Antitrust Law Daily Wrap Up, STRATEGIC PERSPECTIVES—Experts critical of RICO’s domestic injury requirement for private actions, (Jul 8, 2016)

By Mark Engstrom, J.D.

The Supreme Court’s recent RJR decision drew criticism from RICO experts because the Court found that RICO did not provide a private remedy for foreign injuries. The majority decision, written by Justice Samuel Alito, left the European Union without a RICO remedy for injuries that allegedly arose from a racketeering scheme to traffic cigarettes in Europe.

Decision. On June 20, 2016, the U.S. Supreme Court ended more than 15 years of RICO litigation in RJR Nabisco v. European Community when it found that the plaintiffs—the European Community and 26 of its member states (collectively, "EC")—lacked the requisite "domestic" injury to pursue RICO claims against RJR Nabisco and related entities (collectively, "RJR"). According to the Court, the nature of the EC’s injuries was extraterritorial, but RICO does not provide a private right of action for injuries that are suffered outside of the United States.

In the unanimous portion of a split ruling, the Court found that RICO could be applied to foreign enterprises and foreign racketeering activities, but only to the extent that the predicate statutes at issue are themselves extraterritorial in reach. The significant and dispositive finding, however, was the majority’s ruling that private RICO plaintiffs cannot pursue a remedy for foreign injuries. The dissenting Justices opposed the majority’s domestic injury requirement.

According to the Court, the RICO statute is subject to a presumption against extraterritoriality. The Court applied that presumption to RICO §§1964(b) and (c), which contained substantive prohibitions, and found that the statute applies to foreign racketeering activities, but only to the extent that the relevant predicate statutes were themselves extraterritorial in reach. Significantly, the Court also applied the presumption to §1964(c), which provides a private right of action for civil RICO claims, and found that the private action provision does not rebut the presumption against extraterritoriality. Remedies for private plaintiffs were thus limited to domestic injuries.

Dismissal of the EC’s RICO claims was warranted, the court decided, because the EC had waived its damages claims for domestic injuries and the remaining damages claims rested entirely on injuries that were suffered abroad. The ruling of the U.S. Court of Appeals for the Second Circuit, which had reversed the district court’s dismissal of the RICO claims, was therefore reversed.

Justice Alito wrote the majority opinion, and Justices Ginsburg and Breyer wrote separately to concur in part, dissent in part, and dissent from the final judgment. Justices Kagan and Breyer joined Justice Ginsburg in her concurring and dissenting opinion. Justice Sotomayor, who had written a Second Circuit opinion for an earlier decision in the litigation, took no part in the consideration or decision of the case.

Professor Blakey: decision was textually and structurally ‘unsound.’ G. Robert Blakey, emeritus professor of the Notre Dame Law School and chief architect of the RICO statute, considered the RJR ruling a good "political" decision but a poor legal one. According to Blakey, the majority decision was not faithful to the text or structure of the statute, which was written to allow its criminal and civil provisions to "complement each other."

The bifurcation of the RICO statute into criminal and civil remedies—and the division of the injury requirement into private harms that require a domestic injury and governmental harms that do not—was structurally unsound, Blakey explained, especially given the expansive construction clause of the statute, which states that "the provisions of this title shall be liberally construed to effectuate its remedial purposes." The remedial purpose of the RICO statute is to fight organized crime, Blakey stated, and in the RICO context, the term "organized crime" is not limited to mafia-type criminals. It includes banks, insurance companies, labor organizations, and other entities that engage in racketeering activities.

Nevertheless, the Court’s decision was a principled way of narrowing the statute to protect its continuing viability in light of political pressure from businesses and other "white collar" interests, Blakey observed. If the majority decision helped to preserve the broad remedies that the statute provides—civil remedies, injunctive relief, treble damages, etc.—by limiting the risk of further statutory attacks from Congress (such as the removal of securities fraud from the scope of the statute in 1995), then it was a good and principled limitation on RICO. "RICO doesn’t need any more enemies," Blakey explained. (Or, as Henry of Navarre might have conceded, "RICO is well worth a requiem mass for domestic injuries.").

Blakey agreed with Justice Alito’s observation that an analogy to the Clayton Act was insufficient, by itself, to carry the weight of the dissent’s objection to the domestic injury requirement. Although RICO’s private right of action was modeled after §4 of the Clayton Act (which allows recovery for extraterritorial injuries arising from antitrust violations), the Court had never sufficiently explained the extent of the Act’s applicability to RICO, Blakey explained. In any event, the analogy was unnecessary—in this case—because the text and structure of the statute do not distinguish between civil and criminal remedies, and criminal remedies do not require a domestic injury.

Blakey agreed with Justice Ginsburg’s dissent, however, to the extent that the Justice had relied on the statute itself. The statute does not require a domestic injury, he noted. In fact, as Justice Ginsburg observed, the statute expressly provides a right of action to "[a]ny person injured in his business or property by reason of a violation of section 1962."

Decision was puzzling, says Paul Batista. Paul Batista, lawyer, novelist, and author of the "Civil RICO Practice Guide," found the majority’s decision puzzling, and at one point characterized it as "schizophrenic." The opinion began well enough, Batista explained, with its vanilla finding that certain predicate acts permit a RICO remedy for foreign misconduct. But then the opinion served a Mickey-Finn-like twist that disabled the right of private plaintiffs to bring RICO claims for foreign injuries. That "astonishing" change will generate uncertainty for years, he predicted.

The Supreme Court has a long and consistent history of rejecting lower-court efforts to narrow the scope of RICO, Batista noted. Generally, the Court has broadly construed the statute’s provisions and has honored the charge to liberally construe the language of the statute to effectuate its remedial purposes. In this case, however, the Court reversed its steadfast course and narrowed the scope of the statute. And it did so immediately after expanding the statute’s protections—in Part III of the decision—to include foreign conduct, Batista observed.

The Court "took away with the left hand" what it had "given … with the right," he added. In Batista’s view, the Court’s opinion was probably the most significant RICO development in the last six to seven years. Unfortunately, courts and legal professionals would likely need several years to delineate exactly what §1964(c) "really means." Except for a limitation that Congress had added when it passed the Private Securities Litigation Reform Act in 1995, the private right of action provision had remained unchanged since its inception.

Conversely, the Court often relied on the Clayton Act to fill gaps in the RICO statute, Batista continued, but it refused to do so in this case, even though RICO’s private right of action was modeled after §4 of the Act. In Batista’s view, the Court’s refusal to use the Clayton Act as a guide in this case was a "gross inconsistency."

Restricting the private right of action to plaintiffs with a domestic injury was an "odd" and "highly unusual" development, Batista observed. The restriction will allow domestic wrongdoers—corporations and "Jeffrey Skilling" types—to expand their markets, maximize their profits, minimize their exposure to liability, and profit from illegal overseas activities. The result will benefit the defense bar and multinational corporations, Batista noted, but that was not the outcome that he had anticipated.

Attorneys: Paul Batista (Paul Batista, P.C.).

MainStory: RICO