Chevron v. Donziger: The Second Circuit Holds That RICO and New York Law Authorize Preemptive Strikes Against the Enforcement of Foreign Judgments

6 min

The U.S. Court of Appeals for the Second Circuit recently issued an important decision in the long-running saga over toxic-waste cleanup in Ecuador's Lago Agrio region. The decision provides an offensive basis for preventing enforcement of foreign judgments, both in the United States and abroad.

In Chevron Corp. v. Donziger, the Second Circuit held that the Racketeer Influenced and Corrupt Organizations (RICO) Act and New York State common law entitled Chevron to an injunction against enforcement of a judgment of US$ 8.6 billion obtained in the Ecuadorian courts and a constructive trust over money recovered through enforcement of the judgment anywhere in the world. The relief approved by the court is limited to those parties over whom the U.S. courts had personal jurisdiction.

The case has attracted attention for many reasons, including the spectacular allegations of fraud and corruption in the Ecuadorian judicial proceedings and Chevron's successful arguments concerning the RICO Act. But perhaps the more notable takeaway is that New York State common law permits a court to prevent a party over which it has personal jurisdiction from enforcing a foreign judgment anywhere in the United States – and, perhaps, anywhere in the world.

Case Background

This protracted dispute dates to the early 1990s. At that time, New York lawyer Steven Donziger filed suit against Texaco in the U.S. District Court for the Southern District of New York on behalf of residents of the Oriente region of Ecuador, which includes Lago Agrio. The case was based on claims of environmental damage that Texaco allegedly caused in Ecuador. Chevron acquired Texaco in 2001. On Chevron's motion, the district court dismissed Donziger's case on the grounds of forum non conveniens, holding that the case belonged in Ecuador.

Donzinger then filed a case in Ecuador against Chevron on behalf of approximately 50 named plaintiffs from the Lago Agrio canton in the Oriente. In February 2011, the Ecuadorian trial court entered a judgment against Chevron for US$ 8.65 billion in compensatory damages. It also entered a judgment for an additional US$ 8.65 billion in punitive damages, although these damages were vacated on appeal. In 2011, Chevron commenced a new action in the Southern District of New York against Donziger and the Lago Agrio plaintiffs. Chevron claimed that Donziger and his clients obtained the Ecuadorian judgment by fraud, and it alleged violations of the RICO Act and New York State common law. The U.S. district court granted Chevron a preliminary injunction that prohibited the Lago Agrio plaintiffs from enforcing the judgment anywhere in the world. The U.S. district court relied on the New York Uniform Foreign Country Money-Judgments Recognition Act (Recognition Act), which sets the rules in New York for the recognition of foreign judgments for sums of money. On appeal, the Second Circuit vacated the preliminary injunction on the ground that the Recognition Act did not provide a basis affirmatively to enjoin enforcement of a foreign judgment. So Chevron pursued a different tack and, in the process, secured another way to prevent enforcement of the judgment, albeit in a more limited way, as explained below.

Following a bench trial, the U.S. district court found that Donziger and those working with him, among other things, secretly paid off court-appointed experts who pretended to be neutral, submitted fraudulent evidence, persuaded an expert to sign blank pages that were submitted to the court with opinions the expert did not authorize, extorted a judge to appoint an expert that would favor them, and ghost-wrote the final judgment themselves. The court concluded that this conduct violated the RICO Act and New York State common law. As a remedy, the district court enjoined Donziger and two of his clients from enforcing the Ecuadorian judgment anywhere within the United States, and it imposed a constructive trust for Chevron's benefit on any property that Donziger or those clients received anywhere in the world that was traceable to the judgment or its enforcement. This relief was limited to Donziger and the two representatives of the Lago Agrio plaintiffs over whom the district court had personal jurisdiction. It did not, therefore, apply to all of the Lago Agrio plaintiffs.

The Second Circuit's Decision

On appeal, Donziger and his clients did not challenge the U.S. district court's extensive factual findings. Instead, they argued that the U.S. district court had no authority under the RICO Act or New York State common law to enjoin them from enforcing the judgment in the United States or to order them to turn over any money they obtained from enforcing the judgment abroad.

On an issue of first impression, the Second Circuit ruled that the RICO Act, which grants federal courts authority to "impos[e] reasonable restrictions on the future activities . . . of any person," authorizes equitable relief for a private plaintiff. The Second Circuit also affirmed that New York State common law provides a cause of action for relief from a foreign judgment—in other words, because the U.S. district court had personal jurisdiction over Donziger and his two clients, it had the authority to prevent them from enforcing the judgment in the United States and to order them to turn over any funds that they received as a result of enforcing the judgment.

The Role of International Comity

Crucial to Chevron's victory was the decision to limit the relief to avoid the obstacle of international comity—the principle that prevents undue encroachment on the domain of a foreign legal system. The Second Circuit found that the U.S. district court's order did not impermissibly interfere with the sovereignty of foreign states for two reasons:

First, the injunction was limited to enforcement of the Ecuadorian judgment in the United States by individuals subject to the district court's jurisdiction.

Second, although the constructive trust was not limited to damages obtained in the United States, the Second Circuit noted that the Ecuadorian appellate courts had declined to consider whether the judgment was obtained by fraud and expressly noted that Chevron had the right to pursue the issue in the U.S. courts. The Second Circuit interpreted the decision by the Ecuadorian appellate courts as consent to a U.S. decision on—and relief from—the alleged corruption.

Important Implications

Fraud, violation of public policy, and similar considerations have always been grounds to defend against recognition of a foreign judgment in U.S. courts. But the Second Circuit's recent decision in Chevron v. Donziger is significant because it expressly approved the offensive use of U.S. courts' equitable powers to prevent enforcement of a judgment issued outside of the United States. Although it is certainly important that private plaintiffs will now be able to obtain injunctive relief under the RICO Act in the Second Circuit, the more important principle from the perspective of international dispute resolution may be that those who have lost a foreign judgment can, under New York State common law, seek affirmatively to prevent enforcement of the judgment anywhere in the world, as long as the party that obtained the award is within the New York courts' personal jurisdiction.

Because the Ecuadorian courts signaled consent to the U.S. courts' consideration of the allegations of fraud and corruption, an open question remains as to whether principles of international comity will limit or prevent similar relief in future cases. At the very least, however, this decision will likely encourage preemptive strikes against foreign judgments in the Second Circuit, and in New York, when the party that obtained the judgment is within the U.S. courts' jurisdiction.