On April 23, 2014, in European Community v. RJR Nabisco, Inc., the US Court of Appeals for the Second Circuit held that the Racketeer Influenced and Corrupt Organizations Act (RICO) may have extraterritorial application and that the European Community is a foreign state for diversity purposes (No. 11-2475, (2d Cir. Apr. 23, 2014)).

The European Community and 26 of its member states brought this lawsuit alleging that the defendant, RJR Nabisco, Inc. and its related entities, directed, managed and controlled a global money laundering scheme with organized crime groups in violation of the RICO statute. Additionally, they alleged that the defendant laundered money through New York-based financial institutions and repatriated the profits of the scheme to the US, and committed various common law torts in violation of New York state law.

The US District Court for the Eastern District of New York dismissed the RICO claims because it concluded that RICO has no extraterritorial application. The district court also dismissed the state law claims because it found that the European Community did not qualify as a "foreign state" as used in the diversity statute (28 U.S.C. § 1332(a)(4)). Therefore its participation in the suit, together with various foreign nation plaintiffs, destroyed complete diversity and deprived the court of jurisdiction over the state law claims. The plaintiffs appealed, arguing that the district court erred in concluding that the complaint failed to allege federal law claims and that diversity jurisdiction was missing for the state law claims.

The Second Circuit agreed with the plaintiffs, vacated the district court's judgment and remanded the case. The court recognized the presumption against extraterritorial application of a US statute unless Congress clearly indicates that the statute applies extraterritorially (Morrison v. Nat'l Austl. Bank Ltd., 130 S. Ct. 2869 (2010)). However, the court found that Congress manifested an unmistakable intent that certain federal statutes that were incorporated into RICO as predicates for liability apply to extraterritorial conduct. The court examined its prior ruling in Norex Petroleum Limited v. Access Industries, Inc., and clarified that that case did not stand for the proposition that RICO can never have extraterritorial reach in any of its applications (631 F.3d 29 (2d Cir. 2010)). Instead, the court concluded that RICO may apply extraterritorially if, and only if, liability or guilt could attach to extraterritorial conduct under the relevant RICO predicate statute. This understanding gives full effect to the "unmistakable instructions Congress provided in the various statutes incorporated by reference into RICO."

In this case, the predicate claims included money laundering, providing material support to foreign terrorist organizations, mail fraud, wire fraud and violations of the Travel Act. The court determined that the money laundering and material support of terrorism statutes both apply extraterritorially under the circumstances alleged in the complaint. On other hand, even though the wire fraud and money fraud statutes as well as the Travel Act did not overcome the Morrison presumption against extraterritoriality, the complaint alleged sufficient allegations to support domestic RICO claims based on violations of those predicates.

In addition, the Second Circuit determined that the district court erred in ruling that the European Community's participation as a plaintiff destroyed complete diversity. The diversity statute grants the federal courts with jurisdiction where the amount in controversy exceeds $75,000 and the suit is between "a foreign state . . . as plaintiff and citizens of a State" (28 U.S.C. § 1332(a)(4)). A "foreign state" is defined in the Foreign Sovereign Immunities Act (FSIA) for these purposes as an "agency or instrumentality of a foreign state," including an entity which is:

(28 U.S.C. § 1603(b)). The court held that the European Community satisfied all of these criteria. In particular, the court applied the factors set out in Filler v. Hanvit Bank to conclude that the European Community qualified as an "organ" of a foreign state under the FSIA (378 F.3d 213 (2d Cir. 2001)). Therefore the suit came within the diversity jurisdiction statute (28 U.S.C. § 1332(a)(4)).

Counsel practicing in the Second Circuit should be aware of the court's holding that RICO may apply to extraterritorial conduct, despite the US Supreme Court's Morrison presumption that US statutes do not apply extraterritorially absent clear Congressional intent. In addition, the European Community can support diversity jurisdiction as a "foreign state" for purposes of 28 U.S.C. § 1332(a)(4).