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The Cyberattack Exception to the Foreign Sovereign Immunities Act: A Proposal to Strip Sovereign Immunity When Foreign States Conduct Cyberattacks Against Individuals and Entities in the United States

February 19, 2017 By in Attachment and Execution, Cyberattack Exception, Default Judgment, Discovery, FSIA, Head-of-State Immunity, Officials, Terrorism Exception, Tort Exception Tags: , , , , , , , , , , , , , , Leave a comment

“The political branches may ultimately deem it advisable to permit suits against foreign sovereigns who, without setting foot on American soil, use technology to commit torts against persons located here.  But if the FSIA is to be altered, that is a function for the same body that adopted it.”

Doe v. Fed. Democratic Republic of Ethiopia, 189 F. Supp. 3d 6, 25 (D.D.C. 2016) (citations, quotations and brackets omitted).

Background

Five days ago, while I was reading about the Russian hacking scandal and the resulting damage to America’s public institutions, a new thought occurred to me: there should be a cyberattack exception to the Foreign Sovereign Immunities Act.

I checked to see if anyone had made the proposal before.  It appears to have been mentioned once, nearly four years ago, in an article about China’s cyber activities by Daniel Blumenthal in the Foreign Policy magazine.[1]  However, Mr. Blumenthal only devoted two sentences to the idea, which (to my knowledge) was never further developed.[2]

Other attorneys have occasionally argued (both in and out of court) that cyberattacks falls within the FSIA’s existing tort exception, 28 U.S.C. section 1605(a)(5).[3]  One attorney even tried to provide a “roadmap to this new line of litigation” in a recent law review article.[4]  However, I litigated the tort exception in district and appellate courts for well over a decade, and it creates only roadblocks to civil suits for cyberattacks. 

In particular, the tort exception’s situs requirement[5] — as well as the discretionary function and misrepresentation exclusions limiting the exception — make any lawsuit against a foreign sovereign for a cyberattack under section 1605(a)(5) very difficult and expensive.[6]  Indeed, a recent dismissal under the FSIA in a cyber case in the United States District Court for the District of Columbia – where the court dismissed a Wiretap Act claim under the tort exception’s situs requirement – only highlights the challenges of such litigation.[7]  In addition, even assuming that a cyber suit falls under the tort exception to the FSIA, a judgment would be extraordinarily difficult to collect upon given the FSIA’s strong immunity provisions related to attachment and execution.[8]

The result is that foreign states can perpetrate cyberattacks with relative impunity in the United States.  Even worse, those harmed by such attacks – often individuals or corporations who are innocent of any misconduct – have no effective means of redress against the offending foreign sovereign (or its officials).

Does this make sense?  Why should countries like Russia and North Korea be immune from suit for illegal conduct targeting computer systems in the United States?  Why shouldn’t foreign states that attack individuals, corporations or institutions over the Internet be liable for the consequences of their misdeeds? 

The United States Supreme Court has emphasized that “foreign sovereign immunity is a matter of grace and comity on the part of the United States, and not a restriction imposed by the Constitution.”[9]  As a matter of “grace and comity,” there is nothing in the history of foreign sovereign immunity that supports a grant of immunity where a foreign state targets a specific individual or entity for attack on the territory of the United States.[10]

The Foreign Sovereign Immunities Act of 1976 is over forty years old.  The time has come to bring the FSIA into the 21st century to address a very real and growing threat.[11]  A new cyberattack exception to the FSIA (28 U.S.C. § 1605C) would remove immunity for foreign states who attack individuals and entities in the United States, and would finally provide those harmed with a means of redress.  It should be drafted and passed forthwith.

Key Components

There are several key components essential to ensure an effective cyberattack exception to the FSIA:

Jurisdictional Provision: The cyberattack exception should have a jurisdictional provision modeled after the tort and the terrorism exceptions of the FSIA, but which is nevertheless specifically tailored to address the peculiarities of a cyberattack:

A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case not otherwise covered by this chapter in which money damages are sought against a foreign state for a cyberattack by the foreign state or by an official, employee or agent of such foreign state acting within the scope of his or her office, employment, or agency.[12]

If this type of language were to be used, the term “cyberattack” would need to be defined elsewhere (such as in 28 U.S.C. § 1603), and would need to track the language in a new cause of action (see below).  The other terms and phrases used in this proposed provision – such as “employee” and “scope of employment” – already have received extensive interpretation in FSIA jurisprudence.[13]  Moreover, the cyberattack exception – like the terrorism exception – should have no discretionary function or misrepresentation exclusions.

