FSIA Immunity Determinations at Trial?

In the recent FSIA case of Funnekotter v. Agricultural Development Bank of Zimbabwe, No. 13 CIV. 1917 CM, 2013 WL 6091616 (S.D.N.Y. Nov. 15, 2013), the district court stated that “where the evidence on the [FSIA] jurisdictional issue overlaps with the evidence on the merits, the Court has the discretion even to ‘proceed to trial and make its jurisdictional ruling at the close of the evidence.’”  Id. at *4, quoting Alliance for Envtl. Renewal, Inc. v. Pyramid Crossgates Co., 436 F.3d 82, 88 (2d Cir. 2006).  The notion that a foreign sovereign should be forced to trial prior to an immunity determination conflicts with FSIA precedent.

A district court must resolve the question of FSIA immunity at the “threshold” of every action.  Verlinden B.V. v. Cent. Bank of Nigeria, 461 U.S. 480, 493-94 (1983); see also Republic of Austria v. Altmann, 541 U.S. 677, 691 (2004).  An early resolution of immunity is essential, since a sovereign enjoys “‘an immunity from trial and the attendant burdens of litigation, and not just a defense to liability on the merits.’”  Phoenix Consulting Inc. v. Republic of Angola, 216 F.3d 36, 39 (D.C. Cir. 2000), quoting Foremost-McKesson, Inc. v. Islamic Republic of Iran, 905 F.2d 438, 443 (D.C. Cir. 1990).

That an FSIA immunity issue may overlap with evidence on the merits does not change the equation.  Courts routinely resolve factual disputes when addressing jurisdictional challenges under the FSIA, including with regard to issues intertwined with the merits.  See, e.g., Moran v. Kingdom of Saudi Arabia, 27 F.3d 169, 173-74 (5th Cir. 1994) (affirming district court’s resolution of disputed facts with regard to whether foreign state employee acted within the scope of employment for purposes of the FSIA’s tort exception).  The “jurisdiction and merits inquiries” may “[i]nevitably” overlap under the FSIA, but permitting a district court to resolve disputed facts “preserves the effectiveness of the immunity doctrine by avoiding put[ting the foreign government defendant] to the expense of defending what may be a protracted lawsuit without an opportunity to obtain an authoritative determination of its amenability to suit at the earliest possible opportunity.”  Robinson v. Gov’t of Malaysia, 269 F.3d 133, 142 (2d Cir. 2001); see also id. at 143-44.

It is true that the general rule outside the FSIA – as stated in Alliance for Envtl. Renewal, the case cited by the Funnekotter court – is that the resolution of jurisdictional issues enmeshed with the merits can be postponed until trial.  However, FSIA precedent has long made clear that it “would be inappropriate” to postpone the jurisdictional issue until trial under the FSIA “[b]ecause sovereign immunity is immunity from suit, not just from liability.”  Gould, Inc. v. Pechiney Ugine Kuhlmann, 853 F.2d 445, 451 (6th Cir. 1988); see also Moran, 27 F.3d at 172.  As explained by the Fifth Circuit:

An exception to the general rule for FSIA cases is justified by the fact that we have held that the FSIA requires courts to fashion procedures that lead to pretrial resolution of a foreign state’s immunity from suit – even if such procedures depart from the usual rule.  The need for special procedures designed to preserve a foreign sovereign’s immunity from suit is heightened in FSIA cases, which implicate notions of international comity.

Montez v. Dep’t of Navy, 392 F.3d 147, 150-51 (5th Cir. 2004) (emphasis added).

In short, if a plaintiff or a court seeks to invoke the general rule that jurisdictional issues enmeshed with the merits can be resolved at or after trial, defense counsel should object under FSIA precedent.  Otherwise, given that many of the FSIA’s exceptions to immunity involve jurisdictional issues that overlap with evidence on the merits, application of the general rule in FSIA cases runs the risk of vitiating foreign sovereigns’ presumptive immunity from suit.

Litigation Comment: Richardson v. Attorney General of the British Virgin Islands

Another blog devoted to issues relating to foreign sovereigns in United States courts recently mentioned the case Richardson v. Attorney General of the British Virgin Islands, Civil No. 2008-144, 2013 WL 4494975 (D.V.I. Aug. 20, 2013).  See www.foreignsovereignblog.com.  Although Richardson is unusual because the foreign sovereign is appearing pro se, the case is indeed interesting for a number of reasons:

Capacity: Richardson addresses the circumstances under which a lawsuit against a foreign sovereign official should be deemed a lawsuit against the foreign sovereign itself.  Richardson, 2013 WL 4494975, at *2.  The official capacity issue frequently arises with respect to domestic government officials.   Cf. Kentucky v. Graham, 473 U.S. 159, 166 (1985) (“[A]n official-capacity suit is, in all respects other than name, to be treated as a suit against the entity.  It is not a suit against the official personally, for the real party in interest is the entity”).  In Samantar, the Supreme Court recognized that it was an issue under the FSIA as well: “it may be the case that some actions against an official in his official capacity should be treated as actions against the foreign state itself, as the state is the real party in interest.”  Samantar v. Yousuf, 560 U.S. 305, 325 (2010), citing Graham, 473 U.S. at 166.  It is an issue that should be kept in mind whenever an attorney confronts a case against a foreign sovereign official.

