The Supreme Court of the United States recently held in Yegiazaryan v. Smagin that a plaintiff alleged a domestic injury for the purposes of RICO in a case where the activities undertaken to evade enforcement of an international arbitration award occurred in California.
Vitaly Smagin and Ashot Yegiazaryan were business partners in a Moscow real estate venture. Yegiazaryan stole Smagin’s shares in the joint venture, and fled to Beverly Hills in California, where he remains until present day, in order to evade Russian authorities. Smagin commenced a London-based arbitration against Yegiazaryan, and was awarded $84 million in damages, which Yegiazaryan refused to pay. Smagin then commenced an enforcement action in the United States District Court for the Central District of California seeking to enforce the award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The District Court issued a preliminary injunction freezing Yegiazaryan’s California assets. Yegiazaryan then engaged in a wide-ranging scheme to keep his assets out of Smagin’s reach – creating shell companies for himself and his family, orchestrating fraudulent judgments tying up assets around the globe, and intimidating a physician to prevent him from responding to a subpoena.
Based on this web of corrupt activity, Smagin brought a civil suit under the Racketeer Influenced and Corrupt Organizations Act (RICO) against Yegiazaryan and his accomplices, seeking over $130 million in damages as well as attorney’s fees and treble damages. The District Court dismissed Smagin’s RICO suit on the grounds that Smagin had failed to adequately allege a “domestic injury” as required by Supreme Court precedent from RJR Nabisco, Inc. v. European Community. It reached that decision because Smagin was a resident and citizen of Russia and, therefore, his injury was felt there. On appeal, the Ninth Circuit reversed, rejected the residency-based test (adopted by the Seventh Circuit), in favor of the context-specific approach to domestic injury inquiry used by the Second and Third Circuits. Under the context-specific approach, since Yegiazaryan’s RICO activities were based and orchestrated in California, the Ninth Circuit held there was a domestic injury and Smagin’s RICO case should not have been dismissed.
The Supreme Court granted certiorari to resolve the Circuit split. The Supreme Court agreed with the Ninth, Second and Third Circuits, adopting the contextual approach for domestic injury under RICO, instructing that “courts should look to the circumstances surrounding the alleged injury to assess whether it arose in the United States.” The Supreme Court affirmed the Ninth Circuit’s finding of a “domestic injury” in Smagin’s case – the circumstances of RICO case arose in the United States, given that the various schemes to divert assets began and were executed in California. Additionally, the Supreme Court rejected the bright-line rule of locating a RICO plaintiff’s injury at the plaintiff’s residence on the grounds such a rule would foreclose foreign plaintiffs from bringing RICO suits. Justice Sonya Sotomayor wrote the majority opinion, which was joined by Justices Roberts, Kagan, Kavanaugh, Coney Barrett, and Brown Jackson. Justices Alito, Thomas, and Gorsuch dissented. Justice Alito, writing in dissent, argued the majority opinion gives no guidance to lower courts as to how to determine domestic injury using the contextual approach, which risks confusion among the lower courts going forward.