OPINION ANALYSIS

Justices rule Russian citizen alleged domestic injury in international racketeering dispute

The Supreme Court’s decision on Thursday in Yegiazaryan v. Smagin adopts a “context-specific inquiry” to determine whether a plaintiff in a private lawsuit brought under the Racketeer Influenced and Corrupt Organizations Act has alleged “a domestic injury to its business or property” sufficient to state a civil claim for damages under Section 1964(c) of the federal RICO statute. The decision is an important step in clarifying the scope of the court’s 2016 decision in RJR Nabisco, Inc. v. European Community, which held that a civil RICO plaintiff must both allege and prove a domestic injury to business or property.

Justice Sonia Sotomayor’s opinion for a six-justice majority affirmed a decision by the U.S. Court of Appeals for the 9th Circuit that employed a context-specific interpretive doctrine to decide that Vitaly Smagin, a Russian citizen and resident, “had pleaded a domestic injury” by alleging that Ashot Yegiazaryan, another Russian citizen who moved to California more than a decade ago, and other defendants had obstructed his efforts to enforce a California judgment against Yegiazaryan by engaging in a pattern of racketeering activity “that largely ‘occurred in, or was targeted at, California.'”

The Supreme Court on Thursday explicitly rejected “a rigid, residency-based test for domestic injuries involving intangible property” adopted by the U.S. Court of Appeals for the 7th Circuit.  Under this test, injuries to intangible property occur at a plaintiff’s residence, which would mean that Smagin could not bring a civil RICO action as a resident of Russia. Any injuries he suffered occurred in Russia and could not constitute a domestic injury in the United States.

The majority rejected arguments favoring a bright-line rule, concluding that a fact-sensitive approach is not unworkable “merely because it directs courts to consider the case-specific circumstances surrounding an injury when assessing where it arises.” In the context of interpreting the RICO statute, Sotomayor reasoned, the benefits of a bright-line rule are illusory, in part because “[c]oncerns about a fact-intensive test cannot displace congressional policy choices, where a more nuanced test is true to the statute’s meaning.”

Sotomayor explained that a case-by-case, fact-specific approach was more consistent with the domestic injury rule adopted in RJR Nabisco. RICO requires “a case-specific analysis that looks to the circumstances surrounding the injury” to business or property because its focus is not on the injury “in isolation, but as the product of racketeering activity.” In this case-specific analysis, “no set of factors can capture the relevant considerations for all cases …, what is relevant in one case … may not be pertinent in another. While a bright-line rule would no doubt be easier to apply, fealty to the statute’s focus requires a more nuanced approach.”

In this case, Smagin alleged that his injuries were caused by racketeering acts carried out to defeat enforcement of a California judgment, which in turn enforced a London arbitral award arising out of crimes committed in Russia. Yegiazaryan allegedly engaged in “intimidation, threats, or corrupt persuasion,” and other racketeering acts, in California and elsewhere. The domestic conduct included submitting a forged doctor’s note to a federal court in California, intimidating a California witness, and creating U.S. shell companies to hide his U.S. assets.

Other alleged RICO acts occurred in foreign countries, Sotomayor acknowledged, but Smagin contended that these activities “were devised, initiated, and carried out” to prevent enforcement of the California judgment, by means of actions “initiated in and directed towards … California.” In particular, “the rights that the California judgment provides to Smagin exist only in California, including the right to obtain postjudgment discovery, the right to seize assets in California, and the right to seek other appropriate relief from the California District Court.” By obstructing these rights, the RICO scheme blocked both “Smagin’s efforts to collect on Yegiazaryan’s assets in California” and various orders issued by the California district court.

Applying the context-specific approach, Sotomayor concluded, Smagin had alleged a domestic injury under the statute.

Justice Samuel Alito, joined by Justice Clarence Thomas and in one part by Justice Neil Gorsuch, dissented. Alito did not argue directly in favor of the 7th Circuit’s specific bright-line rule for defining domestic injuries in the context of RICO civil damage actions. Instead, he complained that the majority’s “totality-based inquiry … offers virtually no guidance to lower courts, [] risks sowing confusion in our extraterritoriality precedents,” and risks causing “significant harm … to the uniformity of our case law.” Alito argued that rather than issue this opinion, the court should dismiss the case as improvidently granted.  

Like other justices dissenting or concurring in earlier RICO cases, Alito acknowledged that “[b]ringing clarity to this area of the law is not an easy task,” but he concluded that the majority opinion “falls short.” He expressed various concerns, including the open-ended nature of the context-specific approach, the majority’s failure to identify potentially relevant and irrelevant factors, and to assign relative weights to relevant factors, or to specify how much “room the Court is leaving for additional factors to be identified” in future cases. On a practical level, he lamented that “were I a lower-court judge, I would struggle to apply today’s decision to any set of facts other than the precise combination present here. In my view, it is not worth our deciding a case when we provoke so many more questions than we provide answers.”

The court sent the case back to the lower courts for further proceedings, which preserves the possibility of a trial on the merits, in which Smagin claims actual damages of “no less than $130 million.” Under the RICO statute he is entitled to recover far more — treble damages and litigation costs, including reasonable attorneys fees. This decision affirms that the door remains open for foreign plaintiffs who can allege a domestic RICO injury to pursue these enhanced damages.