Waiver: The Richardson court correctly held that a foreign state does not waive immunity simply by failing to appear in the matter.  Richardson, 2013 WL 4494975, at *4.  However, the court also accurately stated that a foreign state does waive immunity if it fails to assert immunity in a responsive pleading – which, according to a docket check, is what the pro se foreign sovereign defendant may just have done in a recent filing.  Id.  Richardson highlights that a foreign sovereign can actually increase the risk of waiver by appearing in the action, particularly if defense counsel is not familiar with the FSIA’s waiver rules.

Commercial Activity: In analyzing whether the plaintiff’s claims involved commercial activity, the Richardson court examined whether the conduct was “of a nature that a private person would undertake for profit.”  Richardson, 2013 WL 4494975, at *4.  The “for profit” test is controversial, particularly given the nature/purpose language in 28 U.S.C. section 1603(d).  However, there is a strong argument that whether or not an activity is the type customarily undertaken for profit is an appropriate factor to consider, and I address that issue here.

Scope of Employment/Respondeat Superior: The Richardson court quotes the Fifth Circuit’s decision in Moran for the following proposition relating to the tort exception’s “scope of employment” requirement: “‘[T]he scope of employment provision of the tortious activity exception requires a finding that the doctrine of respondeat superior applies to the tortious act or omission committed by the officer or employee of the foreign state.’”  Richardson, 2013 WL 4494975, at *5, quoting Moran v. Kingdom of Saudi Arabia, 27 F.3d 169, 173 (5th Cir. 1994).  This again is an issue for a future post, but courts and attorneys in FSIA cases should be careful not to equate the tort exception’s “scope of employment” requirement with a respondeat superior analysis.  Under most circumstances the two are identical, but in certain situations there is a big difference.  Cf. Primeaux v. United States, 181 F.3d 876 (8th Cir. 1999) (en banc).

Political Subdivision: Richardson determined that BVI was a political subdivision of the United Kingdom for purposes of the FSIA.  Richardson, 2013 WL 4494975, at *10.  On its face that determination appears correct, but it is worth noting that there are not many cases under the FSIA addressing what is meant by the term “political subdivision.”  Under the right circumstances, the political subdivision issue is one that could involve very interesting litigation.

Strict Compliance: The Richardson court correctly held that a plaintiff must strictly comply with section 1608(a)’s service of process requirements.  See Richardson, 2013 WL 4494975, at *8; see also https://fsialaw.com/2013/11/07/the-ninth-circuits-substantial-service-error/.  However, Richardson is unusual in that the court appeared to hold that the strict compliance standard applied to the requirements of the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, Nov. 15, 1965, 658 U.N.T.S. 163 (“Hague Service Convention”).  See Richardson, 2013 WL 4494975, at *13; see also 28 U.S.C. § 1608(a)(2).  There are not many cases under section 1608(a)(2), but applying a strict compliance standard to the Hague Service Convention requirements appears to be a logical extension of FSIA service precedent.

Official Immunity: Official immunity is relatively straightforward when the Executive Branch files a suggestion of immunity.  See, e.g., Rosenberg v. Lashkar-e-Taiba, — F. Supp. 2d — , 2013 WL 5502851 (E.D.N.Y. Sept. 30, 2013).  Richardson provides an example of a court finding a foreign sovereign official immune even in the absence of a suggestion of immunity from the Executive Branch.  Richardson, 2013 WL 4494975, at *16; see also Samantar, 560 U.S. at 311 (discussing that, under the common law, a district court “had authority to decide for itself whether all the requisites for such immunity existed” in the “absence of recognition of the immunity by the Department of State”) (citations and internal quotations omitted).  A court determination of official immunity can be a useful tool for FSIA defense counsel in cases against officials or in situations where discovery is sought from foreign sovereign officials.

The FSIA’s Recurring Burden Problem

The FSIA has a burden problem, and it is not going away.

The trouble began with loose language in the House Report at the time of the FSIA’s passage.  The Report characterized the FSIA’s burden-shifting regimen as follows:

Evidence must be produced to establish that a foreign state or one of its subdivisions, agencies or instrumentalities is the defendant in the suit and that the plaintiff’s claim relates to a public act of the foreign state – that is, an act not within the exceptions in sections 1605-1607.  Once the foreign state has produced such prima facie evidence of immunity, the burden of going forward would shift to the plaintiff to produce evidence establishing that the foreign state is not entitled to immunity.  The ultimate burden of proving immunity would rest with the foreign state.

