Justin Santolli. This month marks the second anniversary of the U.S. Supreme Court's decision in RJR Nabisco v. European Community, 136 S.Ct. 2090 (2016), addressing the extraterritorial application of the Racketeer Influenced and Corrupt Organizations Act (RICO). The RJR Nabisco decision introduced a new requirement in private civil litigation brought under RICO by holding that “a private RICO plaintiff ... must allege and prove a domestic injury to its business or property.” The Supreme Court's decision did not, however, provide clear guidance on the difference between a “domestic” and a “foreign” injury, which has required federal courts to further refine the governing standards of what constitutes a domestic injury.   Over the last two years, the U.S. Courts of Appeals for the Second and Seventh circuits have addressed RJR Nabisco 's domestic injury requirement. The two decisions from the Second and Seventh circuits focused solely on where the injury was suffered, and can be read to establish two bright-line rules: (i) injury to tangible personal property physically located within the United States is a domestic injury and (ii) injury to intangible property that belongs to an individual located southside of the United States is not a domestic injury.   Substantial questions remain regarding how courts will further develop the domestic injury requirement, especially in cases where the harm is sustained by a U.S. resident outside of the United States, or where property located outside of the United States is harmed by individuals and entities acting from within the United States.

The 'RJR Nabisco' Decision

Following the Supreme Court's decision in Morrison v. National Australia Bank , 561 U.S. 247 (2010), courts recognized that the presumption against extraterritoriality applied to civil RICO claims. Those courts differed, however, over how to apply Morrison 's analysis.   Courts employed three different tests to determine the extraterritorial reach of RICO. They are whether the conduct of the RICO enterprise was directed from inside the United States; whether the pattern of racketeering activity occurred in the United States; and whether the underlying predicate acts applied extraterritorially. (See  European Community v. RJR Nabisco , 764 F.3d 129, 136-39 (2d Cir. 2014), rev'd 136 S.Ct. 2090 (2016); United States v. Chao Fan Xu , 706 F.3d 965, 977 (9th Cir. 2013).) Given these competing approaches, the Supreme Court granted a petition for certiorari challenging the Second Circuit's determination that RICO applied extraterritorially in RJR Nabisco . The Supreme Court's decision focused principally on two issues: (1) whether RICO's substantive prohibitions in Section 1962 applied to conduct occurring in foreign countries; and (2) whether RICO's private right of action in Section 1964(c) applied to injuries that were suffered in foreign countries. 136 S.Ct. at 2099-100. With respect to the first issue, the court unanimously held RICO did apply to “some” foreign activity so long as each of the RICO offenses violated a predicate statute that is itself extraterritorial.    On the second issue, a 4-3 majority held that RICO's private right of action did not rebut the presumption against extraterritoriality, and consequently a plaintiff must allege a “ domestic injury.”  The majority explained that the extraterritorial application of RICO's private right of action must be analyzed separately from RICO's substantive prohibitions. In reaching this conclusion, the court was concerned that permitting private plaintiffs to recover for foreign injuries presented the “danger of international friction.” The court determined that RICO's private right of action did not provide “a clear indication that Congress intended to create a private right of action for injuries suffered outside the United States.” Therefore, the majority concluded that “Section 1964(c) requires a civil RICO plaintiff to allege and prove a domestic injury to business or property and does not allow recovery for foreign injuries.”   The court did not, however, have the opportunity to provide any guidance on the issue because the plaintiffs filed a stipulation in the district court “waiving their damages claims for domestic injuries.”  

