The D.C. Circuit’s Recent Decision Reinforces the Urgent Need for a Cyberattack Exception to the FSIA

March 16, 2017 By in Attachment and Execution, Cyberattack Exception, FSIA, Tort Exception Tags: , , , , , , , , , Leave a comment

On March 14, 2017, the D.C. Circuit affirmed the district court’s dismissal of a lawsuit against Ethiopia that arose out of an alleged hacking of a computer in the United States.  See Doe v. The Federal Democratic Republic of Ethiopia, — F.3d —, 2017 WL 971831 (D.C. Cir., Mar. 14, 2017, No. 16-7081). You can read the opinion here. 

The D.C. Circuit’s opinion makes it clear that the FSIA’s tort exception is wholly inadequate as a means to assert jurisdiction over a foreign state in a cyberattack case.  As the D.C. Circuit correctly held, the tort exception is inapplicable in such cases because of the situs requirement: “The tort [the plaintiff] alleges . . . did not occur entirely in the United States; it is a transnational tort over which we lack subject matter jurisdiction.”  Doe, 2017 WL 971831, at *3, citations, quotations and brackets omitted. The D.C. Circuit stated that Congress’s “primary purpose in enacting § 1605(a)(5) was to eliminate a foreign state’s immunity for traffic accidents and other torts committed in the United States,” and that “[i]t is thus unsurprising that transnational cyberespionage should lie beyond section 1605(a)(5)’s reach.”  Ibid., citation and quotations omitted.

The D.C. Circuit’s holding – that the tort exception’s situs requirement bars a claim arising out of a cyberattack originating overseas – corresponds exactly with the point that I made in my prior post. It is the reason why commentators who argue that the tort exception is sufficient to address the growing cyberattack problem are simply wrong.

Sovereign immunity was born centuries ago, and it underwent an important evolution in the 20th century to reflect a changing world. The FSIA now needs to catch up to the modern realities of the Internet Age. Given the prevalence of computer hacking by foreign states, and the resulting harm to American individuals and companies, a new cyberattack exception to the FSIA is urgently needed. However, as I previously explained, such an exception will only work if it has teeth – such as, for example, the ability to collect on judgments against foreign states from the state’s instrumentalities and agencies, even if such entities were not involved in the cyberattack at issue.  Cf. 28 U.S.C. § 1610(g)(1)(A)-(E). Otherwise, a new exception will do little to stem the rising tide of cyberattacks by foreign sovereigns in the United States.

The Cyberattack Exception to the Foreign Sovereign Immunities Act: A Proposal to Strip Sovereign Immunity When Foreign States Conduct Cyberattacks Against Individuals and Entities in the United States

February 19, 2017 By in Attachment and Execution, Cyberattack Exception, Default Judgment, Discovery, FSIA, Head-of-State Immunity, Officials, Terrorism Exception, Tort Exception Tags: , , , , , , , , , , , , , , Leave a comment

“The political branches may ultimately deem it advisable to permit suits against foreign sovereigns who, without setting foot on American soil, use technology to commit torts against persons located here.  But if the FSIA is to be altered, that is a function for the same body that adopted it.”

Doe v. Fed. Democratic Republic of Ethiopia, 189 F. Supp. 3d 6, 25 (D.D.C. 2016) (citations, quotations and brackets omitted).

Background

Five days ago, while I was reading about the Russian hacking scandal and the resulting damage to America’s public institutions, a new thought occurred to me: there should be a cyberattack exception to the Foreign Sovereign Immunities Act.

I checked to see if anyone had made the proposal before.  It appears to have been mentioned once, nearly four years ago, in an article about China’s cyber activities by Daniel Blumenthal in the Foreign Policy magazine.[1]  However, Mr. Blumenthal only devoted two sentences to the idea, which (to my knowledge) was never further developed.[2]

Other attorneys have occasionally argued (both in and out of court) that cyberattacks falls within the FSIA’s existing tort exception, 28 U.S.C. section 1605(a)(5).[3]  One attorney even tried to provide a “roadmap to this new line of litigation” in a recent law review article.[4]  However, I litigated the tort exception in district and appellate courts for well over a decade, and it creates only roadblocks to civil suits for cyberattacks. 

In particular, the tort exception’s situs requirement[5] — as well as the discretionary function and misrepresentation exclusions limiting the exception — make any lawsuit against a foreign sovereign for a cyberattack under section 1605(a)(5) very difficult and expensive.[6]  Indeed, a recent dismissal under the FSIA in a cyber case in the United States District Court for the District of Columbia – where the court dismissed a Wiretap Act claim under the tort exception’s situs requirement – only highlights the challenges of such litigation.[7]  In addition, even assuming that a cyber suit falls under the tort exception to the FSIA, a judgment would be extraordinarily difficult to collect upon given the FSIA’s strong immunity provisions related to attachment and execution.[8]

The result is that foreign states can perpetrate cyberattacks with relative impunity in the United States.  Even worse, those harmed by such attacks – often individuals or corporations who are innocent of any misconduct – have no effective means of redress against the offending foreign sovereign (or its officials).

Does this make sense?  Why should countries like Russia and North Korea be immune from suit for illegal conduct targeting computer systems in the United States?  Why shouldn’t foreign states that attack individuals, corporations or institutions over the Internet be liable for the consequences of their misdeeds? 

The United States Supreme Court has emphasized that “foreign sovereign immunity is a matter of grace and comity on the part of the United States, and not a restriction imposed by the Constitution.”[9]  As a matter of “grace and comity,” there is nothing in the history of foreign sovereign immunity that supports a grant of immunity where a foreign state targets a specific individual or entity for attack on the territory of the United States.[10]

The Foreign Sovereign Immunities Act of 1976 is over forty years old.  The time has come to bring the FSIA into the 21st century to address a very real and growing threat.[11]  A new cyberattack exception to the FSIA (28 U.S.C. § 1605C) would remove immunity for foreign states who attack individuals and entities in the United States, and would finally provide those harmed with a means of redress.  It should be drafted and passed forthwith.

Key Components

There are several key components essential to ensure an effective cyberattack exception to the FSIA:

Jurisdictional Provision: The cyberattack exception should have a jurisdictional provision modeled after the tort and the terrorism exceptions of the FSIA, but which is nevertheless specifically tailored to address the peculiarities of a cyberattack:

A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case not otherwise covered by this chapter in which money damages are sought against a foreign state for a cyberattack by the foreign state or by an official, employee or agent of such foreign state acting within the scope of his or her office, employment, or agency.[12]

If this type of language were to be used, the term “cyberattack” would need to be defined elsewhere (such as in 28 U.S.C. § 1603), and would need to track the language in a new cause of action (see below).  The other terms and phrases used in this proposed provision – such as “employee” and “scope of employment” – already have received extensive interpretation in FSIA jurisprudence.[13]  Moreover, the cyberattack exception – like the terrorism exception – should have no discretionary function or misrepresentation exclusions.

Cause of Action: While there are State and federal civil causes of action available in cyberattack cases – such as under the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act – it is not always clear whether such provisions apply against foreign governmental entities.[14]  In fact, a federal district court recently concluded “that section 2520 of the Wiretap Act does not create a civil cause of action against a foreign state for interceptions of wire, oral, or electronic communications in violation of section 2511(1).”[15]  Accordingly, to clearly define the type of conduct that would fall within the new cyberattack exception, Congress should use existing federal law to create a new federal cyberattack cause of action against foreign states.  There is precedent for such an approach under the terrorism exception,[16] and it would serve the principle of uniformity underlying the FSIA.[17]  In addition, to avoid potential issues under international law, the new cause of action should clarify that the tort occurs in the United States, where the computer system is breached. 