H.R. Rep. No. 94-1487, at 17 (1976) (emphasis added).

The House Report’s description of the foreign state’s initial burden was inconsistent with the FSIA’s statutory scheme.  Indeed, a foreign state’s claim of immunity can rest on the contention that a plaintiff’s claim arises out of a private act.  For example, if a foreign state employee has a car accident after work, the foreign state is likely to claim that the employee was engaged in private, personal conduct that is outside the scope of employment – and therefore not within the scope of the FSIA’s tort exception to immunity.  See, e.g., Randolph v. Budget Rent-A-Car, 97 F.3d 319, 326-28 (9th Cir. 1996); Moran v. Kingdom of Saudi Arabia, 27 F.3d 169, 173-74 (5th Cir. 1994); see also 28 U.S.C. § 1605(a)(5).  Similarly, a foreign state may concede that a plaintiff’s commercial claim arises out of private conduct, but contend that there is no jurisdiction under the commercial activity exception because the actions are not attributable to the sovereign or because the specific requirements of section 1605(a)(2)’s clauses are not met.  See 28 U.S.C. § 1605(a)(2).  In other words, whether or not a claim arises out of a public act is not coextensive with a foreign state’s entitlement to immunity under the FSIA, and it thus makes no sense to require a foreign state to make a prima facie showing that a plaintiff’s claim arises out of a public act.

Nevertheless, the legislative history’s “public act” language found its way into important early FSIA cases.  See, e.g., Siderman de Blake v. Republic of Argentina, 965 F.2d 699, 708 n.9 (9th Cir. 1992); Gould, Inc. v. Pechiney Ugine Kuhlmann, 853 F.2d 445, 451 n.5 (6th Cir. 1988); Alberti v. Empresa Nicaraguense De La Carne, 705 F.2d 250, 256 (7th Cir. 1983).  And although the majority of courts now do not identify the public act requirement as part of a foreign sovereign’s initial burden, the problem persists in recent jurisprudence.  See, e.g., Terenkian v. Republic of Iraq, 694 F.3d 1122, 1131 (9th Cir. 2012); Malewicz v. City of Amsterdam, 517 F. Supp. 2d 322, 327 (D.D.C. 2007); see also O’Bryan v. Holy See, 549 F.3d 431 (6th Cir. 2008), opinion amended and superseded by O’Bryan v. Holy See, 556 F.3d 361 (6th Cir. 2009).

To the extent that a plaintiff or a court relies upon a public act requirement, defense counsel in FSIA cases would be well-served to argue that a foreign state need not make that initial showing to shift the burden of production to the plaintiff.  Such an argument should include three basic points.

First, as set forth above, the public act requirement is inconsistent with the statutory scheme since a foreign sovereign can be immune for private conduct.  See, e.g., Phaneuf v. Republic of Indonesia, 106 F.3d 302, 306 (9th Cir. 1997) (holding that requiring a foreign state “to prove a public act conflicts with the plain language of the statute: a foreign state is immune from suit unless one of the enumerated exceptions applies.  There is no exception for non-public acts.”)

Second, if the legislative history opened the door to a public act requirement, it was closed by the Supreme Court’s decision in Saudi Arabia v. Nelson, 507 U.S. 349 (1993).  The Nelson Court held that “a foreign state is presumptively immune from the jurisdiction of United States courts” under 28 U.S.C. section 1604.  Id. at 355.  Since a presumption “imposes on the party against whom it is directed the burden of going forward with evidence to rebut or meet the presumption,” Fed. R. Evid. 301, the presumption of immunity based upon sovereign status automatically shifts a burden of production to the plaintiff.  In fact, since Nelson was decided, courts have generally determined that the party claiming FSIA immunity bears only the initial burden of establishing prima facie that it satisfies the FSIA’s definition of a foreign state.  See Cargill Int’l S.A. v. M/T Pavel Dybenko, 991 F.2d 1012, 1016 (2d Cir. 1993) (relying on Nelson in describing burden-shifting regimen under FSIA with no public act requirement); Orient Mineral Co. v. Bank of China, 506 F.3d 980, 991-92 (10th Cir. 2007) (same); Good v. Aramco Serv. Co., 971 F. Supp. 254, 256 (S.D. Tex. 1997) (same); see also Mann v. Hanil Bank, 900 F. Supp. 1077, 1087 (E.D. Wis. 1995) (stating that the public act requirement “violated the . . . notion of presumptive immunity as articulated” by the Nelson Court).