Cause of Action: While there are State and federal civil causes of action available in cyberattack cases – such as under the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act – it is not always clear whether such provisions apply against foreign governmental entities.[14]  In fact, a federal district court recently concluded “that section 2520 of the Wiretap Act does not create a civil cause of action against a foreign state for interceptions of wire, oral, or electronic communications in violation of section 2511(1).”[15]  Accordingly, to clearly define the type of conduct that would fall within the new cyberattack exception, Congress should use existing federal law to create a new federal cyberattack cause of action against foreign states.  There is precedent for such an approach under the terrorism exception,[16] and it would serve the principle of uniformity underlying the FSIA.[17]  In addition, to avoid potential issues under international law, the new cause of action should clarify that the tort occurs in the United States, where the computer system is breached. 

Retroactivity and Statute of Limitations: To allow parties previously harmed by cyberattacks to bring suit, Congress should make the new immunity exception retroactive – which is permitted under Supreme Court jurisprudence.[18]  Like the terrorism exception, the cyberattack exception should also include a 10-year statute of limitations, extending back to claims occurring prior to the amendment’s enactment.[19]

Appearance/Default: Foreign states that engage in cyberattacks in the United States can be expected either not to appear at all in United States district court, or to withdraw from the litigation after making an initial appearance.[20]  Discovery is difficult to obtain under such circumstances, and yet the plaintiff still has the burden under section 1608(e) of “establish[ing] his claim or right to relief by evidence satisfactory to the court” prior to entry of default judgment.[21]  That burden is a particularly heavy one in cyberattack cases, especially for a private party who may have limited resources.  As a result, I would propose a new provision that specifically addresses a foreign state’s failure to appear in a cyberattack case:

If any federal law enforcement or intelligence agency certifies that there is probable cause that a foreign state, or an official, employee or official thereof, committed the act described in section * * *, there shall be a rebuttable presumption that the foreign state, or the official, employee or official thereof, has committed the act.  If the foreign state does not appear in the action, that presumption shall be accepted by the district court and shall constitute sufficient evidence to satisfy the requirements of section 1608(e).  If the foreign state appears in the action, the rebuttable presumption shall be rendered ineffective until such time, if any, that the foreign state no longer participates in the litigation.[22]

Damages: Under 28 U.S.C. section 1606, a foreign state sued under the cyberattack exception would “be liable in the same manner and to the same extent as a private individual under like circumstances; but a foreign state except for an agency or instrumentality thereof shall not be liable for punitive damages.”[23]  If the cyberattack exception creates a new cause of action, it should define the types of damages that should be recoverable (like the terrorism exception).[24]  Those damages should include reputational and professional harm caused by the hacking of personal and business e-mail systems.  As with the terrorism exception, Congress should also consider removing foreign sovereigns’ protection against punitive damages for cyberattacks, particularly if an attack causes major damage or disruption in the United States.[25]

Execution/Attachment: Because the FSIA currently provides strong protections against execution and attachment in a case involving a foreign sovereign,[26] it creates a massive disincentive to filing suit in a cyberattack case.  Even if a plaintiff establishes jurisdiction under the tort exception and prevails on the merits, the plaintiff is effectively limited to attaching or executing on “any contractual obligation or any proceeds from such a contractual obligation to indemnify or hold harmless the foreign state or its employees under a policy of automobile or other liability or casualty insurance covering the claim which merged into the judgment.”[27]  Given that foreign states do not (to my knowledge) carry insurance to protect themselves against cyberattack claims, a plaintiff can at best obtain a judgment that cannot be enforced – which is as useless as no judgment at all, especially when the foreign nation involved is a country such as Russia or North Korea.

