The Extraterritorial Defense: A Border to RICO Claims Arising from International Transactions
Hargrove, Lorrie L., Sledge, Edward S., IV, Kimbrell, Katie M., Defense Counsel Journal
WHILE the Racketeer Influenced and Corrupt Organizations Act ("RICO") (1) has its roots in the fight against organized crime, (2) plaintiffs' attorneys, seeking RICO's treble damages and award of attorneys' fees, (3) have long sought to fit the RICO square peg into the round holes of basic fraud and business disputes. International business transactions, in particular, are often vulnerable to RICO claims.
Every RICO claim requires: (1) "racketeering activity" that is (2) conducted through an "enterprise." (4) A RICO "enterprise" is the "vehicle through which the unlawful pattern of racketeering activity is committed." (5) "Racketeering activity" consists of any of the criminal offenses, commonly referred to as "predicate acts," identified in 18 U.S.C. [section] 1961(1). (6) Mail and wire fraud are the most commonly pled predicate acts. (7)
Prior to 2010, federal courts applied varying approaches to resolve the issue whether RICO should apply to a case involving racketeering activity occurring outside of the United States, or involving enterprises, plaintiffs and/or defendants located outside the United States. The RICO statute is silent as to its extraterritorial application.
In 2010, the Supreme Court addressed the issue of whether section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") had extraterritorial application. (8) In concluding it did not, the Supreme Court reiterated the "longstanding principle of American law that ... unless there is the affirmative intention of Congress clearly expressed to give a statute extraterritorial effect, we must presume it is primarily concerned with domestic conditions." (9) Because the Exchange Act is silent as to extraterritorial application, the Court concluded unequivocally: "When a statute gives no clear indication of an extraterritorial application, it has none." (10)
Since Morrison, federal courts have overwhelmingly concluded that because RICO is silent as to its extraterritorial application, it has none. With federal courts consistently concluding that RICO does not apply extraterritorially, the battle lines are drawn at the outset: whether the complaint in question alleges an extraterritorial RICO claim. Predictably, counsel for RICO plaintiffs argue there are no extraterritorial facts, while RICO defendants seek to peel back and expose the extraterritorial elements of the RICO claim. This current battleground is highly relevant to international cross-border business transactions. Courts post-Morrison are all over the board in making this fact-based determination.
The extraterritorial defense can be a powerful weapon for defendants in combatting a RICO claim, which, because of its stigma and potency, has itself been described as the "thermonuclear option" for plaintiffs. (11) This article examines: (1) the pre-Morrison jurisprudence regarding the extraterritorial application of RICO; (2) the Morrison decision; (3) post-Morrison decisions regarding the extraterritorial application of RICO; and (4) an ensuing set of questions to consider when making an effective motion to dismiss a RICO claim based on the extraterritorial defense.
I. Pre-Morrison Jurisprudence Regarding the Extraterritorial Application of RICO
Pre-Morrison, some courts had held that RICO could not be applied extraterritorially at all, given Congress's silence on the subject. (12) Most federal courts, however, applied variations of the "conduct" test (focusing on whether certain conduct occurred in the United States) and/or the "effects" test (focusing on whether the effects of certain conduct were felt in the United States). (13) The "conduct" and "effects" tests generally were borrowed in the RICO context from tests applied in cases involving the Exchange Act. (14)
There was some variation among the federal courts in the way in which the "conduct" and "effects" tests were applied. The Ninth Circuit blended the two tests and concluded more generally that provided plaintiffs alleged that defendants were engaged in substantial fraudulent activity in the United States that affected United States citizens and commerce, there was no impermissible extraterritorial application of RICO. …