An Unprofitable Test Under the FSIA’s Commercial Activity Exception

The relevance of profit motive under the FSIA’s commercial activity exception is the subject of continued confusion.  The Second Circuit claims that the Seventh Circuit mischaracterizes its “profit” precedent (see, e.g., NML Capital, Ltd. v. Republic of Argentina, 680 F.3d 254, 259 (2d Cir. 2012)), and circuit courts have abrogated district court opinions addressing profit motive.  See Intercontinental Dictionary Series v. De Gruyter, 822 F. Supp. 662 (C.D. Cal. 1993), abrogated by Sun v. Taiwan, 201 F.3d 1105 (9th Cir. 2000); see also Malewicz v. City of Amsterdam, 362 F. Supp. 2d 298, 314 n.5 (D.D.C. 2005).  As one commentator recently stated, “insofar as ‘profit’ is concerned, the legislative instructions are ambiguous and misleading, while the case law appears unsettled at best.”  Yang, State Immunity in International Law 92 (Cambridge Univ. Press, 2012).  There is, in short, a distinct need for clarity, and this post seeks to explain the proper use of profit motive under section 1605(a)(2).

The FSIA Forecloses Subjective Profit Inquiries.  Although some litigants continue to argue that a foreign sovereign’s subjective profit motive remains relevant under the commercial activity exception, there is no doubt that the FSIA precludes such an inquiry.  Section 1603(d) specifically commands that “[t]he commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose.”  28 U.S.C. § 1603(d).  Consistent with the statute’s plain language, the Supreme Court has unambiguously held that the “question is not whether the foreign government is acting with a profit motive.”   Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 614 (1992).  Notwithstanding litigants’ occasional attempts to invoke a sovereign’s motive, any argument based upon a sovereign’s subjective profit motive (or lack thereof) has long been rejected by the courts.  See, e.g., NML Capital, Ltd., 680 F.3d at 260 (“The [sovereign’s] lack of a profit motive is simply irrelevant.”); Beg v. Islamic Republic of Pakistan, 353 F.3d 1323, 1327 n.1 (11th Cir. 2003) (“We decline to examine the government’s motives in determining what is commercial activity.”); see also, e.g., Rush-Presbyterian-St. Luke’s Med. Ctr. v. Hellenic Republic, 877 F.2d 574, 581 (7th Cir. 1989); Joseph v. Office of Consulate Gen. of Nigeria, 830 F.2d 1018, 1024 (9th Cir. 1987).

An Objective Profit Inquiry Can be Used to Determine if an Activity is Commercial. In the section-by-section analysis addressing section 1603(d), the FSIA’s legislative history stated that “if an activity is customarily carried on for profit, its commercial nature could readily be assumed.”  H.R. Rep. No. 94-1487, at 16 (1976) (emphasis added).  As stated by the Second Circuit, “where a private party would customarily engage in an activity for profit, there can be little question that that private party is engaging in commercial activity.  When a foreign sovereign engages in the same conduct, that activity retains its commercial nature, even though the foreign sovereign acts without a profit motive.”  Weltover, Inc. v. Republic of Argentina, 941 F.2d 145, 150 (2d Cir. 1991); see also NML Capital, Ltd., 680 F.3d at 259-60; EM Ltd. v. Republic of Argentina, 389 F. App’x 38, 44 (2d Cir. 2010); Sun, 201 F.3d at 1108; MCI Telecommunications Corp. v. Alhadhood, 82 F.3d 658, 663 (5th Cir. 1996); United States v. Moats, 961 F.2d 1198, 1205 (5th Cir. 1992); Gould, Inc. v. Pechiney Ugine Kuhlmann, 853 F.2d 445, 452 (6th Cir. 1988).  The inquiry is not a subjective one directed at the foreign sovereign defendant, but instead an objective one based upon a theoretical “private person” engaged in the same conduct.

However, as some courts have pointed out, there are activities carried on “for profit” that should not be construed commercial activities under the FSIA:

Although trafficking in persons and property captured by sovereign entities solely for profit is certainly not unknown within the international community, this Court is of the opinion that state-supported kidnapping, hostage-taking, and similar universally criminal ventures were simply not the sorts of proprietary enterprises within the contemplation of Congress when it enacted the “commercial activity” exception to FSIA in conferring jurisdiction upon federal courts to entertain cases against foreign sovereigns.

Cicippio v. Islamic Republic of Iran, CIV. A. 92-2300, 1993 WL 730748, at *2 (D.D.C. Mar. 13, 1993) aff’d, 30 F.3d 164 (D.C. Cir. 1994); see also Mwani v. bin Laden, 417 F.3d 1, 16-17 (D.C. Cir. 2005).  The scenarios set forth in the Cicippio opinion – and other conceivable situations where the nature of a profitable activity demonstrates that it is not “commercial” – suggest potential limits of any objective profit inquiry.