Third, while there were early FSIA cases that followed the public act requirement, the overwhelming majority of circuit courts now describe the foreign sovereign’s initial burden as requiring only that a defendant make a prima facie showing that it qualifies as a foreign state under the FSIA.  See BP Chemicals Ltd., an English Corporation v. Jiangsu SOPO Corp., 420 F.3d 810, 816 (8th Cir. 2005);  Int’l Ins. Co. v. Caja Nacional De Ahorro y Seguro, 293 F.3d 392, 397 (7th Cir. 2002); Keller v. Central Bank of Nigeria, 277 F.3d 811, 815 (6th Cir. 2002); S & Davis Intern., Inc. v. The Republic of Yemen, 218 F.3d 1292, 1300 (11th Cir. 2000); Byrd v. Corporacion Forestal y Industrial de Olancho S.A., 182 F.3d 380, 388 (5th Cir. 1999); Fed. Ins. Co. v. Richard I. Rubin & Co., 12 F.3d 1270, 1285 (3d Cir. 1993).  While the D.C. Circuit left the issue open in 2004 (Kilburn v. Socialist People’s Libyan Arab Jamahiriya, 376 F.3d 1123, 1131 (D.C. Cir. 2004)), it now appears to follow the other circuits as well.  See Bell Helicopter Textron, Inc. v. Islamic Republic of Iran, — F.3d —, 2013 WL 5853916, at *6 (D.C. Cir. Nov. 1, 2013); see also Recent Developments: The D.C. Circuit’s Latest FSIA Decision.

The Ninth Circuit’s holding in Phaneuf that a foreign state is not required to make an initial showing of a “public act” makes the recent re-emergence of the public act requirement in Terenkian – a case that cited the Phaneuf precedent (694 F.3d at 1131) – all the more baffling.  Terenkian and other recent cases show that counsel must remain vigilant to ensure that courts do not require a sovereign to meet a burden that is contrary to the statutory scheme, in violation of Nelson, and inconsistent with the vast majority of circuit cases.

Litigation Comment: The FSIA’s Misrepresentation Exclusion

In a recent decision, the United States District Court for the Southern District of New York held that a claim for fraudulent conveyance met the requirements of the FSIA’s tort exception, 28 U.S.C. section 1605(a)(5).  See Peterson v. Islamic Republic of Iran, 10 CIV. 4518 KBF, 2013 WL 5538652, at *3 (S.D.N.Y. Oct. 8, 2013).  The ruling highlights the need for courts to consider the tort exception’s misrepresentation exclusion, 28 U.S.C. section 1605(a)(5)(B), with respect to any alleged claim arguably arising out of misrepresentation or deceit.

There is not much FSIA case law relating to the misrepresentation exclusion.  However, there is a great deal of authority under the Federal Tort Claims Act’s misrepresentation exclusion, 28 U.S.C. section 2680(h).  Since the FSIA’s misrepresentation exclusion was based upon section 2680(h), De Sanchez v. Banco Central de Nicaragua, 770 F.2d 1385, 1398 (5th Cir. 1985), defense counsel in FSIA cases must be familiar with the relevant FTCA precedent.

Although the case law cannot be adequately summarized here, there are several key issues to keep in mind:

•          The exclusion for actions based on misrepresentation or deceit “is broadly construed.”  Maryland Cas. Co. v. United States, No. C 05-02558 JSW, 2006 WL 563046, at *9 (N.D. Cal. Mar. 6, 2006).

•          The misrepresentation exclusion “encompasses claims arising out of negligent, as well as willful, misrepresentation.”  Janowsky v. United States, 913 F.2d 393, 396 (7th Cir. 1990).

•           The exclusion “bars not only claims of negligence in the misrepresentation, but in the conduct underlying the misrepresentation.”  Dorking Genetics v. United States, 76 F.3d 1261, 1264 (2d Cir. 1996).

•          The exclusion applies irrespective of whether the allegations are based upon affirmative misrepresentations or omissions.  JBP Acquisitions LP v. United States ex rel. FDIC, 224 F.3d 1260, 1266 (11th Cir. 2000).

•           The term “misrepresentation” is “broad enough to reach all types of claims for misrepresentation, whether those claims seek recovery for commercial injury, physical injury, or emotional injury.”  Najbar v. United States, 723 F. Supp. 2d 1132, 1137 (D. Minn. 2010), aff’d, 649 F.3d 868 (8th Cir. 2011).

•          In determining whether a plaintiff’s claims are barred by the misrepresentation exclusion, courts must look to the “gravamen” of the claim.  Deloria v. Veterans Admin., 927 F.2d 1009, 1012-13 (7th Cir. 1991).

“[T]he essence of an action for misrepresentation, whether negligent or intentional, is the communication of misinformation on which the recipient relies.”  Block v. Neal, 460 U.S. 289, 296 (1983).

It is not clear how the plaintiff’s fraudulent conveyance claim in the Peterson case – which is now on appeal – would fare under this analysis, though at least one court has found such claims to run afoul of the FTCA’s misrepresentation exclusion.  Yagman v. Whittlesey, 2:12-CV-08413-SVW-CW, 2012 WL 5831169, at *3 (C.D. Cal. Nov. 2, 2012).  The Peterson case nevertheless serves as a reminder that the misrepresentation exclusion should be fully litigated in FSIA cases, since it is an area with significant promise for foreign sovereign defendants.

