A single hearing in the Supreme Court on Tuesday arises out of a long line of prior rulings, back as far as 1804 and the case of a schooner named the Charming Betsy and her famous role in the young United States’ efforts to stay neutral in a European war, between France and Britain. Those rulings still shape disputes over whether U.S. laws do, or do not, apply overseas.
The Court will broadcast “live” the audio (no video) of the hearing on its homepage, supremecourt.gov To listen, click on “Live Audio” and follow the prompt when the courtroom scene appears lower on the page. The audio also will be available, under the title of the case, on C-Span TV at this link: cspan.org/supremecourt
Tuesday’s hearing: Two combined cases, Yegiazaryan v. Smagin and CMB Monaco v. Smagin Starting at 10 a.m., the hearing is scheduled for one hour.
Background: In 1804, America’s most famous Chief Justice, John Marshall, devised a rule-of-thumb to guide courts in controversies over legal disputes that happen beyond the nation’s borders. Laws passed by Congress, he wrote, should not be interpreted in a way that conflicts with international law.
That is known as “the Charming Betsy canon” – canon meaning a guide on how to interpret the meaning and reach of a law. It gets that name because Marshall spelled it out in a case involving an American sea captain’s capture on the high seas of a U.S.-built schooner, the Charming Betsy.
That seizure, the Court said, was illegal even though the captain believed he was enforcing a law from 1800 that barred U.S. citizens from doing business with France while that country was at war with Britain. The captain thought the vessel was owned by a U.S. citizen. The Court ruled that the law did not apply, because the owner, though born in the U.S., had now become a resident in Denmark and was no longer subject to domestic U.S. law, meaning his vessel was a neutral. That result, the Court seemed to say, was required by international law on who is a neutral.
Ever since then, the Court has applied that basic interpretive approach, though varying it from time to time. The canon begins with the notion (a “presumption”) that U.S. laws do not apply abroad, then asks whether that is overcome by reliable indications that Congress meant a law to have “extraterritorial” effect.
Here is the way the Court expressed it in a 2007 decision: “The presumption against extraterritoriality” is that “United States law governs domestically but does not rule the world.” One can see the concept in the wording of the Constitution’s Article VI, saying that acts of Congress are “the supreme law of the land” – meaning America.
With the modern growth of interconnected global business and markets, the doctrine has had a strong revival in Supreme Court’s decisions, especially over the past ten years.
The combined appeals that the Court will hear on Tuesday ask the Court to fill a gap it left when it applied the ban on extraterritoriality in the case of RJR Nabisco v. European Community. That ruling in 2016 involved a lawsuit filed in U.S. courts by the European Community (Europe’s “common market”) and 26 of its member countries against the giant U.S. tobacco and food company.
RJR was accused of being a part of an international money laundering scheme in which organized crime groups in Colombia and Russia sent illegal drugs into Europe, sold them and hid the money in the form of payments for imports of RJR’s cigarettes.
That lawsuit was based on the Racketeer Influenced and Corrupt Organizations Act of 1970, usually referred to simply as RICO. Originally passed by Congress to provide ways to deal with crime mobs disguising their racketeering as legitimate business activity, RICO allows both criminal and civil enforcement. It also allows private individuals or businesses to sue to enforce RICO and that option has been used increasingly in recent years, even in cases where there is no organized crime involvement.
In the RJR Nabisco decision, the Court ruled that RICO did not apply to private lawsuits that involved overseas activity. It said that, to come under RICO, lawsuits based upon events abroad had to prove that an injury had occurred within the U.S., not elsewhere. It said it did not need to spell out in that case what would be a domestic injury, since a claim of that had been dropped.
That is what this new case seeks to clarify.
Facts of this case: A Russian businessman, Vitaly Smagin, joined with another Russian businessman and politician, Ashot Yegiazaryan, in a real estate project in Moscow, known as Europark. The project fell apart when the two men disagreed about the use of funds in the project as security for another venture.
Smagin took their dispute to an international arbitration tribunal in London, and won an award of $84 million in 2014. Smagin then sought to enforce that award by filing a U.S. lawsuit in federal court in California; Yegiazaryan by that time had left Russia and was living in Los Angeles. The California court enforced the award, which by that time had risen with interest to $92 million.
Smagin then filed another lawsuit in the California federal court, suing this time under RICO. He claimed that Yegiazaryan was avoiding paying the London award as upheld by the U.S. court by hiding in other countries funds sufficient to cover that award. In addition, Smagin contended that his adversary had sued him in Europe and elsewhere to frustrate that award.
The issue in Smagin’s RICO lawsuit focused on whether a resistance to something intangible – in this case, an arbitration award – caused Smagin injury within the U.S., as required by the RJR Nabisco precedent. Yegiazaryan countered that a loss on an intangible item is felt only where its owner lived, so Smagin’s injury had occurred in Russia.
A federal trial court upheld that challenge and dismissed the case, but a federal appeals court disagreed. It ruled that Smagin’s injury had occurred in California, the site of Yegiazaryan’s efforts to avoid paying the arbitration award.
Smagin appealed to the Supreme Court, arguing that federal appeals courts have split on the issue. A bank in Monaco, CMB Monaco, which had also been sued by Smagin but only because funds in the dispute had been deposited there, also appealed to the Supreme Court. The Court agreed to hear both appeals, together, to get the full range of the dispute over RICO’s reach.
The questions before the Court: Does an economic injury fall within the RICO law if it results from a loss of value of an intangible item — in this case, an arbitration award? What proof is needed to show that the injury occurred within the U.S.?
Significance: A good deal of business activity is in intangible form: a court judgment, a contract right, a right to a patent, harm to a business’s reputation or goodwill, the loss of profits or – as in this case — an award by an arbitration tribunal.
All of those, if harmed or frustrated in some way, can result in huge losses, such as the $92 million that Smagin has been unable to collect. He has found the courts in the U.S. quite favorable, but now his pursuit reaches its ultimate test in his business adversary’s appeal to the Supreme Court.
It is obvious that placing the site of injury to an intangible interest is not an easy task, since federal appeals courts have divided in three different ways in locating the harm done to something lacking physical presence.
Because the RICO law has become so important in international commerce, the outcome of this case surely will have wide-ranging impact.
On Wednesday, the Court will hold the final scheduled hearing of its current term. It is a case testing the power of a local government to take over a person’s private property in order to collect a tax debt.
