Recent Development: Smith Rocke Ltd. v. República Bolivariana de Venezuela

On January 27, 2014, District Judge Schofield granted Venezuela’s motion to dismiss a lawsuit arising out of the expropriation of a Venezuelan company and its assets.  See Smith Rocke Ltd. v. Republica Boliviariana de Venezuela, 12 CV. 7316 LGS, 2014 WL 288705 (S.D.N.Y. Jan. 27, 2014).  The district court’s opinion addressed several important issues under the FSIA:

Sovereign Activity: The court concluded that the commercial activity exception did not apply because the case was based upon a sovereign act – the expropriation a Venezuelan company – rather than commercial activity.  Smith Rocke Ltd., 2014 WL 288705, at *4.  In my view, foreign states do not sufficiently rely upon the “sovereign activity” defense in FSIA cases.  There is a tendency for attorneys to assume that the commercial activity exception applies if the case involves commercial conduct or a breach of contract.  However, even in the context of a commercial dispute, defense counsel in FSIA cases must carefully examine the allegations and determine whether the requirements of section 1605(a)(2) are met.  That includes an analysis of whether the sovereign activity defense applies.  See, e.g., Braka v. Bancomer, S.N.C., 762 F.2d 222, 225 (2d Cir. 1985) (no jurisdiction under commercial activity exception where contractual breach caused by the exercise of sovereign power); MOL, Inc. v. Peoples Republic of Bangladesh, 736 F.2d 1326, 1328 (9th Cir. 1984) (no jurisdiction under commercial activity exception where licensing agreement and its alleged breach concerned Bangladesh’s sovereign right to regulate its natural resources).

Gravamen Rule: In determining that the commercial activity exception did not apply, the district court held that only the expropriation exception could confer jurisdiction because the “gravamen here is that Defendants engaged in the unlawful taking of [the property] . . . without compensation, in violation of international law.”  Smith Rocke Ltd., 2014 WL 288705, at *4.  Judge Schofield’s reliance on the gravamen rule was correct, and highlights yet another critical issue for a sovereign challenging jurisdiction under the FSIA.  Cf. Saudi Arabia v. Nelson, 507 U.S. 349, 363 (1993); O’Bryan v. Holy See, 556 F.3d 361, 380 (6th Cir. 2009); Garb v. Republic of Poland, 440 F.3d 579, 588 (2d Cir. 2006); Randolph v. Budget Rent-A-Car, 97 F.3d 319, 324 (9th Cir. 1996); de Sanchez v. Banco Cent. de Nicaragua, 770 F.2d 1385, 1398 (5th Cir. 1985).

Violation of International Law: In holding that the expropriation exception did not confer jurisdiction, Judge Schofield applied the “widely accepted” rule “that the taking of property by a state from its own nationals does not violate international law.”  Smith Rocke Ltd., 2014 WL 288705, at *7; see also, e.g., Republic of Austria v. Altmann, 541 U.S. 677, 713 (2004) (Breyer, J., joined by Souter, J., concurring).  The court also made it clear that what counts is the nationality of the property owner at the time of the seizure itself.  Id. at *7; cf. Siderman de Blake v. Republic of Argentina, 965 F.2d 699, 704, 711 (9th Cir. 1992) (plaintiff who became United States citizen prior to the taking could invoke the expropriation exception).

Capacity: The capacity issue under the FSIA – which I have addressed before – is likely to become increasingly important in the post-Samantar era.  In Smith Rocke Ltd., the district court dismissed the individual defendants because they were sued in their official capacity; as the court noted, “where an official is sued in his official capacity, and where the action is clearly against the foreign state itself as the real party in interest, the case may be treated as an action ‘against the foreign state itself, as the state is the real party in interest.’”  Smith Rocke Ltd., 2014 WL 288705, at *11, quoting Samantar v. Yousef, 560 U.S. 305, 325 (2010).

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