The Second Circuit’s Apparent FSIA Authority

Agency is deeply enmeshed with FSIA jurisdiction.  Because jurisdiction over a foreign state generally requires an act by the state, the question of whether an exception to immunity applies will often turn on whether the conduct of an individual – for example, an official, employee or agent – is attributable to the sovereign.  Since jurisdiction is the key legal issue in FSIA cases, the need for clear rules relating to agency is paramount.  Cf. H.R.Rep. No. 94-1487, at 32 (discussing “the importance of developing a uniform body of law in this area [of foreign sovereign immunity]”).

Unfortunately, FSIA jurisprudence does not provide the needed clarity with respect to agency.  In this post, I will examine one of the agency problems in FSIA cases: whether an individual’s apparent authority to act on behalf of a foreign state is sufficient to give rise to subject matter jurisdiction under the commercial activity exception.  As will be shown below, the Second Circuit’s unclear precedent on the issue of apparent authority unnecessarily gives rise to confusion and lack of uniformity.  The issue should be litigated in the Second Circuit at the earliest opportunity.

The Ninth, Fourth and Fifth Circuits have all squarely held that apparent authority is insufficient to give rise to jurisdiction under the commercial activity exception.  See Phaneuf v. Republic of Indonesia, 106 F.3d 302, 308 (9th Cir. 1997) (“We hold that an agent must have acted with actual authority in order to invoke the commercial activity exception against a foreign state.”); Velasco v. The Gov’t of Indonesia, 370 F.3d 392, 400 (4th Cir. 2004) (“we concur with the position of the Ninth Circuit and hold that the commercial activity exception may be invoked against a foreign state only when its officials have actual authority”); Dale v. Colagiovanni, 443 F.3d 425, 429 (5th Cir. 2006) (“We agree with the Fourth and Ninth Circuits that an agent’s acts conducted with the apparent authority of the state is insufficient to trigger the commercial activity exception to FSIA.”) [Author’s Note: I represented the foreign sovereign in the Dale district court and appellate proceedings].

There are two basic reasons for the rule.  First, “[a]ll three clauses of the [commercial activity] exception require ‘a commercial activity of the foreign state.’”  Phaneuf, 106 F.3d at 307, quoting 28 U.S.C. § 1605(a)(2) (emphasis in original).  That language “clearly entails commercial activity in which the foreign state is engaged.”  Id.  “If the foreign state has not empowered its agent to act, the agent’s unauthorized act cannot be attributed to the foreign state; there is no ‘activity of the foreign state.’”  Id. at 308, quoting 28 U.S.C. § 1605(a)(2); see also Dale, 443 F.3d at 428.

Second, “courts analyzing the sovereign immunity of the United States have held consistently that the act of an agent beyond what he is legally empowered to do is not binding upon the government.”  Velasco, 370 F.3d at 399; see also Larson v. Domestic & Foreign Commerce Corp., 337 U.S. 682, 689 (1949); Fed. Crop Ins. Corp. v. Merrill, 332 U.S. 380, 383-84 (1947). Under basic principles of comity, similar principles apply to preclude foreign sovereigns from being drawn into litigation based upon the unauthorized acts of individuals.  See, e.g., Long v. The Tampico & Progresso, 16 F. 491, 495 (S.D.N.Y. 1883) (“By international comity, and that tacit agreement which constitutes the law of nations, every government accords to every other friendly power the same respect to its dignity and sovereignty . . . which it enjoys itself within its own dominions.”); see also Velasco, 370 F.3d at 399; Phaneuf, 106 F.3d at 308.