RICO's Domestic Injury Requirement

RJR Nabisco 's holding that a private civil RICO plaintiff must demonstrate a domestic injury to state a valid claim has forced federal courts to define the contours of this new requirement from whole cloth. The majority of courts that have addressed the domestic injury requirement appear to agree that the focus of the inquiry should be on where the plaintiff ultimately felt the injury and not where the alleged predicate acts occurred. Moreover, courts have determined the location of plaintiff's injury may differ based on the claims asserted. For example, the District of New Jersey has held that a plaintiff who claims fraudulent conversion of its products “feels” the injury in the location in which the plaintiff relinquished control of the property. (See  Cevdet Aksüt Oğullari Koll. STI v. Cavusoglu , 245 F. Supp. 3d 650, 658-59 (D.N.J. 2017).)   On the other hand, courts have held that where an alleged injury is purely economic, the plaintiff feels the injury where the plaintiff resides. (See  Elsevier v. Grossmann , 2017 U.S. Dist. LEXIS 69677, at *10-11 (S.D.N.Y. May 8, 2017); City of Almaty v. Ablyazov , 226 F. Supp. 3d 272, 282-85 (S.D.N.Y. 2016).) The Second Circuit's decision in Bascuñan v. Elsaca , 874 F.3d 806 (2d Cir. 2017),  was the first circuit court decision to address the domestic injury requirement and embrace the distinction between the situs of economic injuries and the situs of conversion claims. The plaintiffs in Bascuñan alleged four different schemes: (1) generation of “sham fees” from plaintiff held in a bank account in New York; (2) creation of a private investment fund in Chile that took money from plaintiff's estate, was financed with assets from foreign entities, and then was laundered through bank accounts in New York; (3) the defendant traveled to New York to remove “bearer shares” that were held in an account in New York; and (4) the defendant stole $1.8 million in dividend payments and diverted a portion of those funds to his accounts in New York.   The court noted that if a plaintiff alleges more than one injury, courts should analyze each injury separately. With respect to the second and fourth schemes, the court found that the plaintiff failed to allege a “domestic injury” because the economic injuries were felt in Chile, where the plaintiff resided. The court held that an injury to tangible property typically is a “domestic injury” only if the property is physically located in the United States and that the use of the United States' financial system as part of the scheme does not mean the injury is “domestic.” The court, on the other hand, found that the first and third schemes did allege “domestic” injuries because the property, although belonging to a foreign owner, was physically located in the United States when it was stolen.   The Seventh Circuit recently addressed the application of the domestic injury requirement to intangible property in Armada (Singapore) PTE Ltd. v. Amcol International , 885 F.3d 1090 (7th Cir. 2018). Armada, a Singaporean shipping company, entered into contracts with an Indian mining company owned completely by an Illinois corporation, Amcol. The mining company breached those contracts and an arbitrator awarded Armada more than $70,000,000.   Armada subsequently commenced a civil RICO lawsuit against Amcol, claiming it engaged in racketeering activity by allegedly draining the mining company of assets in order to avoid collection of the judgment. In determining whether Armada satisfied RICO's domestic injury requirement, the Seventh Circuit reasoned that Bascuñan 's holding only applied to injuries involving tangible property. The Seventh Circuit held that the property at issue was a judgment and as a general rule a judgment is intangible because it does not have a physical existence. The Seventh Circuit reasoned that a party sustains injuries to its intangible property at its residence or principal place of business. Given that Armada's principal place of business was Singapore, the Seventh Circuit concluded that any harm to Armada's ability to enforce its judgment was not suffered domestically but in Singapore.  

Conclusion

Although RJR Nabisco did not define the contours of the domestic injury requirement, the decisions by the Second and Seventh circuits have established the general rules that injury to tangible property located in the United States is a domestic injury, and injury to intangible property owned by an individual or entity residing outside of the United States is not a domestic injury.   These bright-lines rules, however, may be of more limited utility in more difficult cases where denying a plaintiff a federal forum based on the location of the injury may conflict with the underlying intent of providing a remedy under RICO. As the lower federal courts have not yet had the opportunity to confront such a case, the further development of the domestic injury requirement bears watching.   Justin J. Santolli is a special counsel in the litigation department of Fried, Frank, Harris, Shriver & Jacobson. Litigation associate Fara M. Saathoff assisted with the preparation of the article.