Courts are Divided as to Whether an Objective Profit Inquiry Can be Used to Determine that an Activity is Not Commercial.  Relying on the same language from the FSIA’s legislative history, several courts have concluded that an activity that is customarily not undertaken for profit by private persons should be deemed noncommercial under section 1605(a)(2).  See, e.g., Amorrortu v. Republic of Peru, 570 F. Supp. 2d 916, 923 (S.D. Tex. 2008) aff’d, 325 F. App’x 400 (5th Cir. 2009) (“confiscation and expropriation are not commercial actions, for they are not actions of a nature that a private person would, or could, engage in for profit”); see also Intercontinental Dictionary Series, 822 F. Supp. at 676 (“the compilation of a linguistic treatise spanning decades and the lifetimes of many scholars is not of the type an individual would customarily carry on for profit”) (quotations and citations omitted); Aschenbrenner v. Conseil Reg’l de Haute-Normandie, 851 F. Supp. 580, 584-85 (S.D.N.Y. 1994).  Nevertheless, as noted above, such decisions have generally not fared well – the Ninth Circuit abrogated Intercontinental Dictionary Series in Sun, and the Aschenbrenner court’s conclusion is questionable under recent Second Circuit precedent.  See NML Capital, Ltd., 680 F.3d at 259.  Moreover, a number of courts have rejected the proposition that an activity that would customarily not be undertaken by a private person for profit should be deemed noncommercial under section 1605(a)(2).  See, e.g., Siderman de Blake v. Republic of Argentina, 965 F.2d 699, 708-09 (9th Cir. 1992) (“Though activities that customarily are carried on for profit are certainly commercial, an activity need not be motivated by profit to be commercial”); Berdakin v. Consulado de la Republica de El Salvador, 912 F. Supp. 458, 462 (C.D. Cal. 1995) (“A transaction or act is commercial if it is of the type an individual would customarily carry on for profit, but although the presence of a profit motive may be sufficient to render activity commercial, it is not necessary.”) (quotations and citations omitted).  As stated by the Eleventh Circuit in Guevara:

[S]aying that all for-profit activities are commercial is not the same thing as saying that all commercial activities are for profit.  The premise that all A is B does not logically compel the conclusion that all B is A, unless A and B are the same thing. There is no reason in the FSIA to believe that commercial activity means the same thing, and no more than, for-profit activity.

 . . . .

In fact, when private individuals purchase goods and services, they rarely do so with the intent to profit from their purchase. (Think of consumers at grocery stores and gas stations.) Peru’s [proposed] test would exclude most cases in which the government acts as a purchaser, rather than a vendor, of goods and services because most purchases made by private persons are not made with the intent to resell for profit.  Nothing in the restrictive theory of sovereign immunity turns on whether the government is a buyer or a seller.

Guevara v. Republic of Peru, 468 F.3d 1289, 1303 (11th Cir. 2006).

Based upon such reasoning, courts have declined to use an objective profit test to determine that a particular activity is not commercial.

The Unprofitable “Profit” Test.  Although the case law in this area is generally deemed confusing and inconsistent, the foregoing precedent in fact suggests relatively clear guidelines with respect to a “profit” inquiry under section 1605(a)(2).  Any attempt to examine profit to determine the commercial nature of an activity should acknowledge the following limitations:

1.         The foreign sovereign’s subjective profit motive is off limits, and will continue to be unless and until Congress amends section 1603(d).

2.         The FSIA does not define commercial activity in terms of profit, instead requiring an examination of the “nature” of the conduct in question.  28 U.S.C. § 1603(d).  In light of section 1603(d), the Supreme Court has specifically held that “the issue is whether the particular actions that the foreign state performs (whatever the motive behind them) are the type of actions by which a private party engages in trade and traffic or commerce.”  Weltover, 504 U.S. at 614.  In addition, the rationale of the Cicippio decision demonstrates that there are limits to an objective profit inquiry.  As a result, any determination of whether an activity is commercial cannot turn solely on an objective profit inquiry.  Courts cannot, in other words, replace the statutory inquiry with a strict objective “profit” test.  At best, under section 1603(d) and Weltover, the objective profit inquiry can be a factor in determining that an activity is commercial in nature.

3.        The fact that an activity is customarily not undertaken for profit should be considered as a factor in determining that the activity is noncommercial.  Such an inquiry is not foreclosed by the Guevara court’s reasoning; the problems identified by the Eleventh Circuit and other courts only appear under a strict objective “no profit = noncommercial” test.  If courts can consider a profit motive from the perspective of an objective private person to determine that conduct is commercial, they should be able to consider the objective lack of a profit motive as a factor in determining that activity is noncommercial as well.

In the final analysis, much of the confusion relating to profit inquiries under section 1605(a)(2) stems from loose language in court opinions and in the legislative history.  If courts make clear that they are undertaking an objective inquiry that considers profit motive solely as a factor, a profit inquiry could become a useful tool in commercial activity jurisprudence.

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