Retroactivity and Statute of Limitations: To allow parties previously harmed by cyberattacks to bring suit, Congress should make the new immunity exception retroactive – which is permitted under Supreme Court jurisprudence.[18]  Like the terrorism exception, the cyberattack exception should also include a 10-year statute of limitations, extending back to claims occurring prior to the amendment’s enactment.[19]

Appearance/Default: Foreign states that engage in cyberattacks in the United States can be expected either not to appear at all in United States district court, or to withdraw from the litigation after making an initial appearance.[20]  Discovery is difficult to obtain under such circumstances, and yet the plaintiff still has the burden under section 1608(e) of “establish[ing] his claim or right to relief by evidence satisfactory to the court” prior to entry of default judgment.[21]  That burden is a particularly heavy one in cyberattack cases, especially for a private party who may have limited resources.  As a result, I would propose a new provision that specifically addresses a foreign state’s failure to appear in a cyberattack case:

If any federal law enforcement or intelligence agency certifies that there is probable cause that a foreign state, or an official, employee or official thereof, committed the act described in section * * *, there shall be a rebuttable presumption that the foreign state, or the official, employee or official thereof, has committed the act.  If the foreign state does not appear in the action, that presumption shall be accepted by the district court and shall constitute sufficient evidence to satisfy the requirements of section 1608(e).  If the foreign state appears in the action, the rebuttable presumption shall be rendered ineffective until such time, if any, that the foreign state no longer participates in the litigation.[22]

Damages: Under 28 U.S.C. section 1606, a foreign state sued under the cyberattack exception would “be liable in the same manner and to the same extent as a private individual under like circumstances; but a foreign state except for an agency or instrumentality thereof shall not be liable for punitive damages.”[23]  If the cyberattack exception creates a new cause of action, it should define the types of damages that should be recoverable (like the terrorism exception).[24]  Those damages should include reputational and professional harm caused by the hacking of personal and business e-mail systems.  As with the terrorism exception, Congress should also consider removing foreign sovereigns’ protection against punitive damages for cyberattacks, particularly if an attack causes major damage or disruption in the United States.[25]

Execution/Attachment: Because the FSIA currently provides strong protections against execution and attachment in a case involving a foreign sovereign,[26] it creates a massive disincentive to filing suit in a cyberattack case.  Even if a plaintiff establishes jurisdiction under the tort exception and prevails on the merits, the plaintiff is effectively limited to attaching or executing on “any contractual obligation or any proceeds from such a contractual obligation to indemnify or hold harmless the foreign state or its employees under a policy of automobile or other liability or casualty insurance covering the claim which merged into the judgment.”[27]  Given that foreign states do not (to my knowledge) carry insurance to protect themselves against cyberattack claims, a plaintiff can at best obtain a judgment that cannot be enforced – which is as useless as no judgment at all, especially when the foreign nation involved is a country such as Russia or North Korea.

In light of the foregoing, and in keeping with an analogous provision related to the terrorism exception,[28] Congress should add a new section 1610(a)(8):

The property in the United States of a foreign state. . . used for a commercial activity in the United States, shall not be immune from attachment in aid of execution, or from execution . . . [if] the judgment relates to a claim for which the foreign state is not immune under section 1605C [the cyberattack exception], regardless of whether the property is or was involved with the act upon which the claim is based.

Just as importantly, Congress should make judgments entered against foreign states in cyberattack cases subject to section 1610(g)(1), so that plaintiffs can collect from agencies or instrumentalities of the foreign state – even if such agencies or instrumentalities were not involved in the cyberattack at issue.[29]

Official Immunity: Congress should consider making all of the prior provisions, mutatis mutandis, applicable to foreign officials who order or participate in the cyberattack.  That includes, in particular, the exception to immunity and the punitive damages provision set forth above.  However, given the international law doctrine of head-of-state immunity, Congress should refrain from providing a means to assert jurisdiction over a sitting head of state for such conduct.

Final Thoughts

The FSIA largely renders foreign states immune for cyberattacks against individuals, corporations and institutions located in the United States.  However, given the financial and non-financial harm caused by such attacks, foreign states should be held liable, and should be compelled to provide compensation to those damaged by their actions.  Such a result not only makes sense, but it is also perfectly acceptable under long-established doctrines of foreign sovereign immunity.  And, perhaps most importantly, a new cyberattack exception – if it has real bite – would disincentivize foreign states from engaging in such harmful conduct in the future.

[1] See D. Blumenthal, “How to Win a Cyberwar with China,” ForeignPolicy.com
(Feb. 28, 2013) (“Congress could also create a cyberattack exception to the Foreign Sovereign Immunities Act, which currently precludes civil suits against a foreign government or entity acting on its behalf in the cyber-realm. There is precedent: In the case of terrorism, Congress enacted an exception to immunity for states and their agents that sponsor terrorism, allowing individuals to sue them.”).  Mr. Blumenthal’s idea was subsequently repeated, in similar conclusory form, in other sources.  See, e.g., Mazza, Michael.  Statement to the House, Committee on Foreign Affairs.  Cyber Attacks: An Unprecedented Threat to U.S. National Security (Mar. 21, 2013), at 47.

[2] Because I wanted to share this proposal as soon as possible – so that it may be considered and improved upon by others – I cannot claim an exhaustive search of prior sources related to cyberattacks under the FSIA.  However, I have not seen any other attempts to describe what such an exception would look like.  If such a prior proposal exists, I welcome comment from, and discussion with, its author.

[3] See U. Colella, “Foreign governments should be sued for cyberattacks,” Washington Examiner (Feb. 13, 2017).

[4] Scott A. Gilmore, Suing the Surveillance States: The (Cyber) Tort Exception to the Foreign Sovereign Immunities Act, 46 Colum. Hum. Rts. L. Rev. 227 (2015) (hereinafter “Gilmore”).  The article is available online.

[5] Mr. Gilmore underestimates the problem posed by the tort exception’s situs requirement in cyberattack cases.  See Gilmore, supra note 4, at 287, n. 149.  Based upon my experience in many cases, the situs requirement poses a major obstacle to jurisdiction in cross-border tort cases.  See also infra, note 7.

[6] See 28 U.S.C. § 1605(a)(5)(A)-(B).  Given the breadth of the misrepresentation exclusion, its effect on computer fraud cases against foreign states remains an open question — particularly since the tort exception’s exclusions, which are based upon similar provisions in the Federal Tort Claims Act (28 U.S.C. §§ 2680(a), (h)), are so ill-defined.  In addition, although Mr. Gilmore may be correct that the discretionary function exclusion does not bar cyberattack claims outright (Gilmore, supra note 4, at 265-274), Mr. Gilmore’s article may not fully appreciate how the discretionary function exclusion can impact specific causes of action or theories of liability.  See, e.g., Doe v. Holy See, 557 F.3d 1066, 1083–85 (9th Cir. 2009).  While the District Court for the District of Columbia recently seemed inclined not to apply the discretionary function exclusion in a cyber case, the discretionary function exclusion is – at a bare minimum – an additional hurdle that complicates any case brought under the tort exception.  See Doe v. Fed. Democratic Republic of Ethiopia, 189 F.Supp.3d 6, 25-28 (D.D.C. 2016). As a result, it provides yet another obstacle to proceeding under the FSIA’s tort exception in a cyberattack case.

[7] Doe, 189 F.Supp.3d at 9; see also id. at 25 (“the Court holds that [plaintiff’s] claim for intrusion upon seclusion is barred by the ‘entire tort’ rule”).

[8] 28 U.S.C. §§ 1609-1611.  As discussed below, Mr. Gilmore’s article does not address this major problem with proceeding under the tort exception.  See infra at note 27.

[9]  Verlinden B.V. v. Cent. Bank of Nigeria, 461 U.S. 480, 486 (1983).

[10] The terrorism exception, 28 U.S.C. § 1605A, is the modern embodiment of this principle.  However, while absolute immunity was the norm pre-1952, even the Schooner Exchange Court recognized that there could be proper restrictions on immunity.  See The Schooner Exch. v. McFaddon, 11 U.S. 116, 123 (1812) (“We may forbid the entrance of [foreign states’] public ships, and punish the breach of this prohibition by forfeiture; nor do we deny the obligation of a foreign sovereign to conform to pre-existing laws, as to offences-and as to the acquisition of property; nor his liability for his private debts and contracts.”) (emphasis added).

[11] For a discussion of recent cyberattacks by foreign states, see Gillmore, supra note 4, at 228-32.  Of course, the problem has only gotten much worse since Mr. Gillmore’s article, and now includes economic and political tampering of a type that was perhaps previously unimaginable. 

[12] See 28 U.S.C. §§ 1605(a)(5) and 1605A(a)(1).

[13] However, to streamline litigation for plaintiffs and defendants alike (as well as serve the principle of uniformity underlying the FSIA), I would strongly urge Congress to apply the federal common law to identify officials, employees and agents, and to define the scope of their office, employment and agency.  The current hodgepodge of State laws creates unnecessary confusion and expense under the existing exceptions; if not addressed, these problems would persist under a new cyberattack exception as well.

[14] See Gilmore, supra note 4, at 244-50.

[15] Doe, 189 F.Supp.3d at 15.

[16] See 28 U.S.C. § 1605A(c).

[17] See, e.g., Verlinden, 461 U.S. at 489 (discussing “the importance of developing a uniform body of law in this area”) (citations and quotations omitted).

[18] Republic of Austria v. Altmann, 541 U.S. 677 (2004).

[19] 28 U.S.C. § 1605A(b).

[20] See, e.g., Calderon-Cardona v. Democratic People’s Republic of Korea, 723 F. Supp. 2d 441, 444 (D.P.R. 2010) (non-appearance by North Korea in FSIA action); Agudas Chasidei Chabad of U.S. v. Russian Fed’n, 729 F. Supp. 2d 141, 144 (D.D.C. 2010) (after participation in the litigation for years, Russia filing a “Statement with Respect to Further Participation [71] which informed th[e] Court that defendants ‘decline[d] to participate further in this litigation’ and ‘believe[d] this Court has no authority to enter Orders with respect to the property owned by the Russian Federation and in its possession, and the Russian Federation will not consider any such Orders to be binding on it’”).

