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Choice of Law Clauses, RICO, and the Securities Acts

By Clayton J. Joffrion

In international contracts, choice of law provisions will be enforced unless the application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest in the determination of the particular issue. Restatement (Second) of Conflict of Laws. That principal was invoked by the Ninth Circuit in the recent case of Govett American Endeavor Fund v. Trueger, 95-16498 (05-01-97).

Isle of Jersey Investment Fund Sues American Agents

Govett American Endeavor Fund ("Endeavor"), the plaintiff, is a corporation formed under the laws of the Isle of Jersey with its shares traded on the London Stock Exchange. The defendants included other corporations from the Isle of Jersey and some from California. The plaintiff alleged that the defendants formed an enterprise or association-in-fact which induced Endeavor to invest in companies in the United States which secretly paid kickbacks to the defendants.

Trial Court Upholds Foreign Choice of Law Provision

The choice of law provisions in several contracts between the parties stated that the laws of Jersey would govern. There were also limitation of liability clauses in favor of the managers which apparently would have offered some protection to the defendants. The suit was filed in federal court in California even though in their contracts the parties had selected to submit to the non-exclusive jurisdiction of the Royal Court of Jersey. In the trial court, the defendants put forth the argument that the laws asserted by the plaintiff, namely civil RICO and the Securities Acts of 1933 and 1934, did not apply as the choice of law provisions stated that the laws of Jersey would apply. Expert testimony was presented to establish that the laws of Jersey did not recognize RICO actions. The trial court agreed with the defendants and dismissed the complaint on the pleadings.

Ninth Circuit Reverses

On appeal the Ninth Circuit made the old distinction between tort and contract law. As the court stated, ". . . Endeavor in this count [RICO] is not charging them with breach of contract but with torts that also constitute crimes under the laws of the United States. The defendants cannot insulate themselves from liability for these claims by invoking the law of an island that does not have a [RICO] statute . . ." Since the dismissal was on the pleadings alone, no evidence was really discussed and the allegations of the complaint were accepted as true. But from the allegations it appears that the relevant acts were conducted in the U.S., although the direct harm was suffered in Jersey. A wrongful act committed in the U.S., even though the harm is suffered elsewhere, would give rise to a U.S. based tort claim.

RICO Represents Fundamental Policy Choice

While there may be valid arguments for and against allowing RICO actions by foreign plaintiffs, the Ninth Circuit described RICO as a "fundamental choice by Congress to employ the heavy artillery of federal law against a variety of organized criminal endeavors . . ." It also stated that " to permit this fundamental choice of public policy to be frustrated by private choice would be to exalt autonomy in contract over the laws of the United States . . ." The court also mentioned that in this case a contract choice of law provision was being offered as a defense from criminal or tort liability acts performed in the United States by citizens of the United States involving investments in companies in the United States.

Securities Acts Can Void Choice of Law Provisions

There is also the matter of the Securities Act Claims. Both statutes contain explicit provisions making void any provision of a contract or agreement that attempts to avoid the protections afforded by the acts. Again the facts were not stated clearly; however, the sums of money involved (not less than $20 million with treble damages) would suggest that security instruments were used. Since many such instruments can be negotiated, the United States would seem to have a "materially greater interest".

Dissenting Judge Argues Case An Isle of Jersey Matter

Here Circuit Judge Goodwin dissented showing that the parties chose Jersey law to govern. Since Jersey does not recognize a RICO cause of action the federal court would have no subject matter jurisdiction. Further, even though the U.S. might have an interest in preventing its citizens from defrauding foreigners, it did not have a materially greater interest than Jersey. Jersey's interest in protecting its citizens is just as strong as the U.S. interest. And, even though Jersey is without a RICO statute it provides remedies for fraud, breach of contract, breach of fiduciary duty, and conspiracy. Judge Goodwin makes this case look like a classic forum shopping case.

Conclusion

Choice of law provisions may not prevent actions based on RICO or the Securities Acts. Thus, it is important for attorneys to advise clients of these developments. Furthermore, foreign laws which establish a fundamental policy of the state must be identified since the foreign court may also refuse to enforce choice of law provisions or declare them not applicable to the action asserted.

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