While there is broad agreement among three circuit courts, the Second Circuit has twice assumed that apparent authority would be sufficient to confer jurisdiction under the FSIA.  See Fidelity Bank, N.A. v. Gov’t of Antigua & Barbuda-Permanent Mission, 877 F.2d 189, 193-94 (2d Cir.1989); Reiss v. Societe Centrale du Groupe des Assurances Nationales, 235 F.3d 738, 748 (2d Cir. 2000).  However, because First Fidelity and Reiss did not address the issue directly, it is arguable that neither constitutes binding precedent.  See Estate of Magnin v. CIR, 184 F.3d 1074, 1077 (9th Cir. 1999) (“When a case assumes a point without discussion, the case does not bind future panels.”); Matter of Stegall, 865 F.2d 140, 142 (7th Cir. 1989) (“A point of law merely assumed in an opinion, not discussed, is not authoritative.”); Am. Portland Cement Alliance v. EPA, 101 F.3d 772, 776 (D.C. Cir. 1996) (“[J]urisdictional issues that were assumed but never expressly decided in prior opinions do not thereby become precedents.”); see also Phaneuf, 106 F.3d at 308 n.4 (stating that First Fidelity “assumed the appropriateness of invoking the commercial activity exception based on apparent authority” and “gave no analysis or explanation of its statements regarding apparent authority”); Dale, 443 F.3d at 429 (stating that only the Fourth and Ninth Circuits had previously “directly addressed the issue”).  Nevertheless, district courts in the Second Circuit have adopted the apparent authority approach, and courts outside the circuit have recognized a circuit split.  See Storr v. Nat’l Defence Sec. Council of Republic of Indonesia-Jakarta, 95 CIV. 9663 (AGS), 1997 WL 633405 (S.D.N.Y. Oct. 14, 1997) aff’d sub nom. Storr v. Nat’l Def. Sec. Council, 164 F.3d 619 (2d Cir. 1998); see also, e.g., EduMoz, LLC v. Republic of Mozambique, — F. Supp. 2d —, CV 13-02309 MMM CWX, 2013 WL 5040937, at *17 n.82 (C.D. Cal. Sept. 10, 2013).  And there have been efforts to harmonize the different opinions, including a recent decision in the Southern District of New York that would embed a public vs. private analysis into the equation – which would likely deepen rather than alleviate any confusion.   See Themis Capital, LLC v. Democratic Republic of Congo, 881 F. Supp. 2d 508, 522-26 (S.D.N.Y. 2012).

The issue of apparent authority is critical, because it can make all the difference on the question of FSIA immunity.  For example, the plaintiffs’ cases in Phaneuf, Velasco and Dale all fell apart once apparent authority was taken off the table.  See, e.g., Phaneuf v. Gov’t of Indonesia, 18 Fed. Appx. 648, 650 (9th Cir. 2001); Velasco, 370 F.3d at 400-02.  On such an important issue, a circuit split – or, in this case, an apparent circuit split – should be resolved as soon as possible.   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.”).

Recent Development: The D.C. Circuit’s Latest FSIA Decision

The D.C. Circuit’s decision last week in Bell Helicopter Textron, Inc.v. Islamic Republic of Iran, — F.3 —, 2013 WL 5853916 (D.C. Cir. Nov. 1, 2013), raises several issues of interest under the FSIA.

First, the affirmance of the district court’s grant of Iran’s motion to vacate the judgment — a motion that was filed nearly a year after the default judgment was entered against the sovereign — acknowledges a powerful tool in the arsenal of foreign states in FSIA cases.  It is significantly easier for foreign sovereigns to vacate default judgments in federal court than it is for non-sovereign corporations or individuals, and that could have important strategic implications in certain cases.

Second, Bell Helicopter is one of relatively few cases in which a plaintiff was found to have failed to meet the burden of production under the FSIA’s burden-shifting scheme.  To function properly, the FSIA’s burden-shifting regimen should require plaintiffs to meet a substantial burden — a burden of production “with bite.”  With the Ninth Circuit’s 2010 decision in Peterson (see Peterson v. Islamic Republic of Iran, 627 F.3d 1117, 1125 (9th Cir. 2010)) and now with Bell Helicopter, that trend may be gathering steam in FSIA cases.

Third, Bell Helicopter properly refused to recognize remote, attenuated or speculate effects as sufficient for purposes of the “direct effect” requirement of the commercial activity exception’s third clause.  The Court of Appeals’ decision is consistent with appellate courts’ recent resistance to accepting creative “direct effect” arguments from plaintiffs’ attorneys in FSIA cases.  Early in FSIA jurisprudence, Judge Leval recognized the danger of a liberal construction of the direct effect requirement:

[T]he direct/indirect distinction serves a meaningful end in relation to the statute’s objectives in foreign relations. The statute seeks a balance between the provision of a convenient forum for claimants aggrieved in commercial dealings with foreign states and the promotion of comity and harmony between the United States and other nations. To extend jurisdiction to claims brought by all persons indirectly injured by commercial acts of foreign states would subject them to the jurisdiction of United States courts in an enormously expanded number of cases (including, no doubt, many that would eventually be dismissed for failure to state a cause of action). Given the proclivity of the United States population to devise lawsuits for every contretemps, the harassment of foreign sovereigns by exposure to the jurisdiction of United States courts would no doubt be considerable. Thus the statutory clause limiting jurisdiction over foreign sovereignties to instances of “direct” effect serves a valuable goal of foreign relations and should not be nullified by freehanded court interpretation.

Colonial Bank v. Compagnie Generale Mar. et Financiere, 645 F. Supp. 1457, 1465 (S.D.N.Y. 1986) (citation omitted).  Judge Leval’s words hold true nearly thirty years later, and it is good to see that federal courts continue to be cognizant of that danger today.

The Ninth Circuit’s Substantial Service Error

This blog dedicated to FSIA jurisprudence begins, fittingly, by addressing the issue that confronts parties at the start of FSIA litigation: service of process.

