Court Examines In Depth Civil RICO Extraterritoriality Post RJR Nabisco: Split in Circuits Evident as Majority Focus in on Where Alleged Injury Occurred

Elsevier Inc. v. Pierre Grossman, IBIS, 2017 WL 1843298  (S.D.N.Y., May 8, 2017)

In a detailed examination of extraterritoriality for civil RICO claims, because of the law change by the Supreme Court’s opinion in RJR Nabisco, the court granted Plaintiffs’ motion for a new trial as to Defendant Grossmann on the issue of domestic injury.  The court also granted Plaintiffs’ motion for leave to file a Second Amended Complaint as to Defendants PTI and IBIS.

Earlier OpinionPre-RJR Nabisco

The Court in a previous opinion in Elsevier had applied its domestic-injury analysis to Plaintiffs’ evidence at trial and found that neither of Plaintiffs’ alleged injuries—the alleged competitive injury to Plaintiffs’ business and alleged parting with property under false pretenses—was a “domestic injury” for purposes of RICO.   In the earlier opinion, the Court considered the strictures of FRCP 59 and 15, however, and concluded that “it would be permissible to order a new trial on the issue of domestic injury at this juncture.”  Because the Court did “not believe it would be advisable to hold a second trial unless Plaintiffs [were] capable of introducing more information on the issue of domestic injury” though, it directed Plaintiffs to “renew their Rule 59 motion,” but only if that motion were “accompanied by a proffer of the evidence that would be offered at a trial on the issue of domestic injury.”  With regard to Plaintiffs’ assertion that they had parted with property under false pretenses, the Court suggested that Plaintiffs’ proffer should indicate that Plaintiffs’ journals left their control in the United States because they were shipped from the United States and/or authorized for shipment by Plaintiffs’ employees in the United States. Id. at 788-90.

The court then discussed the recent Supreme Court opinion on extraterritoriality in depth.  In RJR Nabisco, Inc. v. European Community, ––– U.S. ––––, (2016), the Supreme Court affirmed the strength of the judiciary’s presumption against extraterritoriality, and the Court outlined the two-step process according to which a court must analyze that presumption’s applicability to a given statute. RJR Nabisco, 136 S. Ct. at 2100-01.   At the first step, a court asks “whether the presumption against extraterritoriality has been rebutted—that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially.” Id. at 2101. The court “must ask this question regardless of whether the statute in question regulates conduct, affords relief, or merely confers jurisdiction.” Id. If the statute applies extraterritorially, then the court’s inquiry is at its end.

However, if there is nothing in the statute to rebut the presumption against extraterritoriality, the court must proceed to the second step of the analysis, which requires the court to consider whether the case involves a domestic or extraterritorial application of the relevant law. RJR Nabisco, 136 S. Ct. at 2101. A court “do[es] this by looking to the statute’s ‘focus’ ”: that is, if the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.*4 Id.; accord Matter of Warrant to Search a Certain E-Mail Account Controlled & Maintained by Microsoft Corp., 829 F.3d 197, 216-17 (2d Cir. 2016).

In RJR Nabisco, the Supreme Court applied this two-step framework to determine the extent to which the “substantive prohibitions in § 1962 may apply to foreign conduct.” 136 S. Ct. at 2101. At step one, the Court found that § 1962 “gives a clear, affirmative indication that [it] applies to foreign racketeering activity—but only to the extent that the predicates alleged in a particular case themselves apply extraterritorially.” Id. at 2102. Thus, for any crime to constitute a proper predicate act under RICO, the crime must involve: (i) a violation of a statute that applies extraterritorially or (ii) domestic conduct that is relevant to the “focus” of a domestic criminal statute. See id. at 2101-02.

Thus, the Court concluded, “[s]ection 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.” Id. at 2111. The Court acknowledged that “[t]he application of this rule in any given case will not always be self-evident,” but declined to articulate a definition of a “domestic injury to business or property,” leaving that question for another case. Id.

Thus, what is “Domestic Injury.”

Courts to consider this question left open by RJR Nabisco have diverged in their analysis thereof. See City of Almaty, Kazakhstan v. Ablyazov, No. 15 Civ. 5345 (AJN), 2017 WL 1424326, at *2 (S.D.N.Y. Apr. 20, 2017) (“[C]ourts both within this District and around the country have adopted varying approaches to assessing the novel domestic-injury question that could at least potentially yield differing determinations.”). Indeed, “two separate, and apparently conflicting, lines of reasoning have emerged from these opinions. The first line … focuses on where the alleged injury was suffered. The second line … focuses on where the conduct occurred that caused the injury.” Cevdet Aksüt Oğullari Koll. Sti v. Cavusoglu, Civ. No. 2:14-3362, 2017 WL 1157862, at *4 (D.N.J. Mar. 28, 2017) (collecting cases).

The SDNY has taken the former approach and earlier had concluded that in the RICO context, courts should employ a more flexible inquiry to determine where an injury occurs. First, the court should determine what type of injury a RICO plaintiff has suffered. If the plaintiff has suffered an injury to his or her business, the court should ask where substantial negative business consequences occurred. By contrast, if the plaintiff has suffered an injury to his or her property, the court should ask where the plaintiff parted with the property or where the property was damaged. Elsevier, 199 F. Supp. 3d at 786. Clearly, the Court’s focus was on where an alleged injury was suffered by a RICO plaintiff, rather than where the alleged predicate acts were committed by a RICO defendant. See id.

