Morrison and international RICO: Kaplan’s take in Chevron case

May 22, 2012

It’s been relatively easy for district courts to figure out how to apply the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank in securities cases – unless the defendant is a U.S.-listed company, shareholders are pretty much out of luck in U.S. courts. Post-Morrison racketeering litigation has no such conveniently bright lines. The Racketeer Influenced and Corrupt Organizations Act doesn’t explicitly mention that it applies to overseas conduct, so under Morrison judges must presume it does not. But they’ve struggled to define exactly what constitutes overseas racketeering as opposed to domestic racketeering with an international component.

After all, as U.S. District Judge Lewis Kaplan of federal court in Manhattan noted in a ruling last week, RICO was originally intended to combat international organized crime rings. Kaplan is presiding over Chevron’s RICO case against the U.S. lawyers and experts who helped Ecuadoreans obtain an $18 billion judgment against the oil company. His ruling cites the Southern District’s famous Pizza Connection prosecution, which involved Mafia drug trafficking between Sicily and New York, as a RICO paradigm. “To say that Congress did not intend RICO to apply unless the enterprise in question was purely domestic would be unsupportable,” Kaplan wrote.

But on the other hand, he said, courts have concluded since Morrison that RICO cases involving mainly foreign plaintiffs, foreign defendants and foreign conduct are not viable in U.S. courts. The 2nd Circuit Court of Appeals ruled first, in a case called Norex Petroleum v. Access Industries. U.S. Senior District Judge Jed Rakoff subsequently reached the same result in Cedeno v. Intech (affirmed by the 2nd Circuit in a summary order). Kaplan also cited several other rulings in which courts have focused on “the domestic or foreign character of the alleged RICO enterprise” – mostly, whether defendants are “foreign” – to decide whether cases are barred by Morrison.

Kaplan disagreed with that reasoning. “It is very unlikely that Congress had ‘no concern’ with the conduct of the affairs of foreign enterprises through patterns of racketeering activity, at least if the prohibited activities injured Americans in this country and occurred here, either entirely or in significant part,” he wrote. “The emphasis on whether the RICO enterprise is domestic or foreign simply begs the question of how to determine the enterprise’s character.”

The proper issue, Kaplan said, was where the alleged acts of racketeering took place, in the United States or abroad. He endorsed the reasoning of U.S. District Judge Brooke Jackson of Colorado, who concluded in CGC Holding v. Hutchens that Canadian defendants could be sued for carrying out an allegedly phony loan scheme because the acts on which the RICO claim were based took place in the United States. That’s consistent with Congress’s intent, Kaplan said, when the victims of RICO schemes are American. “If there is a domestic pattern of racketeering activity aimed at or causing injury to a domestic plaintiff,” he wrote, “the application of (RICO) to afford a remedy would not be an extraterritorial application of the statute.”

With that interpretation, Kaplan said, Chevron’s RICO claims survive the plaintiffs’ motion to dismiss on Morrison grounds: Chevron sufficiently alleged a pattern of racketeering activity in the United States, supposedly conceived and directed by an American with the goal of obtaining a judgment against a U.S. corporation. Kaplan did leave open a possibility that Morrison could yet save the defendants, noting that “it remains to be seen whether critical acts upon which Chevron relies are domestic or would be predicate acts only by virtue of impermissible extraterritorial application of RICO.” Chevron counsel Randy Mastro of Gibson, Dunn & Crutcher said it will be no problem for the company to prove the alleged scheme to defraud the Ecuadorean court was orchestrated in the United States. (Kaplan did dismiss tortuous interference and unjust enrichment claims against Steven Donziger, the U.S. lawyer who was longtime counsel to the Ecuadorean plaintiffs.)

The judge was more enigmatic about Morrison in denying Chevron’s motion to attach any money the Ecuadoreans obtained to satisfy their judgment. The ruling marked a big (and rare) win for the Ecuadoreans in Kaplan’s court, where they’ve generally taken a beating. Kaplan said the oil company still hadn’t demonstrated that it was likely to succeed on the merits of specific damages claims in the RICO case. In particular, Kaplan said, Morrison left questions about “whether and to what extent Chevron may recover under RICO for injuries sustained in whole or part as a result of events that occurred beyond the boundaries of the United States.”

Mastro said Kaplan meant only that Chevron may not be able to show that legal fees it paid to defend the Ecuadorean litigation may not be recoverable because of Morrison, but the oil company’s larger damages theory is intact. Karen Hinton, a spokeswoman for the Ecuadorean plaintiffs, said Kaplan’s refusal to attach Chevron’s assets and dismissal of fraud claims against plaintiffs’ lawyer Donziger are “yet another devastating setback for Chevron’s prospects to avoid paying the Ecuador judgment. The fact Chevron is now running into resistance from its most favored U.S. federal judge shows just how dim the company’s legal outlook has become on the Ecuador case.”

Plaintiffs’ counsel James Tyrrell of Patton Boggs agreed that “the Ecuadorean plaintiffs remain free to pursue judgment recognition and enforcement anywhere in the world.” Donziger counsel from Keker & Van Nest did not return a call seeking comment.

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