On December 10, 2010, in Peterson v. Islamic Republic of Iran, 627 F.3d 1117 (9th Cir. 2010), the Ninth Circuit created a circuit split with respect to a significant issue relating to service of process under the FSIA.  The ruling has attracted little attention or commentary.  But the Peterson court’s decision was in error, and it should one day be challenged.

The basic rules relating to service of process under the FSIA are well known.   Service upon a foreign state is governed by 28 U.S.C. section 1608(a), whereas the requirements for service upon a foreign state agency or instrumentality are set forth in section 1608(b).  Until the Ninth Circuit’s decision in Peterson, the law was unambiguous: a plaintiff had to strictly comply with section 1608(a)’s requirements for service upon a foreign state.  Seee.g.Magness v. Russian Fed’n, 247 F.3d 609, 611 (5th Cir. 2001) (“strict compliance”); Transaero, Inc. v. La Fuerza Aerea Boliviana, 30 F.3d 148, 153-54 (D.C. Cir. 1994) (“strict adherence”); Gray v. Permanent Mission of People’s Republic of Congo to United Nations, 443 F. Supp. 816, 821 (S.D.N.Y. 1978), aff’d, 580 F.2d 1044 (2d Cir. 1978) (“strict compliance”); Alberti v. Empresa Nicaraguense De La Carne, 705 F.2d 250, 253 (7th Cir. 1983) (strict compliance); see also O’Bryan v. Holy See, 490 F. Supp. 2d 826, 831 (W.D. Ky. 2005) (“Service of process on a foreign state must be effected in strict compliance with the provisions of section 1608(a).”).  By contrast, with regard to service upon an agency or instrumentality, courts agreed that substantial compliance was sufficient.  Seee.g.Magness, 247 F.3d at 616 (“substantial compliance with section 1608(b) is sufficient so long as the defendants have actual notice of the suit”); see also Semtek Int’l Inc. v. Info. Satellite Sys., CIV.A. 09-10183-RWZ, 2012 WL 831475 (D. Mass. Mar. 9, 2012) (“While service on a ‘foreign state’ under FSIA § 1608(a) must be accomplished in accordance with standard of ‘strict compliance,’ service on an agency or instrumentality of a foreign state under § 1608(b) requires only ‘substantial compliance.'”).

As courts have found – and as I have previously successfully argued in FSIA litigation – there are weighty reasons underlying the more careful treatment of foreign states with respect to service of process.  Most importantly, application of a strict compliance standard comports with the statutory scheme.   For example, in the absence of a special arrangement or an international convention, section 1608(a) requires service upon the “head of foreign affairs of the foreign state concerned” – a requirement that is absent in Section 1608(b).  See 28 U.S.C. § 1608(a)(3); compare 28 U.S.C. § 1608(b).  In the event service by mail upon the foreign minister fails, service is permitted only through diplomatic channels – a procedure also absent in Section 1608(b).  See 28 U.S.C. § 1608(a)(4); compare 28 U.S.C. § 1608(b).  The adoption of high-level procedures in Section 1608(a)’s service provisions reflects Congress’s determination that service upon a foreign state has greater political and diplomatic significance, requiring a more exacting standard of compliance.  See Note, Service of Process Under the Foreign Sovereign Immunities Act of 1976: The Arguments for Exclusivity, 14 Cornell Int’l L. J. 357, 362 (1981) (“The utilization of diplomatic service when other methods fail [under Section 1608(a)], instead of court-ordered service [as permitted under Section 1608(b)], indicates an unwillingness on Congress’s part to entrust the courts with power to deal with foreign states and subdivisions.”).

The same holds true with Section 1608(a)’s notice of suit requirement, which is absent from section 1608(b).  The notice of suit was a “new document” created by Congress, unique to service upon foreign sovereigns and designed “to minimize potential irritants to relations with foreign states.”  H.R. Rep. No. 94-1487, at 11.  The notice of suit’s requirements are separate and distinct from notice requirements imposed by other rules.  See 28 U.S.C. § 1608(a); 22 C.F.R. § 93.2 (detailing notice of suit requirements).  The notice of suit reflects the added importance attached to service on foreign states and the need to minimize irritants to foreign relations, which both require service in accordance with the statute’s provisions.  See Arthur L. George, A Practical and Theoretical Analysis of Service of Process under the Foreign Sovereign Immunities Act, 19 Int’l Law. 49, 75 & n.177 (1985) (notice of suit required under Section 1608(a) demonstrates Congress’s “sensitivity to the need for greater delicacy in suits against foreign states themselves as opposed to their agencies and instrumentalities”).

