Second Circuit Revives RICO Case Against R.J. Reynolds

Second Circuit Revives RICO Case Against R.J. Reynolds Diego M. Radzinschi Jones Day's Gregory Katsas

It’s been more than two years since Jones Day’s Gregory Katsas argued European Community v. RJR Nabisco at the U.S. Court of Appeals for the Second Circuit, urging the court to affirm a ruling that a coalition of European governments can’t sue R.J. Reynolds under the Racketeer Influenced and Corrupt Organizations Act. But as the wait for a ruling dragged on, Katsas had good reason to predict a win. Most of all, that’s because the plaintiffs accused RJR of running a cigarette smuggling and money laundering scheme centered in Europe, and the Second Circuit had already signaled in another case that RICO doesn’t apply to overseas conduct.

Instead, on Wednesday a unanimous Second Circuit panel defied expectations and revived the case against RJR, concluding that RICO does indeed have extraterritorial reach. In the process, the court devised a new formula for judges to use in weighing RICO claims with a foreign dimension, ruling that the analysis should focus on individual predicate acts under the law.

“Congress manifested an unmistakable intent that certain of the federal statutes adopted as predicates for RICO liability apply to extraterritorial conduct,” Judge Pierre Leval wrote for the panel. “By incorporating these statutes into RICO as predicate racketeering acts, Congress has clearly communicated its intention that RICO apply to extraterritorial conduct to the extent that extraterritorial violations of those statutes serve as the basis for RICO liability.”

The case, which has been pending in some form since 2000, was brought by 26 European countries and the European Community (now European Union) against RJR Nabisco and its R.J. Reynolds tobacco subsidiaries. The plaintiffs accuse RJR of orchestrating a vast and complex operation in which criminal organizations used cigarette smuggling to launder money earned in the European narcotics trade.

As with other litigation concerning alleged violations of U.S. laws abroad, the fate of the case was thrown into question by the U.S. Supreme Court’s June 2010 ruling in Morrison v. National Australia Bank. In Morrison, which dealt specifically with federal securities law, the Supreme Court affirmed the presumption that U.S. laws don’t apply extraterritorially unless Congress clearly indicated that they do.

Three months later, the Second Circuit cited Morrison in dismissing a RICO case called Norex Petroleum Ltd. v. Access Industries, noting that RICO is “silent” as to any extraterritorial application. The court in Norex also wrote that Morrison “forecloses Norex’s argument that because a number of RICO’s predicate acts possess an extraterritorial reach, RICO itself possesses an extraterritorial reach.”

Faced with the combined precedent of Morrison and Norex, U.S. District Judge Nicholas Garaufis in Brooklyn tossed the case against RJR in 2011. Garaufis also dismissed related state law claims after finding that the EC didn’t qualify as an organ of a foreign state for the purposes of establishing diversity jurisdiction.

In other cases requiring judges to square Morrison‘s stricture against extraterritoriality with foreign-flavored RICO claims, some have simply said that RICO doesn’t extend to foreign “conduct.” In the RJR case, Garaufis concluded that RICO targets “enterprises,” and since RJR’s alleged money laundering and smuggling enterprise was mostly foreign, the statute didn’t apply.

On Wednesday, the Second Circuit concluded that both approaches are incorrect. The panel found that shielding overseas criminal enterprises from the scope of RICO could lead to absurd results, like putting foreign terror squads that attack the U.S. out of the statute’s reach.

The panel ruled that it was “far more reasonable” to analyze whether individual RICO predicate acts named in the RJR complaint could survive Morrison. Under that standard, the Second Circuit found that the plaintiffs’ allegations of money laundering and material support of terrorism both apply to overseas conduct. And while the plaintiffs’ claims of wire fraud, money fraud and Travel Act violations were premised on statutes without an extraterritorial dimension, the court determined that those specific allegations concerned conduct in the United States or while crossing U.S. borders.

The Second Circuit never addressed one of RJR’s core arguments, which was that civil RICO claims always require a domestic injury in order to survive. And the court also reversed Garaufis’s decision to dismiss the state law claims against RJR, ruling that the EC is an agency or instrumentality of a foreign state, so its inclusion in the case doesn’t defeat the court’s diversity jurisdiction.

Jones Day’s Katsas, longtime outside counsel to RJR, argued the case at the Second Circuit way back in February 2012. Katsas referred us for comment to an RJR spokesman, who said the company was considering additional appeals and would pursue other grounds for dismissal on remand.

Plaintiffs counsel Kevin Malone of Krupnick Campbell Malone Buser Slama Hancock Liberman & McKee wasn’t immediately available to comment on the ruling.

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