Monthly Archives: September 2015

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.]