In addition, the legislative history of Section 1608(a) – unlike the legislative history of Section 1608(b) – states that the Section 1608(a) service provisions provide the “exclusive procedures” for service upon a foreign state.  H.R. Rep. No. 94-1487, at 24; cf. H.R. Rep. No. 94-1487, at 25 (no “exclusive procedures” language in discussion of section 1608(b) provisions).  The “exclusive procedures” language “simply does not support a finding that anything less than strict compliance will suffice under the law.”  Magness, 247 F.3d at 615; see also Finamar Investors, 889 F. Supp. at 117 (same).

By contrast, section 1608(b) contains relatively informal service procedures that are akin to service provisions for foreign individuals and corporations under Rules 4(f) and (h)(2) of the Federal Rules of Civil Procedure rather than to service upon foreign states.  See, e.g., 28 U.S.C. § 1608(b)(3)(C) (permitting service “as directed by order of the court consistent with the law of the place where service is to be made”); see also George, supra, at 55 (stating that the service options under section 1608(b) “are more numerous and offer more flexibility than those of section 1608(a).”).  Indeed, section 1608(b)(3) explicitly allows a range of service options “if reasonably calculated to give actual notice.”  As several courts have found, the “actual notice” language in section 1608(b)(3) shows “that Congress was there concerned with substance rather than form; but the analogous subsection of Section 1608(a) says nothing about actual notice.”  Transaero, Inc., 30 F.3d at 154; see also Magness, 247 F.3d at 616 (same); Finamar Investors, 889 F. Supp. at 117 (same).

The distinctions in the service provisions are “neatly tailored to the differences between ‘foreign states’ and ‘agencies or instrumentalities.’  The latter, typically international commercial enterprises, often possess a sophisticated knowledge of the United States’ legal system that other organs of foreign governments may lack . . . .”  Transaero, Inc., 30 F.3d at 154; see also H.R. Rep. No. 94-1487, at 25 (foreign states may be “unfamiliar with U.S. law or procedures”).  Given Congress’s adoption of procedures to ensure service upon a foreign state which would both “minimize potential irritants to relations with foreign states” and take into consideration a foreign state’s lack of sophistication (H.R. Rep. No. 94-1487, at 11), leniency in section 1608(a) cases “would disorder the statutory scheme.”  Transaero, Inc., 30 F.3d at 154.  Accordingly, in keeping with the language, structure and legislative history of the FSIA, service upon foreign states requires strict compliance.

The Peterson court failed to address any of these issues.  Even worse, there is no indication that the court was ever advised of the relevant case law or legislative history.  Iran did not appear in the Peterson case, and neither the third-party’s answering brief nor the United States’ amicus brief addressed the standard applicable to service under section 1608(a).

Deprived of the benefit of adversarial briefing on the standard applicable to service of process, the Peterson court relied on Straub v. A P Green, Inc., 38 F.3d 448 (9th Cir. 1994), which had stated in a section 1608(b) case that “[w]e formally adopt a substantial compliance test for the FSIA.”  Id. at 453.  Citing Straub, Peterson stated that the “Ninth Circuit has adopted a substantial compliance test for the FSIA’s notice requirements; a plaintiff’s failure to properly serve a foreign state defendant will not result in dismissal if the plaintiff substantially complied with the FSIA’s notice requirements and the defendant had actual notice.”  But Straub was a case under section 1608(b), and therefore is not precedent on the standard applicable under section 1608(a).  See Straub, 38 F.3d at 451 (holding that defendant was “an instrumentality of a foreign state”); id. at 452-53 (addressing solely whether service had been effected under sections 1608(b)(2) and (b)(3)).  This was, in fact, the oral ruling of the United States District Court for the District of Oregon in John V. Doe v. Holy See (a case in which I represented the foreign sovereign defendant), where the court adopted a strict compliance standard notwithstanding the Ninth Circuit’s decision in Straub: “I believe that Straub intends to be a holding about the appropriate standard under subsection (b) or, more particularly, under subsection (b)(3), and that in the broader language in one sentence of that opinion isn’t an intention by the Ninth Circuit to decide a very important issue that wasn’t before the court in any way.”  Oral Transcript of February 5, 2004 Hearing, at 30 (on file with author).

In the aftermath of Peterson, it appears that district courts in the Ninth Circuit may no longer believe they have the flexibility to adopt a strict compliance standard under section 1608(a).  Cf. FSM Dev. Bank v. Arthur, 11-CV-05494-LHK, 2012 WL 1438834, at *4 (N.D. Cal. Apr. 25, 2012) (“Under the Ninth Circuit’s ‘substantial compliance’ test, which is binding on this Court, the pivotal factor is whether the defendant receives actual notice and was not prejudiced by the lack of compliance with the FSIA”) (emphasis in original).  That is a shame, because an important development in FSIA jurisprudence – and the creation of a circuit split – should be based upon reasoned legal analysis rather than a court error arising from the unusual non-adversarial posture of the relevant appellate proceedings.

If and when the issue presents itself again in the Ninth Circuit, Peterson should be challenged.  And if the challenge is carefully done, Peterson could be – and should be – reversed.