[21] 28 U.S.C. § 1608(e).

[22] If such a provision were adopted, there would need to be a mechanism for certification by federal law enforcement or intelligence agencies.

[23] 28 U.S.C. § 1606.

[24] See 28 U.S.C. § 1605A(c)-(d) (“(c) . . . In any such action, damages may include economic damages, solatium, pain and suffering, and punitive damages. In any such action, a foreign state shall be vicariously liable for the acts of its officials, employees, or agents.  (d) Additional damages.–After an action has been brought under subsection (c), actions may also be brought for reasonably foreseeable property loss, whether insured or uninsured, third party liability, and loss claims under life and property insurance policies, by reason of the same acts on which the action under subsection (c) is based.”).

[25] Not only is there recent precedent for lifting the punitive damages bar (28 U.S.C. § 1605A(c)), but the bar was always on precarious footing with respect to international law.  Cf. H.R. Rep. No. 94-1487 (1976), at 22, citing, inter alia, 5 Hackwork, Digest of International Law, 723-26 (1943) (“Under current international practice, punitive damages are usually not assessed against foreign states.”) (emphasis added).  Hackworth’s treatise, cited in the FSIA’s legislative history, stated the following:

[T]he refusal of international tribunals to assess punitive, vindictive, or exemplary damages, as such, against respondent governments may be explained in part by the absence of malice, or mala mens, on the part of the government of the respondent state.

5 Hackworth, Digest of International Law 723-26 (1943).  It is unclear whether a foreign state lacks “malice” in a cyberattack case, especially where the attack is significant and is intended to disrupt core economic or political activities in the other nation.

[26] See 28 U.S.C. §§ 1609-1611.

[27] 28 U.S.C. § 1610(a)(5).  The plaintiff in a cyberattack case proceeding under the tort exception will be limited to section 1610(a)(5), because the plaintiff likely would not be able to show that the foreign state has waived immunity (§ 1610(a)(1)), that “the property is or was used for the commercial activity upon which the claim is based” (§ 1610(a)(2)), that “the execution relates to a judgment establishing rights in property which has been taken in violation of international law or which has been exchanged for property taken in violation of international law” (§ 1610(a)(3)), that “the execution relates to a judgment establishing rights in property . . . which is acquired by succession or gift, or . . . which is immovable and situated in the United States” (§ 1610(a)(4)), that “the judgment is based on an order confirming an arbitral award rendered against the foreign state, provided that attachment in aid of execution, or execution, would not be inconsistent with any provision in the arbitral agreement” (§ 1610(a)(6)), or that “ the judgment relates to a claim for which the foreign state is not immune under section 1605A or section § 1605(a)(7) (as such section was in effect on January 27, 2008), regardless of whether the property is or was involved with the act upon which the claim is based” (§ 1610(a)(7)).  In his article, Mr. Gilmore does not address the difficulties caused by the FSIA’s attachment and execution provisions with respect to any cyberattack claim proceeding under the tort exception.  Gilmore, supra note 4, passim.  

[28] 28 U.S.C. § 1610(a)(7).

[29] The terrorism exception’s section 1610(g)(1), which was intended to remove the presumption of separate juridical status set forth in First Nat. City Bank v. Banco Para el Comercio Exterior de Cuba (“Bancec”), 462 U.S. 611 (1983), states the following in relevant part:

[T]he property of a foreign state against which a judgment is entered under section 1605A, and the property of an agency or instrumentality of such a state, including property that is a separate juridical entity or is an interest held directly or indirectly in a separate juridical entity, is subject to attachment in aid of execution, and execution, upon that judgment as provided in this section, regardless of–(A) the level of economic control over the property by the government of the foreign state;(B) whether the profits of the property go to that government;(C) the degree to which officials of that government manage the property or otherwise control its daily affairs;(D) whether that government is the sole beneficiary in interest of the property; or(E) whether establishing the property as a separate entity would entitle the foreign state to benefits in United States courts while avoiding its obligations.

28 U.S.C.A. § 1610.  Section 1610(g)(1) could be easily amended to over both terrorism cases (§ 1605A) and cyberattack cases (proposed § 1605C).

OBB v. Sachs: A Smart Result

December 1, 2015 By in Commercial Activity Exception Tags: , , , , , , Leave a comment

Over two months ago, I argued that OBB v. Sachs was “an easy call” with regard to the commercial activity exception.  I contended that the case was controlled by Saudi Arabia v. Nelson, 507 U.S. 349 (1993), and that “the Supreme Court should simply apply Nelson . . . and order the dismissal of Sachs’ lawsuit.”  Today, a unanimous Court did just that.  The Court applied Nelson and reversed the judgment of the Ninth Circuit.  The Court got it right.

The Court not only got it right, but it also cleaned up a key part of FSIA jurisprudence.  In my post a few months ago, I stated the following with regard to the gravamen vs. elements approach in Nelson:

[W]hile Nelson contained sloppy language that could be interpreted to support an elements approach (Nelson, 507 U.S. at 357), the Nelson Court clearly used a gravamen approach.  It did not methodically review Nelson’s sixteen causes of action to determine whether some of the claims contained elements that required proof of commercial activity in the United States.  Instead, Nelson used a gravamen analysis, as reflected by its discussion of the failure to warn claim . . . . In other words, with regard to Nelson, one should do as the Court did, and not as the Court said.  Its actual holding makes clear that gravamen is the proper method of analysis.  However, the sloppy “elements” language in Nelson has indeed caused confusion in FSIA jurisprudence over the years, and Sachs is the perfect opportunity to clean it up.

In its opinion today, the Court echoed this analysis:

The Ninth Circuit apparently derived its one-element test from an overreading of one part of one sentence in Nelson, in which we observed that “the phrase [‘based upon’] is read most naturally to mean those elements of a claim that, if proven, would entitle a plaintiff to relief under his theory of the case.” 507 U. S., at 357. . . . [O]ur analysis in Nelson is flatly incompatible with a one-element approach. A one-element test necessarily requires a court to identify all the elements of each claim in a complaint before that court may reject those claims for falling outside §1605(a)(2). But we did not undertake such an exhaustive claim-by-claim, element-by-element analysis of the Nelsons’ 16 causes of action, nor did we engage in the choice-of-law analysis that would have been a necessary prelude to such an undertaking. . . .  Nelson instead teaches that an action is “based upon” the “particular conduct” that constitutes the “gravamen” of the suit.

Accordingly, the Supreme Court has now “cleaned up” the gravamen vs. elements issue, and has made it clear that a gravamen approach constitutes the governing mode of jurisdictional analysis under the FSIA.  Its conclusion is correct under Nelson, and is also a good result for all of the reasons I have previously identified.

Finally, the Court declined to reach the attribution issue in Sachs.  Since the commercial activity issue resolved the case, the Supreme Court’s decision was wise.  The attribution issue was complicated, and had the potential to yield a host of unintended consequences in FSIA jurisprudence.  The Court will eventually need to revisit attribution under the FSIA, but sidestepping the issue here was a sensible exercise of judicial restraint.

With Respect to the Agency Issue in OBB v. Sachs, the Supreme Court Should Stick with Bancec

September 29, 2015 By in Agency Tags: , , , , , , , , Leave a comment

While the commercial activity issue in OBB v. Sachs is a cinch (as I discussed here and here), the agency issue is more complicated – and could have far-reaching consequences for FSIA jurisprudence.  However, at the end of the day, the Court should reject the parties’ arguments and simply stick with Bancec.  That is the wisest and safest choice.

Until the Ninth Circuit’s panel and en banc decisions in Sachs v. OBB, FSIA case law was relatively clear with regard to the appropriate agency analysis in cases involving separate juridical entities.  When a plaintiff sought to establish jurisdiction over a foreign state based upon the conduct of a separate juridical entity, courts applied the standard set forth in the Supreme Court’s seminal decision in First Nat. City Bank v. Banco Para el Comercio Exterior de Cuba (“Bancec ”), 462 U.S. 611 (1983).  Under Bancec, there is a presumption that the conduct of a separate juridical entity cannot be imputed to the foreign state.  See Bancec, 462 U.S. at 626-27 (stating that “government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such”); id. at 627 (discussing the “presumption of independent status”); see also, e.g., Doe v. Holy See, 557 F.3d 1066, 1077-80 (9th Cir. 2009); Transamerica Leasing v. La Republica de Venezuela, 200 F.3d 843, 848 (D.C. Cir. 2000).  In cases not involving fraud or injustice through the use of the corporate form, the presumption of separateness means that a plaintiff must allege facts (and later prove) that the foreign state exercises day-to-day control over the separate corporation.  See, e.g., Dale v. Colagiovanni, 443 F.3d 425, 429 (5th Cir. 2006); see also Walter Fuller Aircraft Sales, Inc. v. Republic of Philippines, 965 F.2d 1375, 1381 (5th Cir. 1992).  Only in these circumstances will the conduct of the separate juridical entity be imputed to the foreign state.  See, e.g., Transamerica Leasing, 200 F.3d at 850-53.