In light of the foregoing, and in keeping with an analogous provision related to the terrorism exception,[28] Congress should add a new section 1610(a)(8):

The property in the United States of a foreign state. . . used for a commercial activity in the United States, shall not be immune from attachment in aid of execution, or from execution . . . [if] the judgment relates to a claim for which the foreign state is not immune under section 1605C [the cyberattack exception], regardless of whether the property is or was involved with the act upon which the claim is based.

Just as importantly, Congress should make judgments entered against foreign states in cyberattack cases subject to section 1610(g)(1), so that plaintiffs can collect from agencies or instrumentalities of the foreign state – even if such agencies or instrumentalities were not involved in the cyberattack at issue.[29]

Official Immunity: Congress should consider making all of the prior provisions, mutatis mutandis, applicable to foreign officials who order or participate in the cyberattack.  That includes, in particular, the exception to immunity and the punitive damages provision set forth above.  However, given the international law doctrine of head-of-state immunity, Congress should refrain from providing a means to assert jurisdiction over a sitting head of state for such conduct.

Final Thoughts

The FSIA largely renders foreign states immune for cyberattacks against individuals, corporations and institutions located in the United States.  However, given the financial and non-financial harm caused by such attacks, foreign states should be held liable, and should be compelled to provide compensation to those damaged by their actions.  Such a result not only makes sense, but it is also perfectly acceptable under long-established doctrines of foreign sovereign immunity.  And, perhaps most importantly, a new cyberattack exception – if it has real bite – would disincentivize foreign states from engaging in such harmful conduct in the future.

[1] See D. Blumenthal, “How to Win a Cyberwar with China,” ForeignPolicy.com
(Feb. 28, 2013) (“Congress could also create a cyberattack exception to the Foreign Sovereign Immunities Act, which currently precludes civil suits against a foreign government or entity acting on its behalf in the cyber-realm. There is precedent: In the case of terrorism, Congress enacted an exception to immunity for states and their agents that sponsor terrorism, allowing individuals to sue them.”).  Mr. Blumenthal’s idea was subsequently repeated, in similar conclusory form, in other sources.  See, e.g., Mazza, Michael.  Statement to the House, Committee on Foreign Affairs.  Cyber Attacks: An Unprecedented Threat to U.S. National Security (Mar. 21, 2013), at 47.

[2] Because I wanted to share this proposal as soon as possible – so that it may be considered and improved upon by others – I cannot claim an exhaustive search of prior sources related to cyberattacks under the FSIA.  However, I have not seen any other attempts to describe what such an exception would look like.  If such a prior proposal exists, I welcome comment from, and discussion with, its author.

[3] See U. Colella, “Foreign governments should be sued for cyberattacks,” Washington Examiner (Feb. 13, 2017).

[4] Scott A. Gilmore, Suing the Surveillance States: The (Cyber) Tort Exception to the Foreign Sovereign Immunities Act, 46 Colum. Hum. Rts. L. Rev. 227 (2015) (hereinafter “Gilmore”).  The article is available online.

[5] Mr. Gilmore underestimates the problem posed by the tort exception’s situs requirement in cyberattack cases.  See Gilmore, supra note 4, at 287, n. 149.  Based upon my experience in many cases, the situs requirement poses a major obstacle to jurisdiction in cross-border tort cases.  See also infra, note 7.

[6] See 28 U.S.C. § 1605(a)(5)(A)-(B).  Given the breadth of the misrepresentation exclusion, its effect on computer fraud cases against foreign states remains an open question — particularly since the tort exception’s exclusions, which are based upon similar provisions in the Federal Tort Claims Act (28 U.S.C. §§ 2680(a), (h)), are so ill-defined.  In addition, although Mr. Gilmore may be correct that the discretionary function exclusion does not bar cyberattack claims outright (Gilmore, supra note 4, at 265-274), Mr. Gilmore’s article may not fully appreciate how the discretionary function exclusion can impact specific causes of action or theories of liability.  See, e.g., Doe v. Holy See, 557 F.3d 1066, 1083–85 (9th Cir. 2009).  While the District Court for the District of Columbia recently seemed inclined not to apply the discretionary function exclusion in a cyber case, the discretionary function exclusion is – at a bare minimum – an additional hurdle that complicates any case brought under the tort exception.  See Doe v. Fed. Democratic Republic of Ethiopia, 189 F.Supp.3d 6, 25-28 (D.D.C. 2016). As a result, it provides yet another obstacle to proceeding under the FSIA’s tort exception in a cyberattack case.