The majority of other courts to consider the question have followed suit. See Cevdet Aksüt Oğullari Koll. Sti, 2017 WL 1157862, at *4-5 (collecting cases) (“[M]ost of the courts appear to have focused on where plaintiffs’ injuries were felt.”). Other courts within this Circuit, for example, have adopted a version of the injury-focused approach derived by analogy to New York State’s choice-of-law statute, N.Y. C.P.L.R. § 202. See Bascuñan v. Daniel Yarur ELS Amended ComplaintA, No. 15 Civ. 2009 (GBD), 2016 WL 5475998, at *4-6 (S.D.N.Y. Sept. 28, 2016); see also City of Almaty, Kazakhstan v. Ablyazov, No. 15 Civ. 5345 (AJN), 2016 WL 7756629, at *7-9 (S.D.N.Y. Dec. 23, 2016) (adopting Bascuñan‘s holding that “[t]he appropriate subject of the inquiry required by RJR Nabisco is not the location of the … purportedly injurious conduct but the location where the injury itself arose.  Under this approach, a court looks to “where the economic impact of [an] injury was ultimately felt,” which is typically the state of a plaintiff’s residence or, in the case of a foreign corporation, either where it maintains a principal place of business or its place of incorporation. Bascuñan, 2016 WL 5475998, at *4 (quoting Deutsche Zentral-Genossenchaftsbank AG v. HSBC N. Am. Holdings, Inc., No. 12 Civ. 4025 (AT), 2013 WL 6667601, at *6 (S.D.N.Y. Dec. 17, 2013)). Courts “ask two common-sense questions: ‘[i] who became poorer, and [ii] where did they become poorer.’ ” Id. (quoting Deutsche Zentral-Genossenchaftsbank AG, 2013 WL 6667601, at *6).

This approach is similar to that adopted by most courts outside the Second Circuit. See, e.g., Cevdet Aksüt Oğullari Koll. Sti, 2017 WL 1157862, at *5 (“The Court, therefore, concludes that the only relevant inquiry is where Plaintiff’s injury occurred—i.e. where the impact of Plaintiff’s injury was felt—and not where the predicate acts occurred.”); Absolute Activist Value Master Fund Ltd. v. Devine, No. 15-cv-328, 2017 WL 519066, at *19-20 (M.D. Fla. Feb. 8, 2017) (“Defendant is correct to the extent she argues that the focus of the matter is the geographic location of the injury to plaintiffs, not the location of a defendant’s wrongful acts”); Exeed Indus., LLC v. Younis, No. 15 C 14, 2016 WL 6599949, at *3 (N.D. Ill. Nov. 8, 2016) (finding foreign plaintiffs did not suffer a domestic injury because “the injury alleged was not initially suffered by Plaintiffs in the United States, nor have Plaintiffs maintained a United States presence”).

District Courts in N.J. and C.D. Cal. Diverge

A minority of courts elsewhere, however, have looked to the place where the RICO-predicate acts that caused the alleged injury occurred. See, e.g., Akishev v. Kapustin, No. CV 13-7152 (NLH) (AMD), 2016 WL 7165714, at *8 (D.N.J. Dec. 8, 2016) (finding domestic injury because defendants chose “to operate their fraudulent scheme from New Jersey and Pennsylvania,” such that “the locus delecti of the crimes committed is the United States”); Tatung Co., Ltd. v. Shu Tze Hsu, No. SA CV 13-1743 (DOC) (ANX), 2016 WL 6683201, at *7-8 (C.D. Cal. Nov. 14, 2016) (declining to follow Bascuñan because conduct of defendants so clearly targeted California that “[i]t would be absurd to find that such activity did not result in a domestic injury to Plaintiff”).

Thus, given the change in civil RICO law regarding domestic injury changed on June 20, 2016, long after the Rule 16 scheduling order’s May 9, 2015 deadline for motions to amend the pleadings, good cause supported Plaintiffs’ motion to amend. Courts in the Second Circuit have found good cause to support amendment when plaintiffs have diligently sought leave upon a change in controlling law.

Thus, Plaintiffs’ diligence in addressing the intervening change in RICO law counsels in favor of permitting amendment.  Consideration of other relevant factors favors the same result. First, permitting an amendment at this stage in the litigation will not prejudice PTI or IBIS, and second, Plaintiffs’ amendment will not be futile. The “amended portion of the complaint” will not “fail to state a cause of action,” but rather will correct those portions of the Amended Complaint that currently fail to state a cause of action. Third, Plaintiffs have not been given “ample prior opportunity to allege” their domestic injury. This is Plaintiffs’ first opportunity to do so. For these reasons, Plaintiffs’ motion for leave to amend their pleading with regard to their RICO and RICO conspiracy claims against Defendants PTI and IBIS was granted.

David J. Stander is a civil RICO Attorney who focuses on complex litigation issues in civil RICO and fraud litigation.   The Second Circuit/majority view appears to liberalize arguments for jurisdiction for U.S. plaintiffs subject to racketeering conduct outside the U.S. when the injury was “felt” domestically, such as where Plaintiff lives or his or her business operates.

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