There are at least two reasons to apply the Bancec standard to the FSIA jurisdictional inquiry.  First, Bancec’s presumption of separateness serves the principle of comity.  “’If U.S. law did not respect the separate juridical identities of different agencies or instrumentalities, it might encourage foreign jurisdictions to disregard the juridical divisions between different U.S. corporations or between a U.S. corporation and its independent subsidiary.’”  Bancec, 462 U.S. at 628, quoting H.R. Rep. No. 94-1487, at 29-30 (1976).  At the jurisdictional stage, that could result in the United States being pulled into foreign court based upon conclusory allegations that a separate corporation is its “agent,” even though the corporate form was respected and even though the United States did not dominate the corporation’s day-to-day operations.

Second, the presumption of separateness provides a critical check against plaintiffs’ attempts to pierce the corporate veil at the jurisdictional stage.  If the actions of separate corporations acting in the United States could be freely imputed to foreign states, foreign sovereigns would be much more frequently drawn into highly burdensome litigation in United States courts based upon a mere allegation of agency.  Plaintiffs’ attorneys are often looking for the deepest pockets, and there would be no presumption of separateness to prevent counsel from alleging that a corporation in the United States is an “agent” of the foreign state.  By drawing the foreign state into litigation, plaintiffs’ counsel would profoundly undermine the benefits of the corporate form, drive up the settlement values of cases, and get their foot in the door to obtain intrusive discovery from foreign sovereigns – which would vitiate a core protection afforded by foreign sovereign immunity, increase litigation costs and cause significant tensions with foreign states.

Even though Bancec has repeatedly proved to be a workable standard over the past thirty years, the parties and the United States government in OBB v. Sachs have urged the Court to effectively abandon Bancec’s presumption of separateness at the jurisdictional stage.  While OBB raises the Bancec issue, its chief argument is that the Court should use 28 U.S.C. section 1603 to determine whether the acts of an entity can be imputed to a foreign state – a meritless argument that I have addressed before. 

Sachs and the government, in turn, argue that the Court should apply the standards set forth in the Restatement of Agency (Third).  The basic argument of Sachs and the government is that Bancec is an alter ego case, and that it did not supplant the traditional common law agency principles set forth in the Restatement.   See, e.g., Brief of the United States as Amicus Curiae 17-18.  That contention does not withstand scrutiny.

Let’s start with some basic principles – which are not mentioned in the briefs of the parties and amici in OBB v. Sachs.  Under traditional rules governing corporations, corporate entities are presumed to be separate and distinct from their creators or owners.  1 William Meade Fletcher et al., Cyclopedia of the law of private corporations § 25 (rev. ed. 1999).  Corporate acts “are the acts of the . . . corporation, and are not the acts of the shareholders composing it, and their powers and duties pertain to them respectively and not to each other[.]”  Id. at § 28. 

In “no particular is the distinction between the corporation and its members more marked and important than in suing and being sued.”  Id. at § 36.  Indeed, “limited liability is one of the principal purposes for which the law has created the corporation.”  Id. at § 41.20.  The rule of limited liability protects the owner or parent of a corporation from being sued for the corporation’s acts.  See, e.g., United States v. Bestfoods, 524 U.S. 51, 61 (1998) (“It is a general principle of corporate law deeply ingrained in our economic and legal systems that a parent corporation . . . is not liable for the acts of its subsidiaries.”).  The presumption of separateness requires courts to “start from the general rule that the corporate entity should be recognized and upheld, unless specific, unusual circumstances call for an exception.  Care should be taken on all occasions to avoid making the entire theory of the corporate entity . . . useless.”  Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir. 1967).

There are two exceptions to the general rule of limited corporate liability.  The first is alter ego, which requires a plaintiff to “show that the corporate form has been abused to the injury of a third person.”  1 Fletcher, supra, § 41.10.  Alter ego is employed “where the corporate entity has been used as a subterfuge and to observe it would work an injustice.”  Id. at § 41.10; see also, e.g., Black’s Law Dictionary (10th ed. 2014) (defining the alter-ego rule as the “doctrine that shareholders will be treated as the owners of a corporation’s property, or as the real parties in interest, whenever it is necessary to do so to prevent fraud, illegality, or injustice”).  The “rationale behind the theory is that, if the shareholders or the corporations themselves disregard the proper formalities of a corporation, then the law will do likewise as necessary to protect individual and corporate creditors.”  1 Fletcher, supra, § 41.10.

The second exception is the existence of a principal-agent relationship.  As the Supreme Court has stated, “'[d]ominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent.’”  NLRB v. Deena Artware, Inc., 361 U.S. 398, 403 (1960), quoting Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95 (1926) (Justice Cardozo).

It is wrong to state that Bancec is only an alter ego case.  Instead, the Supreme Court in Bancec set forth both exceptions to the rule of limited corporate liability:

In discussing the legal status of private corporations, courts in the United States and abroad have recognized that an incorporated entity . . . is not to be regarded as legally separate from its owners in all circumstances.  Thus, where a corporate entity is so extensively controlled by its owner that a relationship of principal and agent is created, we have held that one may be held liable for the actions of the other.  In addition, our cases have long recognized the broader equitable principle that the doctrine of corporate entity, recognized generally and for most purposes, will not be regarded when to do so would work fraud or injustice.

Bancec, 462 U.S. at 628-29 (citations and quotations omitted) (emphasis added).  The first exception identified by Bancec is explicitly an agency relationship.  Bancec, 462 U.S. at 629, citing Deena Artware, Inc., 361 U.S. at 402-04 (“a relationship of principal and agent”).  The second Bancec exception is alter ego.  Id. (“work fraud or injustice”); see also 1 Fletcher, supra, § 41.10; Berkey, 244 N.Y. at 95.  In other words, contrary to the argument advanced by Sachs and the government, Bancec is not simply an alter ego case.  Bancec set forth the standard for both agency and alter ego in cases involving separate corporate entities and foreign sovereigns.

The real question, then, is whether it makes sense to apply Bancec at the jurisdictional stage under the FSIA.  As stated above, courts have done so for many years, and Bancec provides a workable standard through which to resolve the imputation issue.  Moreover, absent Bancec’s presumption of separateness applied to the jurisdictional inquiry, the floodgates would open to lawsuits against foreign states based upon conclusory allegations of “agency” and “authorization.”  As someone who has litigated Bancec at the jurisdictional stage in five separate FSIA cases, I know that Bancec affords a critical protection for foreign sovereigns from frivolous lawsuits and burdensome discovery (a point not mentioned in the briefs of the parties and amici).  If the Bancec jurisdictional protection is taken away by the Court, the result will be a major increase in (meritless) lawsuits against foreign sovereigns.  There is no reason to go down that path. 

In sum, OBB v. Sachs is a piece of cake – if the Court applies its own precedent.  The Court should apply Nelson with respect to the commercial activity inquiry, and should apply Bancec with regard to the agency issue.  If the Court takes that approach, it would avert a major upheaval in this sensitive area of the law – since Nelson and Bancec have been bulwarks of FSIA jurisprudence for decades.  The Court would also be avoiding a host of unintended consequences, including increased jurisdiction over foreign torts (in contravention to international law), disregard for the corporate form (with potentially serious comity and foreign relations consequences), and vitiation of several of the core protections afforded by the doctrine of foreign sovereign immunity.  The Court got these issues right before in Nelson and Bancec, and the Court could get them right again – simply by following the principle of stare decisis.

With Regard to the Commercial Activity Exception, OBB v. Sachs is an Easy Call

September 26, 2015 By in Commercial Activity Exception Tags: , , , , Leave a comment

The commercial activity portion of OBB v. Sachs should be easy for the Supreme Court to resolve – as long as the Court follows its own precedent.

With respect to the commercial activity exception, OBB v. Sachs is indistinguishable from Saudi Arabia v. Nelson, 507 U.S. 349 (1993).  In the Nelson case, Saudi Arabia recruited Nelson in the United States for employment as a monitoring systems engineer at a hospital in Saudi Arabia.  Id. at 351-52.  After Nelson began his new job in Saudi Arabia and discovered safety defects in the hospital’s oxygen and nitrous oxide lines, he was falsely imprisoned and beaten by agents of the foreign state. Id. at 352.  Upon his return to the United States, Nelson filed suit against Saudi Arabia for a range of intentional torts and for the failure to warn Nelson about the dangers of the employment position.  Id. at 352-53.  Nelson sought to establish jurisdiction under the first clause of the commercial activity exception.  Id. at 354.

