Antitrust Law Daily Wrap Up, RICO—SDNY: Republic of Iraq’s Claims Against Hussein Regime Failed for Allegation of Extraterritorial Conduct, (Feb 7, 2013)

By John W. Arden, J.D., LLM.

The Republic of Iraq’s claims that numerous companies conspired with the Government of Iraq during the rule of Saddam Hussein to frustrate the United Nation’s Oil-for-Food Programme did not state a claim under the Racketeer Influenced and Corrupt Practices Act because the alleged misconduct by the Hussein Regime was extraterritorial, the federal district court in New York City has held (The Republic of Iraq v. ABB AG, February 6, 2013, Stein, S.).

Even if it were not extraterritorial, the Republic could not state a RICO claim because the conduct was attributable to the Republic of Iraq itself. Having engineered the wrongdoing alleged in the complaint, and having alleged that the wrongdoing directly harmed the Programme, Iraq could not recover from that wrongdoing, according to the court.

Background. In 1979, Saddam Hussein seized power in Iraq by military coup. The administration he put in place wielded absolute power over the country and violently suppressed all opposition. Iraq invaded neighboring Kuwait on August 2, 1990, and the U.N. Security Counsel responded by adopting sanctions that were designed “to place the Hussein Regime under complete economic isolation.” The Security Council sought to protect the Iraqi population by starting the UN Oil-for-Food Programme, which was to permit Iraq to sell its oil to third parties as long as the proceeds were used to purchase food and medical supplies for the Iraqi population.

Under the program, UN member states were authorized to import Iraqi oil on the condition that sales be approved by a UN committee, which was to verify that the oil sold for a price “reasonable in light of prevailing market conditions.” The program required Iraq to submit a plan of distribution of medicine, health supplies, and foodstuffs essential for civilian needs. A memorandum of understanding was signed by a representative of the United Nations and a representative of the Government of Iraq.

The complaint alleged that the Government of Iraq—with the active assistance of the other defendants—used the program to generate hundreds of millions of dollars of case for itself. The Hussein Regime allegedly priced its oil below the market price in order to facilitate kickback payments from buyers and overpaid for food and medicine in order to facilitate side payments from sellers in the form of surcharges.

The Republic of Iraq filed a complaint in the federal district court in New York City in June 2008, alleging violations of federal RICO law, violations of the Foreign Corrupt Practices Act, fraud, civil conspiracy, breach of fiduciary duty, inducement to breach fiduciary duty, breach of contract, and unjust enrichment.

Defendants moved to dismiss the complaint on the basis of standing, act of state doctrine, political question doctrine, statute of limitations, in pari delecto, and on the merits of each claim.

Standing. The court held that, although the Republic of Iraq did not have standing to pursue its quasi-sovereign interests as parens patriae, it had alleged an injury to its proprietary interests. It claims presented legal questions that were neither political nor inappropriate to consider under the act of state doctrine.

Act of state doctrine. Defendants contended that the act of state doctrine barred the court from considering Iraq’s claims. The act of state doctrine traditionally precluded courts of the United States from examining the validity of public acts committed by a foreign sovereign government within its own territory. However, the policies justifying the doctrine did not favor its application in this case. In this action, the current government of Iraq had sought out U.S. courts. The acts at the center of the dispute occurred under a prior government led by a now-deposed ruler. To the extent any party called into question the validity of the prior government’s acts, it was the current government of Iraq that had done so. Because the Republic of Iraq attempted to repudiate the acts of the Hussein Regime, the court found no basis to invoke the act of state doctrine.

Political question doctrine. The defendants contended that the political question doctrine precluded consideration of the action because the complaint called into question the legitimacy of the former Iraqi government. However, the action did not require to court to decide questions that had been deemed political. Most of the issues—causation, territoriality, private rights of action—fell squarely into the court’s competence, even though they happen to involve international and political actors.

Legal relationship between current government, Hussein Regime. Because the Hussein Regime acted under color of its authority as the government of Iraq, the Republic of Iraq bore the responsibility for its conduct. The ethicality, illegitimacy, or illegality of the conduct did not immunize the Republic from responsibility, the court held.

RICO claims. The Republic’s RICO claims focused on a foreign enterprise and a pattern of racketeering and corruption that occurred most meaningfully abroad, the court noted. Because civil RICO does not provide a cause of action for extraterritorially offenses, the court dismissed the claims. It further dismissed the RICO claims on the ground that Iraq was barred from recovery by the doctrine of in pari delicto and for failure to allege proximate causation.

The Republic alleged that the defendants used the program to maintain their fraud, bribery, and money laundering scheme. However, it argued that the claims were based on diversions of its oil wealth, not the reduction in the humanitarian aid received by its citizens. The scheme described by the Republic was primarily foreign, focused on a multinational organization, engineered by a foreign government, and concerned with Iraqi oil, goods, and contracts. “Applying the RICO statute to these allegations would be applying the statute to extraterritorial conduct, which is no permitted under the case law,” in the court’s view.

It was well settled that the RICO statute did not apply extraterritorially and that peripheral contacts with the United States did not bring otherwise foreign schemes within the reach of RICO. The Republic’s complaint demonstrated that its claims were extraterritorial. The alleged enterprise—the Food Programme—was not domestic. The pattern of racketeering activity was concentrated abroad, the court found. The oil was clearly located in Iraq. The Hussein Regime negotiated directed with defendants for the sale of the oil and the receipt of bribes. Surcharges and fees were paid directly to the Hussein Regime and its agents.

Besides the extraterritorial nature of the conduct, the Republic was barred from pursuing the RICO claims by in pari delecto. As alleged by the complaint, the Hussein Regime bore equal or greater responsibility for the alleged racketeering activity than the defendants. Because the acts of the Hussein Regime were attributable to the Republic of Iraq, the complaint’s allegations brought the Republic within the scope of in pari delecto.

To state a claim for civil RICO, plaintiffs must show that a RICO predicate offense was the proximate cause of the injury. In this case, the Republic’s injury was the diversion of its oil wealth. Thus, the alleged racketeering activity harmed the Republic only indirectly.

The court dismissed the Foreign Corrupt Practices Act claim because the Act has no private right of action. With the dismissal of the federal claims, the court declined to exercise supplemental jurisdiction over the remaining state common law claims.

The case is No. 08 Civ. 5951 (SHS).

Attorneys: Christian Patrick Siebott (Bernstein Liebhard, LLP) for The Republic of Iraq. James Philip Gillespie (Kirkland & Ellis LLP) for ABB AG.

Companies: ABB AG

Cases: RICO NewYorkNews