Legal Update: RICO Can Apply to Activities Outside the US 16:16, June 27, 2016

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Legal Update: RICO Can Apply to Activities Outside the US

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The US Supreme Court recently ruled on how far a federal corruption statute applies to international business. During the 1990s, cigarette smuggling in Europe and between the United States and Canada greatly increased. In fact, cigarette smuggling was so rampant that in 1994, Canada sharply cut its anti-smoking taxes to combat widespread smuggling from the United States. In 2002 an expert from the European Anti-Fraud Office said that it was generally accepted that the trade in smuggled cigarettes was at least as lucrative as the illegal drug trade.

In a 1998 tobacco litigation settlement with Minnesota, cigarette companies including Philip Morris, British American Tobacco, and R.J. Reynolds agreed to put company documents into public depositories for 10 years. A 2001 story by The Economist  discusses documents in which cigarette company executives agreed to fix prices in both the legal and smuggled cigarette markets.

European Union-RJR Lawsuit

In 2000 the European Union (then called the European Community) filed a complaint against RJR Nabisco and its related entities (RJR) under the Racketeer Influenced and Corrupt Organizations Act (RICO), which prohibits certain activities of organized crime groups in relation to an enterprise that engages in interstate or foreign commerce. RICO violations are subject to criminal penalties and civil proceedings brought by the US Attorney General. In addition, RICO includes a private cause of action that allows parties who are injured in “business or property” to sue in federal district court and recover damages, costs, and attorney fees.

The European Union (EU) claimed that RJR participated in a global money-laundering scheme in which Columbian and Russian drug traffickers smuggled narcotics into Europe and sold them for euros. The euros were used to pay for large shipments of RJR cigarettes into Europe through transactions involving black-market money brokers, cigarette importers, and wholesalers. The EU claimed that RJR concealed its smuggling activities through money laundering, wire fraud, mail fraud, and other violations of US law. The EU also claimed that while smuggling cigarettes, RJR conducted a public relations and lobbying campaign stating that high cigarette taxes encouraged smuggling. The lawsuit also claimed that RJR and its affiliates sold “large quantities of cigarettes to entities and/or destinations even though [they] know, based on their own marketing studies, that the legitimate demand for cigarettes from those entities and/or destinations cannot possibly account for the orders made and the massive quantities delivered. Under these circumstances, [they] know that their cigarettes are being sold for illegal purposes.”

According to the EU, RJR’s violations caused competitive harm to their state-owned cigarette businesses and caused lost tax revenue from back-market cigarette sales, harm to European financial institutions, currency instability, and increased law enforcement costs.
RJR claimed that RICO doesn’t apply to foreign enterprises or to racketeering activity that occurs outside US territory.

Sixteen years later, the US Supreme Court held that RICO applies to some foreign racketeering activity but that RICO provides a remedy only for a domestic injury suffered to business or property.

The Law of Extraterritoriality

When courts determine whether a federal law applies to events outside the United States, they apply a presumption against extraterritoriality: a federal law is construed to apply only within the United States unless the law clearly expresses the opposite congressional intent. In this case, although RICO doesn’t expressly say that it applies abroad, the Court found that certain parts of RICO show that it was intended to apply outside the United States. For example, RICO defines racketeering to include crimes that, as the Court said, “plainly apply to at least some foreign conduct,” such as prohibitions against (1) engaging in monetary transactions in criminally derived property, (2) assassinating government officials, and (3) hostage taking. “This unique structure,” said the Court, “makes RICO the rare statute that clearly evidences extraterritorial effect despite lacking an express statement of extraterritoriality.”

Private Right of Action

Although the Court had decided that the presumption against extraterritoriality was rebutted with respect to RICO’s provisions concerning illegal activities, it did another presumption analysis with respect to RICO’s private cause of action, because “providing a private civil remedy for foreign conduct creates a potential for international friction beyond that presented by merely applying U.S. substantive law to that foreign conduct.”

The Court noted that in the context of antitrust violations, for example, the application of US private remedies to anticompetitive conduct taking place abroad has generated considerable controversy in other nations, even when those nations agree with US law on issues like banning price fixing. Numerous foreign countries have complained that applying US remedies would allow foreign citizens to bypass a country’s own less generous remedies, upsetting a balance of competing considerations embodied by the countries’ own domestic antitrust laws. In a securities fraud case, France told the US Supreme Court that allowing foreign investors to pursue private suits in the United States would upset the balance of other countries’ schemes for litigating securities fraud “and offend the sovereign interests of foreign nations.”
“Allowing recovery for foreign injuries in a civil RICO action, including . . .  damages, presents the same danger of international friction,” said the Court. Further, nothing in the law “provides a clear indication that Congress intended to create a private right of action for injuries suffered outside of the United States.”

In this case, the EC had expressly waived its damage claims for domestic injuries. Therefore, because the remaining RICO damages claims concerned only injury suffered abroad, the complaint was dismissed. [RJR Nabisco, Inc., et al. v. European Community et al. (US SupCt 2016) no. 150138]

Dissent

Justices Ginsburg, Breyer, and Kagan believed that RICO did not require a domestic injury. Having found that RICO applied to some of RJR’s actions outside the United States, those justices would not have done a separate analysis to see if the EU could sue. Justice Ginsburg’s opinion noted that “[a]ll defendants are U. S. corporations, headquartered in the United States, charged with a pattern of racketeering activity directed and managed from the United States, involving conduct occurring in the United States . . .  In short, this case has the United States written all over it .”

“Invoking the presumption against extraterritoriality as a bar to any private suit for injuries to business or property abroad, this case suggests, might spark, rather than quell, international strife. Making such litigation available to domestic but not foreign plaintiffs is hardly solicitous of international comity or respectful of foreign interests,” said Justice Ginsburg in the dissent.

Past Cigarette Smuggling Settlements

In 2004 the EU and Philip Morris International (PMI) (one of the entities related to RJR in this case) signed a 12-year agreement to combat contraband and counterfeit cigarettes; the EC agreed to halt all claims against PMI, which agreed to pay up to $1.25 billion in the settlement. The settlement is set to expire on July 9, 2016.

In 2010 RJR paid Canada C$325 million and Japan Tobacco’s JTI-MacDonald unit paid C$150 million to settle claims related to cigarette smuggling in Canada in the 1990s.
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Christine Day
Christine Day is a legal editor at EverFi. She writes about employment law issues and tracks case law and legislative and regulatory updates. Before joining EverFi she worked in legal publishing, researching and writing about tax law, business law, and employment law. She earned her JD from the University of San Diego Law School and her BA from the University of Southern California.

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