In short, Nelson involved a plaintiff who sought to establish jurisdiction over torts occurring overseas under the first clause of the commercial activity exception, on the theory that the action was “based upon” the preceding commercial activity (the recruitment) in the United States.  That is exactly what Sachs is trying to do – she is seeking to establish jurisdiction over alleged tortious conduct occurring overseas under the first clause of the commercial activity exception, based upon the argument that the lawsuit is “based upon” the preceding commercial activity (the ticket sale) in the United States.

The Supreme Court in Nelson rejected the plaintiff’s jurisdictional theory:

In this case, the Nelsons have alleged that petitioners recruited Scott Nelson for work at the hospital, signed an employment contract with him, and subsequently employed him. While these activities led to the conduct that eventually injured the Nelsons, they are not the basis for the Nelsons’ suit. Even taking each of the Nelsons’ allegations about Scott Nelson’s recruitment and employment as true, those facts alone entitle the Nelsons to nothing under their theory of the case. The Nelsons have not, after all, alleged breach of contract, . . . but personal injuries caused by petitioners’ intentional wrongs and by petitioners’ negligent failure to warn Scott Nelson that they might commit those wrongs. Those torts, and not the arguably commercial activities that preceded their commission, form the basis for the Nelsons’ suit.

Nelson, 507 U.S. at 358.  As OBB persuasively argued in its merits brief, this paragraph from Nelson should control the result in Sachs.  It’s an easy call.

There is one additional issue relating to the applicability of Nelson.  With regard to when a lawsuit is “based upon” commercial activity, the parties dispute at some length whether Nelson requires a gravamen approach or an elements approach to a plaintiff’s complaint.  Yet while Nelson contained sloppy language that could be interpreted to support an elements approach (Nelson, 507 U.S. at 357), the Nelson Court clearly used a gravamen approach.  It did not methodically review Nelson’s sixteen causes of action to determine whether some of the claims contained elements that required proof of commercial activity in the United States.  Instead, Nelson used a gravamen analysis, as reflected by its discussion of the failure to warn claim:

In addition to the intentionally tortious conduct, the Nelsons claim a separate basis for recovery in petitioners’ failure to warn Scott Nelson of the hidden dangers associated with his employment. The Nelsons allege that, at the time petitioners recruited Scott Nelson and thereafter, they failed to warn him of the possibility of severe retaliatory action if he attempted to disclose any safety hazards he might discover on the job.  In other words, petitioners bore a duty to warn of their own propensity for tortious conduct. But this is merely a semantic ploy. For aught we can see, a plaintiff could recast virtually any claim of intentional tort committed by sovereign act as a claim of failure to warn, simply by charging the defendant with an obligation to announce its own tortious propensity before indulging it. To give jurisdictional significance to this feint of language would effectively thwart the Act’s manifest purpose to codify the restrictive theory of foreign sovereign immunity.

Nelson, 507 U.S. at 363.  In other words, with regard to Nelson, one should do as the Court did, and not as the Court said.  Its actual holding makes clear that gravamen is the proper method of analysis.  However, the sloppy “elements” language in Nelson has indeed caused confusion in FSIA jurisprudence over the years, and Sachs is the perfect opportunity to clean it up.

There are several final important points with regard to the gravamen issue that neither the parties nor the amici mentions in their briefs – but that the Supreme Court would be well-served to consider.  First, the gravamen approach has a long history under the FTCA.  See, e.g., United States v. Neustadt, 366 U.S. 696 (1961).  Given the general principle that courts should treat foreign sovereigns how the United States government itself is treated in its own courts (see, e.g., Von Mehren, The Foreign Sovereign Immunities Act of 1976, 17 Colum. J. Transnat’l L. 33, 45 (1978)), it makes sense to apply the gravamen rule under the FSIA.  See Nelson, 507 U.S. at 363 (citing United States v. Shearer, 473 U.S. 52, 54-55 (1985), in support of its gravamen approach).

Second, the gravamen analysis has been employed by courts in FSIA cases for thirty years.  See, e.g., De Sanchez v. Banco Central de Nicaragua, 770 F.2d 1385, 1398 (5th Cir. 1985); Garb v. Republic of Poland, 440 F.3d 579, 588 (2d Cir. 2006); O’Bryan v. Holy See, 556 F.3d 361, 379-80 (6th Cir. 2009).  It makes little sense to overturn that precedent now, both because the gravamen approach has worked well and because it would create unnecessary confusion in this sensitive area of the law.

Third, an abandonment of the gravamen approach would invite gamesmanship by plaintiffs’ counsel.  To provide an example, I once litigated a personal injury tort case where the plaintiff included a meritless breach of contract cause of action to establish jurisdiction under the commercial activity exception.  There was no colorable breach of contract claim, but the alleged claim could have been enough – in the absence of the gravamen approach – for the court to take jurisdiction and order discovery.  With the gravamen approach, I was able to make a strong argument that the case should be analyzed under the tort exception rather than the commercial activity exception.  That case – and others like it – shows that the gravamen analysis prevents jurisdiction from being based upon clever tactical ploys, and thereby serves to protect the integrity of the FSIA’s jurisdictional provisions.

Despite some sloppy language that can easily be fixed, Nelson was correctly decided.  It has been a bulwark of FSIA jurisprudence for over twenty years.  With regard to the commercial activity issue in OBB v. Sachs, the Supreme Court should simply apply Nelson – and order the dismissal of Sachs’ lawsuit.

Sachs’s Meritless Commercial Activity Argument

September 14, 2015 By in Uncategorized Tags: , , , , , , , , Leave a comment

Last week, I examined the problems with the main attribution argument advanced by OBB in the Supreme Court.  Now it is time to analyze the merits of one of the central commercial activity arguments proffered by Sachs. 

The first clause of the commercial activity exception requires that a plaintiff’s action be “based upon a commercial activity carried on in the United States by the foreign state.”  28 U.S.C. § 1605(a)(2).  As a result, to establish jurisdiction under section 1605(a)(2)’s first clause, Sachs must show that her action – which arises from a railway accident in Innsbruck, Austria – is based upon a commercial activity carried on in the United States by OBB.

In her merits brief, Sachs argues that her claims are based upon “OBB’s overall commercial railway enterprise.”  There are three problems with Sachs’s argument.

First, Sachs did not advance the argument below.  It may be that Sachs can avoid a claim of waiver because the issue relates to subject matter jurisdiction (cf. Fed. R. Civ. P. 12(h)(3)), but the fact that Sachs did not raise the argument before her merits brief in the Supreme Court does not inspire confidence.  Like OBB’s novel (and unsupported) agency argument, this was probably an idea that would have been best left on the cutting room floor.

Second, Sachs’s claim ignores a host of FSIA cases (which are also not cited in OBB’s reply on the merits).  Under established law, a plaintiff cannot rely on a sovereign’s alleged general commercial activities under the commercial activity exception.  As courts have repeatedly held for over thirty-five years, it is not the sovereign’s general commercial activities that matter for purposes of the exception:

The focus of the exception to immunity recognized in § 1605(a)(2) is not on whether the defendant generally engages in a commercial enterprise or activity. . . ; rather, it is on whether the particular conduct giving rise to the claim in question actually constitutes or is in connection with commercial activity, regardless of the defendant’s generally commercial or governmental character.

Arango v. Guzman Travel Advisors Corp., 621 F.2d 1371, 1379 (5th Cir. 1980); see also, e.g., Rush-Presbyterian-St. Luke’s Med. Ctr. v. Hellenic Republic, 877 F.2d 574, 580 n.8 (7th Cir. 1989) (same); Jungquist v. Sheikh Sultan Bin Khalifa Al Nahyan, 115 F.3d 1020, 1030 (D.C. Cir. 1997) (stating that the plaintiffs “confuse general activity related to the claim with the specific activity upon which the claim is based”); cf. Sun v. Taiwan, 201 F.3d 1105, 1109 (9th Cir. 2000) (holding that the “focus must be solely upon those specific acts that form the basis of the suit”).  In other words, if the Supreme Court accepts Sachs’s argument, it would be overturning decades of FSIA precedent.  The Court would also be swinging the gates wide open to jurisdiction under the first clause of the commercial activity exception, since plaintiffs’ lawyers can almost always conjure an underlying general commercial activity that can serve as a “basis” for their suits.

Finally, Sachs’s argument lacks merit because OBB “carries on” its “overall commercial railway enterprise” in Austria – and not, as the first clause of the commercial activity exception requires, “in the United States.”  28 U.S.C. § 1605(a)(2).  I understand that Sachs relies on section 1603(e), which defines a “commercial activity carried on in the United States by a foreign state” to mean “commercial activity carried on by such state and having substantial contact with the United States.”  28 U.S.C. § 1605(e).  However, Sachs cannot have it both ways.  If the commercial activity is deemed to be the ticket sale by the travel agency in Massachusetts (and that sale is attributable to OBB), then it may be true that the sale constitutes commercial activity carried on in the United States by OBB.  See Sachs v. Republic of Austria, 737 F.3d 584, 598-99 (9th Cir. 2013) (en banc).  Yet, for reasons I will explain in a subsequent post, Sachs’s lawsuit is not based upon the ticket sale.  And even if a plaintiff were not precluded under FSIA precedent from relying on a foreign state’s general commercial activity, OBB’s operation of its “overall commercial railway enterprise” is carried on in Austria; OBB is Austria’s national railroad company, and it appears undisputed that OBB does not have offices, employees or bank accounts in the United States. 

