OBB v. Sachs: A Smart Result

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

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.

Recent Development: TJGEM LLC v. Republic of Ghana

In the recent case of TJGEM LLC v. Republic of Ghana, — F. Supp. 2d —, CV 13-382 (BAH), 2013 WL 6857988 (D.D.C. Dec. 31, 2013), District Judge Beryl Howell applied three important rules that are often implicated in cases under the FSIA’s commercial activity exception.

First, the district court emphasized that the commercial activity exception does not apply where the alleged commercial activity is unrelated to a plaintiff’s claims.  Id. at *5; see also, e.g., Transatlantic Shiffahrtskontor GmbH v. Shanghai Foreign Trade Corp., 204 F.3d 384, 390 (2d Cir. 2000) (holding that the term “‘based upon’ [under the commercial activity exception] requires a degree of closeness between the acts giving rise to the cause of action and those needed to establish jurisdiction that is considerably greater than common law causation requirements”).

Second, the court followed Phaneuf v. Republic of Indonesia, 106 F.3d 302, 308 (9th Cir.1997), in holding that apparent authority is insufficient to confer jurisdiction over a foreign state under the commercial activity exception.  TJGEM LLC, 2013 WL 6857988, at *6; see also The Second Circuit’s Apparent FSIA Authority.

Third, the district court reaffirmed that an alleged financial loss to an American individual or firm does not satisfy the “direct effect” requirement of section 1605(a)(2)’s third clause.  TJGEM LLC, 2013 WL 6857988, at *6; see also Recent Development: The D.C. Circuit’s Latest FSIA Decision.

District Judge Howell’s decision is interesting with respect to another issue that I have previously addressed on this blog.  The district court held that to “survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1), the plaintiff must establish the court’s jurisdiction over the subject matter by a preponderance of the evidence.”  TJGEM LLC, 2013 WL 6857988, at *4.  The TJGEM case is therefore the latest opinion to indicate that traditional subject matter jurisdiction procedural rules apply with respect to a plaintiff’s burden under the FSIA. See Peterson v. Islamic Republic Of Iran, 627 F.3d 1117, 1125 (9th Cir. 2010) (“It must fall to the plaintiff to prove that immunity does not exist.”); see also Am. Telecom Co., L.L.C. v. Republic of Lebanon, 501 F.3d 534, 537 (6th Cir. 2007).

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.

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.