By

Gilberto Elio de Martinis

In June 2023, the United States Supreme Court ruled¹ that a U.S. defendant’s criminal activity against a non-U.S. plaintiff when enforcing an international commercial arbitration award triggers Article 18 U.S.C. § 1964(c) — the Racketeer Influenced and Corrupt Organizations Act (RICO). This decision creates a new circumstance under which non-US plaintiffs can enforce foreign arbitral awards in the United States.

In Yegiazaryan, the United States Supreme Court ruled on a multimillion-dollar international commercial arbitration award in favor of the non-US plaintiff Smagin against Yegiazaryan. This judgment considered Yegiazaryan, who misappropriated investment funds in a joint real estate venture in Moscow. Smagin alleged that Yegiazaryan, who lives in California, violated RICO by creating shell companies in the U.S. and abroad to avoid paying the award. The United States Supreme Court re-examined the case after the District Court dismissed the complaint on the reasoning that Smagin failed to plead a “domestic injury” as required by RJR Nabisco, Inc. v. European Community.² On the first appeal, the Ninth Circuit applied a context-specific approach to the domestic-injury inquiry, using the specific circumstances of the case, in contrast with the District Court’s residency-based approach. After granting certiorari, the US Supreme Court concluded that Smagin’s complaint satisfied the requirements of RICO and gave evidence overcoming the presumption against extraterritoriality³

“Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court . . ..”⁴ “It is unlawful for anyone employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.” ⁵ Furthermore, in RJR Nabisco, Inc., the Court provided a two-step inquiry to overcome the presumption against extraterritoriality and apply RICO domestically. First, a court must consider “whether the statute gives a clear, affirmative indication that it applies extraterritorially”.⁶ If yes, the test ends, if no, the court must consider whether “{a} private RICO plaintiff . . . must allege and prove a domestic injury to its business or property.”⁷ In Yegiazaryan, the court held that RICO does not provide the clear indication required at stage one, therefore the court considered whether in the case there is a domestic injury, in relation to a business or property. In this sense, the Supreme Court considers the arbitration award as the foundation for giving the successful non-US plaintiff a right of property. This property, based on the court’s context-specific approach, was injured by the conduct of Yegiazaryan, who frustrated the purpose of the award, by avoiding paying the sum Smagin lawfully obtained through the successful arbitration.

In light of the above, one must pay particular attention to how the Court conceptualizes and uses the concept of “property”. The arbitration award in favor of Smagin gives him the right to collect the multi-million-dollar payment from Yegiazaryan. This mirrors the creditor-debtor relationship where the former has a right to collect the sum of money lent to the latter, through an obligation directed towards one party. On the other hand, a tangible property right, such as land, or an intangible property right, such as a patent, are not considered in relation to just one counterparty, but to all in general. The nature of the creditor’s right is, therefore, highly different from a property right, which gives the owner the possibility of exercising it in relation to every person who commits a breach. This leads to the conclusion that the judgment considered by the United States Supreme Court should not be considered a property right, but a creditor’s right. Accordingly, RICO should not be applied in the present case as there was no property to be injured.

In conclusion, the United States Supreme Court’s decision provides a new path for enforcing an arbitration award in the U.S. by a non-U.S. plaintiff. Unfortunately, this path is based on a flawed concept of property, that differs from its practical use. The Court’s very elastic reasoning now lets non-US plaintiff obtain a “significant increase in the value of his arbitration victory”⁸