On its face, this analysis may seem hyper-technical and unfair to Sachs.  The opposite is true.  It is Sachs who is trying to fit a square peg into a round hole.  Sachs’s claims, after all, arise from an alleged tortious act or omission occurring in Austria in connection with a commercial activity overseas.  Sachs should therefore be asserting jurisdiction under the third clause of the commercial activity exception.  Cf. 28 U.S.C. § 1605(a)(2) (third clause stating that a foreign state is not immune in any case based “upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States”).  Sachs is not doing so, presumably because she cannot demonstrate the requisite “direct effect in the United States” under existing law.  See, e.g., Zernicek v. Brown & Root, Inc., 826 F.2d 415, 418 (5th Cir.1987) (“consequential damages [from personal injury tort abroad] are insufficient to constitute a ‘direct effect in the United States’ for purposes of abrogating sovereign immunity”).  Sachs also cannot assert jurisdiction under the FSIA’s tort exception for her slip-and-fall case, because the alleged tortious conduct occurred overseas.  See  Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 441 (1989) (stating that the FSIA’s tort exception, 28 U.S.C. § 1605(a)(5), “covers only torts occurring within the territorial jurisdiction of the United States”).  As a result, to get around the requirements of the FSIA’s other (and more applicable) exceptions to sovereign immunity, Sachs is forced to proceed under the first clause of the commercial activity exception.  However, reliance on that clause does not work — at least not if Sachs’ argument is based on OBB’s general commercial activity of operating a national railway in Austria.

In the end, because she cannot rely on OBB’s general commercial activity in Austria, Sachs is stuck with arguing that her personal injury action is “based upon” the ticket sale in the United States.  As I will explain in subsequent posts, that should spell the end of Sachs’s lawsuit under existing Supreme Court precedent.

[Next week, I will examine why the Supreme Court’s decision in Saudi Arabia v. Nelson, 507 U.S. 349 (1993), should control the result in OBB v. Sachs.]

OBB’s Novel “Agency or Instrumentality” Argument Revisited

September 11, 2015 By in Agency Tags: , , , , , , , , , Leave a comment

OBB v. Sachs is scheduled for oral argument in the United States Supreme Court on October 5, 2015.  During the period leading up to oral argument, I intend to publish a series of posts regarding issues in the Sachs case.  My general view is that Sachs is an easy case to resolve under Saudi Arabia v. Nelson, 507 U.S. 349 (1993), but that there is potential for a major mistake by the Supreme Court on the critical issue of attribution.  I will provide more information on these key points in the upcoming weeks.

Today, I want to focus on an issue that I have discussed before, namely OBB’s argument that the determination of whether an entity is an “agent” of a foreign state should be resolved through the definition of “agency or instrumentality” set forth in 28 U.S.C. section 1603(b).  I will not revisit the points I made in previous posts (here and here).  I do, however, want to add three points:

(1) OBB did not raise its argument that section 1603(b) controls the inquiry of whether an entity is an “agent” of a foreign state during district court proceedings.  OBB also did not raise the argument in its main briefing before the Ninth Circuit Court of Appeals.  Instead, OBB raised the issue for the first time during oral argument on en banc rehearing, and was subsequently ordered by the Ninth Circuit to submit supplemental briefing addressing its new argument.  See Sachs v. Republic of Austria, 737 F.3d 584, 594 n. 7 (9th Cir. 2013) (en banc).  OBB’s novel argument – which was contrary to FSIA precedent – was thereafter squarely rejected by the Ninth Circuit.  Sachs, 737 F.3d at 594-98.  That OBB itself did not see fit to raise the issue until oral argument on en banc rehearing fails to inspire confidence, and a closer look shows why OBB’s novel interpretation of the FSIA should have remained on the cutting room floor.

(2) OBB’s argument would require an extremely strained (and confusing) interpretation of 28 U.S.C. section 1603.  The relevant portion of section 1603 states:

(a) A “foreign state”, except as used in section 1608 of this title, includes a political subdivision of a foreign state or an agency or instrumentality of a foreign state as defined in subsection (b).

(b) An “agency or instrumentality of a foreign state” means any entity—

. . .

(2) which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof

. . . .

28 U.S.C. § 1603(a), (b)(2).  For OBB’s argument to work, the term “foreign state” in section 1603(b) must include “agencies or instrumentalities” of foreign states; otherwise, under OBB’s framework, an “agency or instrumentality” of a foreign state could never be held to have an “agent.”  Yet, as applied to OBB’s situation (that is, the question of whether an entity is an agent of an agency or instrumentality), OBB’s interpretation would effectively yield a statute that states the following:

(b) An “agency or instrumentality of [an agency or instrumentality of] a foreign state” means any entity—

. . .

(2) which is an organ of [an agency or instrumentality of] a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by [an agency or instrumentality of] a foreign state or political subdivision thereof

. . . .

Such a reading of section 1603(b) is not only deeply confusing, but it is also inconsonant with the statute’s use of the term “political subdivision thereof” (since agencies or instrumentalities of a foreign state do not have “political subdivisions”).  In other words, when section 1603(b) used the term “foreign state,” it was referring to foreign states proper – such as the Republic of Austria – and not to agencies or instrumentalities of a foreign state.  That is, in fact, exactly what the FSIA’s legislative history demonstrates.  See H.R. Rep. No. 94-1487, at 15 (1976) (stating that an agency or instrumentality must “be either an organ of a foreign state (or of a foreign state’s political subdivision), or that a majority of the entity’s shares or other ownership interest be owned by a foreign state (or by a foreign state’s political subdivision)”).  It is also what the Supreme Court concluded in Dole Food Co. v. Patrickson, 538 U.S. 468 (2003), when the Court held “that only direct ownership of a majority of shares by the foreign state satisfies the statutory requirement [set forth in section 1603(b)(2)].”  Id. at 474 (emphasis added).

There is, in short, no statutory support for OBB’s approach.  Nothing in the FSIA indicates that a court first needs to examine section 1603(b) to determine whether the defendant (like OBB) is an agency or instrumentality of a foreign state, and then re-examine section 1603(b) to determine whether the putative agent is an “agency or instrumentality” of the “agency or instrumentality.”  No court has ever adopted that type of circular analysis under section 1603, and for good reason: it makes no sense. 

(3) OBB’s agency or instrumentality argument fails for another reason: it would render far too many entities incapable of being deemed an “agent” of a foreign state, and thereby deeply undermine the FSIA’s commercial activity exception.

Consider the following scenario: through individual intermediaries, a foreign state creates a separate corporation in New York State.  The foreign state exercises extensive day-to-day control over the corporation, which engages in a series of commercial transactions in the United States.  After the corporation’s conduct leads to multi-million dollar losses for a number of United States citizens, the individuals damaged file suit against the corporation and the foreign state.  Their main jurisdictional argument under the FSIA is that the corporation was an agent of the foreign state through the latter’s exercise of day-to-day control, and that the corporation’s conduct is attributable to the foreign state for jurisdictional purposes. 

Under OBB’s (mis)interpretation of section 1603(b), the plaintiffs in this scenario could not proceed against the foreign state itself because the corporation does not meet the definition of an agency or instrumentality under the FSIA.  The corporation was created in New York, not in the foreign state, and therefore could never (under OBB’s theory) be an agent of a foreign state.  See 28 U.S.C. § 1603(b)(3) (stating that an “agency or instrumentality of a foreign state” means any entity which, inter alia, “is neither a citizen of a State of the United States as defined in section 1332(c) and (e) of this title, nor created under the laws of any third country”).  The same would hold true if the foreign state created the entity under the law of a third country, such as the law of the Bahamas or Panama.  In fact, OBB’s formulation would provide a blueprint to foreign states about how to engage in commercial activity in the United States without risking the possibility of litigation: if the foreign state engages in commercial activity through a corporation created under the law of the United States or a third country, it will never be held to engage in commercial activity in the United States — even if the foreign state exercises day-to-day control over the corporation created, and effectively engages in extensive commercial activity in the United States through the nominally separate corporation.

OBB’s position, in other words, would profoundly undermine the effectiveness of the FSIA’s commercial activity exception.  Where a foreign state dominates a separate corporation to such an extent that a principal-agent relationship is created, courts must be permitted to attribute the corporation’s conduct to the foreign state for jurisdictional purposes.  Otherwise, the first clause of the commercial activity exception would contain a loophole that would swallow the exception itself.

