White Collar Criminal Law Meets Foreign Arbitration in Recent U.S. Supreme Court Ruling
The U.S. Supreme Court recently handed down a slew of decisions from its October 2022 term. One such decision, decided 22 June 2023, combined two legal worlds when it decided a case involving U.S. white collar crime and foreign arbitration. In Yegiazaryan, aka Egiazaryan v. Smagin et al., the Court held that a foreign arbitration award could be enforced through the U.S. Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§1961-1968, so long as the circumstances surrounding the plaintiff’s injury indicate it arose in the U.S. Just last year, the Court ruled on another arbitration-related matter but with much less success for the foreign arbitration world in ZF Automotive US, Inc. v. Luxshare, Ltd. and AlixPartners, LLP v. Fund for Protection of Investors’ Rights in Foreign States (holding that private arbitrations can no longer use Section 1782 to obtain discovery from persons or entities in the U.S.). While the Yegiazaryan decision is much more favorable for foreign arbitration, those seeking to enforce arbitration awards in the U.S. should not be so quick to celebrate.
Ashot Yegiazaryan, a Russian national, committed fraud in Russia against Vitaly Smagin, also a Russian national. To avoid a Russian criminal indictment, Yegiazaryan fled to California where he resided since 2010. In 2014, Smagin won a multimillion-dollar arbitration award in London against Yegiazaryan for the Russian fraud. Smagin then successfully filed suit in the Central District of California pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) to freeze Yegiazaryan’s assets and collect the award. In the interim, Yegiazaryan himself won a multimillion-dollar arbitration award in another matter and concealed the funds to keep Smagin from collecting them. Smagin then filed a civil suit in 2020 in California under RICO, alleging that Yegiazaryan and others worked together through wire fraud and other racketeering acts to frustrate his abilities to collect the arbitration award.
The District Court dismissed the complaint stating that Smagin failed to plead domestic injury since the parties were Russian and the arbitral award stemmed from activities that occurred in Russia. The Ninth Circuit reversed, rejecting a residency-based test for intangible property, which had been followed by the Seventh Circuit. Instead, the Ninth Circuit applied a context-specific approach, which it found consistent with the approaches of the Second and Third Circuits and concluded that Smagin did indeed plead a domestic injury since he was trying to execute on a California judgment against a California resident and the racketeering activity had largely occurred in California.
A “Contextual Approach”
The U.S. Supreme Court granted certiorari due to the federal circuit split as to what constitutes “domestic injury” under RICO when foreign parties are involved. The U.S. Supreme Court had already dealt with RICO and its extraterritorial reach in RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (2016), wherein it stated that “absent clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application.” In RJR Nabisco, the U.S. Supreme Court had utilized a two-step test and looked first to whether the statute gives a clear, affirmative indication that it applies extraterritorially and second but only in the negative, to whether the case involves a domestic application of the statute considering the respective statute’s focus. For RICO’s private right of action, §1964 (c), the U.S. Supreme Court in RJR Nabisco held that there is no clear indication that Congress intended to create a private action for injuries that are suffered outside of the U.S.; therefore, a private RICO plaintiff must prove a domestic injury in step two. The U.S. Supreme Court failed, however, to clearly define “domestic injury”, leaving the circuits to disagree on the definition.
The U.S. Supreme Court in Yegiazaryan v. Smagin now resolved the circuit split, ultimately agreeing with the Ninth Circuit. The U.S. Supreme Court held that courts should look to the circumstances surrounding the injury to see if they sufficiently tie the injury back to the U.S. Applying this principle, the U.S. Supreme Court found that the circumstances surrounding Smagin’s injury made clear that the injury arose in the U.S. since Yegiazaryan’s scheme to avoid collection was carried out in the U.S. and was directed toward frustrating the California judgment.
Future Foreign Arbitration Awards in the U.S. under RICO
While at first glance, it sems great that the enforcement of foreign arbitration award can benefit from the regulations under RICO, it should be noted that there were numerous U.S. ties in this particular case.
Yegiazaryan lived in California, and the judgment had been issued by a California District Court. Further, the underlying RICO activity occurred in the U.S., e.g. the creation of U.S. shell companies to hide his U.S. assets, submission of a forged doctor’s note to a U.S. District Court and intimidation of a U.S.-based witness. Moreover, all of the rights attached to the California judgment pursuant to the New York Convention existed only in California (including the right to obtain post judgment discovery, seize assets in California, and seek other appropriate relief from the California District Court). All these ties to the United States played a significant role in the U.S. Supreme Court’s decision. In view of this, it is unclear what and how a U.S. district court might decide when there are fewer U.S. connections.
In any event, the newly found expansion of possibilities of enforcement of arbitral awards is limited to the RICO statute. Thus, while this opens the door for RICO lawsuits by foreign arbitration award creditors, plaintiffs must still allege a sufficient pattern of racketeering activity to implicate RICO. Moreover, U.S. Supreme Court has left open which factors may be relevant to the establishment of a “domestic injury” for RICO purposes and how those factors are to be weighed against one another. These issues remain to be decided in future cases.
It could therefore prove quite difficult to bring a RICO action against those seeking to avoid arbitration judgments in most cases. Further, Justice Alito points out in his dissent in Yegiazaryan v. Smagin that the foreign arbitral award is “not ‘domestic’ in any way” and that the U.S. Supreme Court has failed to address this point. While it is in the dissent, the argument could be expounded upon by parties opposing foreign arbitral award enforcement via RICO.
Foreign plaintiffs can in principle now utilize RICO to enforce foreign arbitration awards in the U.S. and take advantage of the statute’s treble damages and attorneys’ fees provisions. However, the hurdles faced in pleading a RICO claim remain high, especially since the U.S. Supreme Court’s decision has made clear that this is a contextual, fact-intensive inquiry. Above all, the plaintiff’s injury must still have sufficient nexus to the U.S. to indicate it arose there. Lower courts will now begin to hash out just what constitutes enough of a nexus.