatement of Conflict of Laws, which at the time the RICO statute was passed, stated that a “plaintiff suffers an economic loss at the plaintiff’s domicile.” They stated that “legal fictions regarding the situs of economic injuries” are only choice-of-law principles that don’t govern the issue of whether a federal law applies extraterritorially.

The court then determined that Smagin suffered an injury in the US because he is attempting to enforce a California court judgment and at least some of Yegiazaryan’s alleged racketeering conduct took place on US soil.

While other racketeering conduct took place abroad, the court said it was “initiated in and directed towards” California and that “those allegations suffice to state a domestic injury in this suit.”

Going forward, legal practitioners know that a RICO case will not be dismissed simply based on plaintiff’s foreign residence. But it’s difficult to predict under the court’s case-by-case approach whether a particular foreign plaintiff has sufficiently alleged a domestic injury.

The justices, however, didn’t state how lower courts should weigh other factors relevant to the site of an injury for RICO purposes and even what factors to consider. For example, even though Yegiazaryan is apparently still a Russian citizen, he has now lived in California for more than 10 years. The court stated three times in its relatively short opinion that he is a “California resident.” Since Yegiazaryan chose to make the US his permanent home, it isn’t unfair to subject him to the RICO law, including its treble damages provisions.

But how would the test change if the defendant doesn’t live in this country and has only limited connections with the US? Lower courts will have to wrestle with questions such as this.

The case is: Yegiazaryan v. Smagin, U.S., No. 22-381, 6/22/23

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Minyao Wang is a civil litigator with expertise in complex business, bankruptcy, and cross-border litigation.

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