[Next week, I will examine Sachs’s argument that OBB’s “overall commercial railway enterprise” satisfies the “commercial activity” requirement under the first clause of the FSIA’s commercial activity exception.]

Does “The Interview” Violate International Law? Maybe.

December 22, 2014 By in Head-of-State Immunity Leave a comment

“The Interview,” the new comedy by Seth Rogen and James Franco, has received a great deal of international attention.  Despite the widespread media coverage, one important issue remains unaddressed: whether the movie’s depiction of the assassination of Kim Jong-un – a sitting foreign head of state – violates international law.

A sitting head of state enjoys a number of privileges and immunities under international law.  When visiting a foreign country, a head of state is entitled to special protection from physical harm.[1]  As often seen on the news, a State is obligated to treat a visiting head of state in accordance with established protocols.[2]  And while perhaps less widely known, a head of state is entitled to absolute immunity from criminal and civil proceedings in foreign courts.[3]

In keeping with the special status accorded to sitting heads of state under international law, it is generally accepted that States have an obligation to prevent attacks on the dignity of a foreign head of state.[4]  That obligation exists whether or not the head of state is visiting the country where the attack has occurred.[5]  In other words, Kim Jong-un is arguably entitled to protection from attacks on his dignity – not just in North Korea, but in countries throughout the world.

North Korea would appear to have a strong claim that “The Interview” – which may be the first major film ever to depict the assassination of a sitting foreign leader[6] – offends the dignity of its head of state.  Based upon publicly-available information, the movie depicts Kim Jong-un being burned to death.[7]  In addition, the movie had been set to be released in countries around the world[8] and shown to millions of people.  As a result, North Korea could plausibly contend both that the movie is particularly offensive to the dignity of its head of state and that its negative impact would be widespread.

However, while it would be difficult to contest that “The Interview” offends the dignity of North Korea’s sitting head of state, that does not necessarily mean that its dissemination would violate international law.

First, North Korea’s diplomatic relations are (at best) frosty with many other nations.  Since the obligation under international law to avoid offending the dignity of foreign heads of state is based in part on the need to preserve amicable relations, any duty to prevent attacks on Kim Jong-un’s dignity may be minimal – at least in nations, such as the United States, with strained or non-existent relations with North Korea.[9]  Of course, one could also argue that serious offenses to the dignity of a foreign leader are particularly dangerous when relations are already poor, and that highly offensive conduct should only be permitted in a time of war.[10]

Second, both international law[11] and domestic law[12] recognize a broad freedom of expression.  How far that freedom extends in practice will depend on the country involved.  For example, some States “have enacted legislation prohibiting offensive conduct towards foreign Heads of States.”[13]  Such conduct is a crime in those States, and there is precedent for criminal prosecutions of individuals who insult foreign leaders.[14]  In cases involving this type of conduct, “States tend to distinguish between reasoned criticism (which is permissible), and conduct which is gratuitously offensive or which, even if associated with criticism, oversteps reasonable limits and becomes intentionally insulting or offensive (which is not).”[15]  While there is no authority directly on point, the depiction of Kim Jong-un burning to death would appear to fall under the second category.  The distribution of “The Interview” might, in other words, violate the law of certain countries.

In the United States, the government lacks the constitutional authority to prevent the dissemination of “The Interview.”[16]  The broad freedom to engage in political speech – which includes “vehement, caustic, and sometimes unpleasantly sharp attacks on government and public officials”[17] – is at the very heart of the American political system.[18]  Yet just because individuals enjoy a right to free speech, that does not mean that highly offensive speech is necessarily a good idea.  As subsequent events have demonstrated, the high-budget depiction of the immolation of a sitting head of state can have major real-world consequences – which likely far outweigh any “comedic” benefit derived therefrom.

Finally, given its record with regard to human rights,[19] North Korea is arguably in a weak position to claim a violation of international law.  However, the equality of States is a basic principle underlying the international system,[20] and North Korea is, in theory, in the same position to claim a violation as any other sovereign State.  Moreover, “[i]n the field of international law, where no single sovereign reigns supreme, the Golden Rule takes on added poignancy.”[21]  Given the importance of reciprocity in international law, the real question is whether it is advisable to promote the ubiquitous depiction of the violent assassination of any head of state.  Those who are not disturbed by the Kim Jong-un assassination scene in “The Interview” may feel differently if the target had been, for example, United States President Obama or Japanese Emperor Akihito.

In the end, although it is uncertain whether the dissemination of “The Interview” violates international law, North Korea clearly has a legitimate gripe.  That does not, of course, excuse North Korea’s apparent retaliatory conduct – which may have included violent threats and a sophisticated cyber-attack against Sony.  Indeed, under international law, the proper response would have been to demand an apology and (if permitted by domestic law) the prosecution of those responsible for the offensive depiction.[22]  However, international law does provide a useful backdrop in terms of understanding North Korea’s response.  In addition, it should make private individuals and corporations pause in the future before offering as “entertainment” the fictionalized assassination of a sitting head of state.

_____________________________

[1]. See, e.g., Convention on the Prevention and Punishment of Crimes Against Internationally Protected Persons, Including Diplomatic Agents, Dec. 14, 1973, 28 UST 1975, TIAS No. 8532 (entered into force for the United States on Feb. 20, 1977) (“1973 New York Convention”), art. 2 (requiring State Parties to criminalize violent attacks on internationally protected persons); art. 1(a) (providing that an “internationally protected person” includes a head of state).

[2]. See http://www.state.gov/s/cpr/c35646.htm (stating that the “essence of international protocol is the practice of employing proper etiquette, official formalities and dignified ceremonies in the welcoming and hosting of foreign leaders”); see also United Nations Protocol and Liaison Service, Manual of Protocol, ST/SG/4/Rev.7 (May 2005), no. 19 (setting forth special protocols for visiting heads of state).

[3]. See, e.g., Doe v. Roman Catholic Diocese of Galveston-Houston, 408 F. Supp. 2d 272 (S.D. Tex. 2005) (dismissing lawsuit against Pope Benedict XVI based upon head-of-state immunity); see also United States v. Deutsches Kalisyndikat Gesellschaft, 31 F.2d 199, 201 (S.D.N.Y. 1929) (“The person of the foreign sovereign and those who represent him are immune, whether their acts are commercial, tortious, criminal, or not, no matter where performed. . . . No one else enjoys such immunity.”).

[4]. See 1973 New York Convention, art. 2(3) (recognizing the “obligation[] . . . under international law to take all appropriate measures to prevent . . . attacks on the . . . dignity of [a head of state].”); United Nations Convention on Special Missions, GA Res. 2530 (XXIV) (Dec. 8, 1969), reprinted in 9 ILM 127 (1970), art. 29 (requiring States to “take all appropriate steps to prevent any attack” on the “dignity” of a State representatives, which can include heads of state); Sir Arthur Watts, The Legal Position in International Law of Heads of State, Heads of Gov’ts and Foreign Ministers, 247 RECUEIL DES COURS 9, 41 (1994) (“Watts”) (“Some aspects of the respect due to the dignity of Heads of States still . . . survive as a matter of international law.”).

[5]. See Watts, supra note 5, at pp. 41-42 (“It is . . . at least clear that a Head of State’s dignity may be violated whether or not he is present in the State where the acts prejudicial to his dignity have occurred.”).

[6]. See B. Barnes and M. Cieply, “Sony Drops ‘The Interview’ Following Terrorist Threats,” New York Times (Dec. 18, 2014), p. B1 (“To depict the killing of a sitting world leader, comically or otherwise, is virtually without precedent in major studio movies, film historians say.”)

[7]. See R. Brody, “How ‘The Interview’ Handled the Assassination of Kim Jong-Un,” The New Yorker (Dec. 18, 2014) (“the wave of heat and shock makes Kim’s face waver—then his hair, eyebrows, and even skin begin to catch fire”); J. Moyer, “Why North Korea has every reason to be upset about Sony’s ‘The Interview,’ The Washington Post (Dec. 16, 2014).

[8]. It appears that Sony intended only a limited release in Asia-Pacific region.  See http://variety.com/2014/film/news/the-interview-to-have-only-limited-release-in-asia-1201376806/

[9]. See Watts, supra note 5, at 42 (“In conditions of tension respect by one State for the other’s dignity is apt to be minimal; since one of the reasons for preventing offensive conduct against foreign Heads of States is the risk it involves of harming the relations between the States concerned, it is less weighty when those relations are already bad.”).

[10]. See Watts, supra note 4, at 42 (stating that the duty to avoid offenses to the dignity of a foreign leader is “particularly [limited] where [relations] have degenerated into war or conflict”).

