The World in U.S. Courts: Fall 2017 - Racketeer Influenced and Corrupt Organizations Act (RICO)
Plaintiff Dandong, a Chinese producer of soybean products, maintains its principal place of business is Dandong City, China, and is one of the largest purchasers of soybeans in the US. Dandong was the victim of a fraud perpetrated by one of its former executives and his relatives, all of whom at the time lived in the US. The relative was convicted of acts relating to the fraud and is presently in prison in China. Dandong sued the three relatives in federal court in New York, among other claims arguing that they had violated civil RICO provisions.
Under the US Supreme Court’s 2016 decision in the RJR Nabisco case, the provision of the RICO statute creating a private right of action has no extraterritorial effect and so a plaintiff must allege that it suffered a US “domestic injury.” The Supreme Court provided little guidance for determining where a RICO injury should be deemed to occur, and lower courts have adopted differing approaches. The District Court in New York identified two such approaches, one focused on the location of the conduct on which the claim is based and the second focused on where the plaintiff suffered the injury alleged. The Court sided with the majority rule, and for alleged injuries to a plaintiff’s “business” found they had been suffered “where substantial negative business consequences occurred”—typically, where a company is incorporated and has its principal place of business. Where there has been an alleged injury to “property,” by contrast, the loss will usually be deemed to occur “where the plaintiff parted with the property or where the property was damaged.”
Dandong argued that its alleged reputational injury in the US should be deemed to have been suffered in the US. Dandong noted that the Court, in a prior RICO opinion, stated that a US injury had been made out where a fraud had damaged the plaintiff’s “relationships with actual or prospective US customers.” In that case, copies of magazines fraudulently obtained at a discount and shipped from the US to Brazil were found to have injured the UIS business of the magazine publisher-plaintiff. The Court disagreed that the cases were analogous, noting that the present case involved alleged injury to the plaintiff’s suppliers. The Court also found the prior case to have involved a claim of a loss to property, the location of which followed a different rule from an alleged injury to a business. In the case at bar, the Court stated that Dandong had received all of the property it had contracted for; it just overpaid for it, in China. Other grounds for rejecting Dandong’s claim were noted: that an alleged injury to prospective supplier relationships in the US could not under any circumstances support a RICO claim; that Dandong’s injury was suffered in China, where the company overpaid for its US soybeans and where the loss of business resulted in reduced factory operations; and that US attorneys’ fees paid from China were not a US “domestic injury.”
[Editors’ note: On October 30, 2017, the first appellate decision addressing the extraterritorial application of the private civil RICO statute was issued, reversing in part the district court’s decision in Bascuñán v. Elsaca, which was covered in the Summer & Fall 2016 edition of The World in US Courts. Our commentary on the Court of Appeals’ decision was published by Law360 on November 3, 2017, and may be found here.]
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