The FSIA, Agency and Agents: Avoiding a Basic Pitfall

On appeal in the Ninth Circuit in Sachs v. Republic of Austria, et al., Case No. 11-15458, the Austrian instrumentality OBB Personenverkehr AG (“OBB”) argued that an entity’s conduct may be attributed to a foreign state under the FSIA only if that entity meets the “agency or instrumentality” requirements set forth in 28 U.S.C. section 1603(b).  OBB contended that because the entity in question did “not fall within the agency definition” set forth in section 1603(b), the “acts of [the entity] cannot be imputed to OBB for purposes of Section 1605(a)(2).”  OBB’s Supplemental Letter, dated Apr. 8, 2013, Docket No. 52, at 2.  Because OBB’s erroneous argument has been made by litigants in FSIA cases before (see Gates v. Victor Fine Foods, 54 F.3d 1457, 1460 n.1 (9th Cir. 1995)), this post examines the issue more closely.

Under the FSIA, the term “‘foreign state,’ except as used in section 1608 . . . , includes a political subdivision of a foreign state or an agency or instrumentality of a foreign state as defined in subsection (b).”  28 U.S.C. § 1603(a) (emphasis added).  An “agency or instrumentality” is defined as any entity which (1) “is a separate legal person, corporate or other,” (2) “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,” and (3) “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.”  28 U.S.C. § 1603(b).   The term “agency or instrumentality” was intended to include entities such as “state trading corporation, a mining enterprise, a transport organization such as a shipping line or airline, a steel company, a central bank, an export association, a governmental procurement agency or a department or ministry which acts and is suable in its own name.”  H.R. Rep. No. 94-1487, at 16 (1976).

Despite section 1603(a)’s sole reference to section 1608 – the FSIA’s service provision – the statutory scheme reflects different treatment of agencies or instrumentalities that extends well beyond service of process.  For example, it is easier to establish jurisdiction under the international takings exception over an agency or instrumentality than it is over a foreign sovereign itself.  See 28 U.S.C. § 1605(a)(3).  The FSIA precludes recovery of punitive damages against a foreign sovereign, but not against an agency or instrumentality.  28 U.S.C. § 1606.  And it is easier to attach or execute on the property of an agency or instrumentality than it is on the property of a foreign sovereign.   Compare 28 U.S.C. § 1610(a) with § 1610(b).

As a result, the determination of whether an entity qualifies as a foreign sovereign or as an agency or instrumentality is an important one.  However, contrary to OBB’s argument, the determination has nothing to do with the issue of attribution – i.e., common law “agency” – under the FSIA.   Section 1603(b) was intended to delineate the entities entitled to the protections of the FSIA, but nothing suggests that the provision was meant to address attribution for purposes of jurisdiction or liability.

In contrast to the requirements of section 1603(b), “agency” for purposes of attribution is governed by common law principles as informed by international law and articulated congressional policies.  First Nat. City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 623 (1983).  For example, with respect to separate juridical entities, courts examine whether an entity is under the “day-to-day” control of a foreign sovereign.  See, e.g., Dale v. Colagiovanni, 443 F.3d 425, 429 (5th Cir. 2006).  In addition, an actual authority agency inquiry will typically turn on foreign law, since that will dictate whether the putative agent was in fact authorized to engage in the conduct alleged.  See, e.g., Velasco v. Gov’t Of Indonesia, 370 F.3d 392, 401-02 (4th Cir. 2004); see also Fed. R. Civ. P. 44.1.  And apparent authority is not permitted as an agency theory under the FSIA, for all of the reasons I have previously discussed.  Plainly, all of these issues are far afield from the statutory inquiry set forth in section 1603(b).

OBB’s erroneous argument may have arisen from use of the term “agency” in the FSIA, which at first blush may appear to refer to common law “agency” principles.  See Hester Int’l Corp. v. Fed. Republic of Nigeria, 879 F.2d 170, 176 n.5 (5th Cir. 1989) (“The use of the single term ‘agency’ for two purposes . . . may cause some confusion.”).    However, as the Fifth Circuit explained long ago:

The FSIA uses [the term] to determine whether an “agency” of the state may potentially qualify for foreign sovereign immunity itself under the FSIA. This is a completely different question from that which we must address here: whether or not the [entity] enjoyed an alter ego relationship with the [foreign sovereign] so that it could bind [the sovereign] to a contract. Although such an alter ego relationship may be described in terms of “agency,” it is a completely different inquiry than that which might be conducted under § 1603.

Hester Int’l Corp. v. Fed. Republic of Nigeria, 879 F.2d 170, 176 (5th Cir. 1989). 

The Ninth Circuit followed Hester in Gates, 54 F.3d at 1460 n.1.  The Ninth Circuit recently reaffirmed Gates when it strongly rejected OBB’s argument in Sachs:

The plain text of the FSIA does not support OBB’s proposed framework for determining whether [the entity in question] is an agent of OBB. Section 1603(b) defines what type of entity can be considered a foreign state for purposes of claiming sovereign immunity. If an entity cannot show that it meets that definition then it is not entitled to sovereign immunity. Whether an entity meets the definition of an “agency or instrumentality of a foreign state” to claim immunity is a completely different question from whether the acts of an agent can be imputed to a foreign state for the purpose of applying the commercial-activity exception.

Sachs v. Republic of Austria, 737 F.3d 584, 595 (9th Cir. 2013) (en banc) (citations and quotations omitted).

Because the term “agency” is used both under section 1603(b) and under the common law, the erroneous argument made by OBB in the Sachs appeal is capable of repetition.  However, FSIA practitioners should be aware of the distinction, and thereby avoid this basic pitfall in FSIA law.

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).

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.”).