[11]. See, e.g., Universal Declaration of Human Rights, G.A. Res. 217, U.N. GAOR, 3d Sess., U.N. Doc. A/810 (1948), art. 19 (“Everyone has the right to freedom of opinion and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers.”);  International Covenant on Civil and Political Rights, Mar. 23, 1976, 999 U.N.T.S. 172, art. 19(2) (“Everyone shall have the right to freedom of expression; this right shall include freedom to seek, receive and impart information and ideas of all kinds, regardless of frontiers, either orally, in writing or in print, in the form of art, or through any other media of his choice.”).

[12]. See, e.g., U.S. Const. amend. I.

[13]. Watts, supra note 5, at 43.

[14]. See J.A.M. v. Public Prosecutor, 73 I.L.R. 387 (1969); but see Colombani and others v. France, ECHR App. No. 51279/99, Judgment of June 25, 2002.

[15]. Watts, supra note 5, at 44.

[16]. See, e.g., Nebraska Press Ass’n v. Stuart, 427 U.S. 539, 559 (1976) (stating that “prior restraints on speech and publication are the most serious and the least tolerable infringement on First Amendment rights”).

[17]. New York Times Co. v. Sullivan, 376 U.S. 254, 270 (1964).

[18]. Garrison v. Louisiana, 379 U.S. 64, 74-75 (1964) (stating that “speech concerning public affairs is more than self-expression; it is the essence of self-government”).

[19]. See generally United Nations, Report of the Commission of Inquiry on Human Rights in the Democratic People’s Republic of Korea, A/HRC/25/63 (Feb. 7, 2014).

[20]. See United Nations Charter, Art. 2, 59 Stat. 1051, T.S. No. 993 (1945) (“The Organization is based on the principle of the sovereign equality of all its Members”.); see also, e.g., Republic of Philippines v. Pimentel, 553 U.S. 851, 865 (2008), quoting Schooner Exchange v. McFaddon, 7 Cranch 116, 137, 3 L.Ed. 287 (1812) (stating that sovereign immunity “is premised upon the ‘perfect equality and absolute independence of sovereigns’”).

[21]. De Sanchez v. Banco Cent. De Nicaragua, 770 F.2d 1385, 1398 (5th Cir. 1985).

[22]. Watts, supra note 5, at 43-44, 46.

Prejudgment Security and Immunity from Attachment

December 15, 2014 By in Attachment and Execution Tags: , , , , Leave a comment

In its recent decision in Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, 771 F.3d 980 (7th Cir. 2014), the Seventh Circuit held that the FSIA’s ban on prejudgment attachment barred enforcement of the Unauthorized Insurers Process Act’s prejudgment security requirement.  The Seventh Circuit’s decision accords with the FSIA’s plain language.

Pine Top Receivables (“Pine Top”) filed suit against the Uruguayan instrumentality Banco de Seguros del Estado (“Banco”) in 2012, seeking claimed overdue balances on various reinsurance contracts.  In the district court litigation, Pine Top moved to strike Banco’s answer on the basis that Banco was required to post pre-answer security in the full amount of the disputed debt under 215 ILCS 5/123(5).  Pine Top Receivables, 771 F.3d at 982; see also 215 ILCS 5/123(5) (“Before any unauthorized foreign or alien company shall file or cause to be filed any pleading in any action or proceeding, including any arbitration, instituted against it, such unauthorized company shall . . . deposit with the clerk of the court in which such action or proceeding is pending or with the clerk of the court in the jurisdiction in which the arbitration is pending cash or securities or file with such clerk a bond with good and sufficient sureties, to be approved by the court, in an amount to be fixed by the court sufficient to secure the payment of any final judgment which may be rendered in such action, proceeding, or arbitration.”).   The district court denied Pine Top’s motion to strike, concluding that the FSIA’s prohibition on attaching a foreign state’s property prevents application of the Illinois security requirement.

On appeal, Pine Top argued that the FSIA’s prohibition against prejudgment attachment was limited to jurisdictional attachments.  That was, indeed, one of the key problems that the FSIA was intended to resolve.  See, e.g., H.R. Rep. 94-1487, at 27 (1976) (“The elimination of attachment as a vehicle for commencing a lawsuit will ease the conduct of foreign relations by the United States and help eliminate the necessity for determinations of claims of sovereign immunity by the State Department.”).  However, the statute’s prohibition extends well beyond prejudgment attachments for purposes of establishing jurisdiction.

In rejecting Pine Top’s argument, the Seventh Circuit relied mainly on the plain language of the FSIA.  Section 1609 provides that “the property in the United States of a foreign state shall be immune from attachment arrest and execution except as provided in sections 1610 and 1611 of this chapter.”  28 U.S.C. § 1609.  As the court recognized, the “FSIA does not define the term ‘attachment arrest and execution,’ nor does § 1609 make any other reference that would clarify whether it covers only jurisdictional attachments or attachments to secure judgments.”  Pine Top Receivables, 771 F.3d at 983.  However, relying on the established rule that “‘[i]nterpretation of a word or phrase depends upon reading the whole statutory text, considering the purpose and context of the statute,’” the Seventh Circuit examined the language of section 1610(d).  Id. at 983 n.3, quoting Dolan v. United States Postal Service, 546 U.S. 481, 486 (2006).  Section 1610(d) provides that the property of a foreign state used for a commercial activity is not immune from prejudgment attachment if “the foreign state has explicitly waived its immunity from attachment prior to judgment” and the “purpose of the attachment is to secure satisfaction of a judgment that has been or may ultimately be entered against the foreign state, and not to obtain jurisdiction.”  28 U.S.C. § 1610(d)(1)-(2).  The Seventh Circuit concluded that “[i]f we accepted Pine Top’s reading—that § 1609 deals exclusively  with jurisdictional attachments—§ 1610(d) would accomplish nothing; it would allow waiver of immunity only for a class of property to which no immunity attached by virtue of the prior section. That is, unless § 1609 includes attachments ‘the purpose of [which] is to secure satisfaction of a judgment,’ § 1610(d) is superfluous.”  Pine Top Receivables, 771 F.3d at 983-84.  Given the settled rule that courts should avoid interpretations that “would render a statutory term superfluous,”  Dole Food Co. v. Patrickson, 538 U.S. 468, 477 (2003), the Seventh Circuit correctly rejected Pine Top’s contention.

The Seventh Circuit’s decision is consistent with FSIA precedent, namely the Second Circuit’s decision in Stephens v. National Distillers & Chemical Corp., 69 F.3d 1226 (2d Cir.1995); see also, e.g., Dellapenna, Suing Foreign Governments and Their Corporations, at 745 (2d ed. 2003).  As a result, in addition to adhering the FSIA’s plain language, the Pine Top Receivables case has the added benefit of not creating a circuit split.  See, e.g., Vencedora Oceanica Navigacion, S.A. v. Compagnie Nationale Algerienne de Navigation, 730 F.2d 195 (5th Cir. 1984) (“[I]t is highly desirable to avoid circuit conflicts in the sensitive area of sovereign immunity.”); Abrams v. Societe Nationale des Chemins de Fer Francais, 332 F.3d 173, 186 (2d Cir. 2003), vacated on other grounds by Societe Nationale des Chemins de Fer Francais v. Abrams, 542 U.S. 901 (2003) (discussing “the importance of having a uniform, consistent law in this area”).

One final note: it appears that the FSIA’s treatment of prejudgment attachments is much stricter than the approach taken in other countries.  See generally Yang, State Immunity in International Law, at 378-90 (2012).  Accordingly, while the Seventh Circuit’s decision is correct as a matter of statutory interpretation, the FSIA could be amended – in a manner consistent with customary international law – to permit greater flexibility with regard to prejudgment attachments.  However, since Congress has not done so, the Seventh Circuit properly followed the statute’s plain language.

Attachment in Terrorism Cases

October 22, 2014 By in Terrorism Exception Tags: , , , , Leave a comment

The Seventh Circuit recently removed a significant obstacle to attachment or execution in terrorism cases. 

Section 1610(c) provides that “[n]o attachment or execution referred to in subsections (a) and (b) of this section shall be permitted until the court has ordered such attachment and execution after having determined that a reasonable period of time has elapsed following the entry of judgment and the giving of any notice required under section 1608(e) of this chapter.”  28 U.S.C. § 1610(c).  In Gates v. Syrian Arab Republic, 755 F.3d 568 (7th Cir. 2014), the Seventh Circuit held that the limitations set forth in section 1610(c) did not apply to attachments in terrorism cases.  In reaching that result, the Seventh Circuit focused on section 1610(c)’s express limitation to attachment or execution under subsections (a) and (b).  Since section 1610(g) – the provision addressing attachment and execution in terrorism cases – “is not mentioned in section 1610(c),” the latter section “simply does not apply to execution or attachment under section 1610(g).”  Gates, 755 F.3d at 575.

By recognizing that section 1610(c)’s limitations are inapplicable to attachment proceedings in terrorism cases, the Seventh Circuit properly adhered to the plain terms of the statute.  The ruling should also serve the goal of helping to streamline attachment proceedings in cases involving terrorism.