[7] Doe, 189 F.Supp.3d at 9; see also id. at 25 (“the Court holds that [plaintiff’s] claim for intrusion upon seclusion is barred by the ‘entire tort’ rule”).

[8] 28 U.S.C. §§ 1609-1611.  As discussed below, Mr. Gilmore’s article does not address this major problem with proceeding under the tort exception.  See infra at note 27.

[9]  Verlinden B.V. v. Cent. Bank of Nigeria, 461 U.S. 480, 486 (1983).

[10] The terrorism exception, 28 U.S.C. § 1605A, is the modern embodiment of this principle.  However, while absolute immunity was the norm pre-1952, even the Schooner Exchange Court recognized that there could be proper restrictions on immunity.  See The Schooner Exch. v. McFaddon, 11 U.S. 116, 123 (1812) (“We may forbid the entrance of [foreign states’] public ships, and punish the breach of this prohibition by forfeiture; nor do we deny the obligation of a foreign sovereign to conform to pre-existing laws, as to offences-and as to the acquisition of property; nor his liability for his private debts and contracts.”) (emphasis added).

[11] For a discussion of recent cyberattacks by foreign states, see Gillmore, supra note 4, at 228-32.  Of course, the problem has only gotten much worse since Mr. Gillmore’s article, and now includes economic and political tampering of a type that was perhaps previously unimaginable. 

[12] See 28 U.S.C. §§ 1605(a)(5) and 1605A(a)(1).

[13] However, to streamline litigation for plaintiffs and defendants alike (as well as serve the principle of uniformity underlying the FSIA), I would strongly urge Congress to apply the federal common law to identify officials, employees and agents, and to define the scope of their office, employment and agency.  The current hodgepodge of State laws creates unnecessary confusion and expense under the existing exceptions; if not addressed, these problems would persist under a new cyberattack exception as well.

[14] See Gilmore, supra note 4, at 244-50.

[15] Doe, 189 F.Supp.3d at 15.

[16] See 28 U.S.C. § 1605A(c).

[17] See, e.g., Verlinden, 461 U.S. at 489 (discussing “the importance of developing a uniform body of law in this area”) (citations and quotations omitted).

[18] Republic of Austria v. Altmann, 541 U.S. 677 (2004).

[19] 28 U.S.C. § 1605A(b).

[20] See, e.g., Calderon-Cardona v. Democratic People’s Republic of Korea, 723 F. Supp. 2d 441, 444 (D.P.R. 2010) (non-appearance by North Korea in FSIA action); Agudas Chasidei Chabad of U.S. v. Russian Fed’n, 729 F. Supp. 2d 141, 144 (D.D.C. 2010) (after participation in the litigation for years, Russia filing a “Statement with Respect to Further Participation [71] which informed th[e] Court that defendants ‘decline[d] to participate further in this litigation’ and ‘believe[d] this Court has no authority to enter Orders with respect to the property owned by the Russian Federation and in its possession, and the Russian Federation will not consider any such Orders to be binding on it’”).

[21] 28 U.S.C. § 1608(e).

[22] If such a provision were adopted, there would need to be a mechanism for certification by federal law enforcement or intelligence agencies.

[23] 28 U.S.C. § 1606.

[24] See 28 U.S.C. § 1605A(c)-(d) (“(c) . . . In any such action, damages may include economic damages, solatium, pain and suffering, and punitive damages. In any such action, a foreign state shall be vicariously liable for the acts of its officials, employees, or agents.  (d) Additional damages.–After an action has been brought under subsection (c), actions may also be brought for reasonably foreseeable property loss, whether insured or uninsured, third party liability, and loss claims under life and property insurance policies, by reason of the same acts on which the action under subsection (c) is based.”).

[25] Not only is there recent precedent for lifting the punitive damages bar (28 U.S.C. § 1605A(c)), but the bar was always on precarious footing with respect to international law.  Cf. H.R. Rep. No. 94-1487 (1976), at 22, citing, inter alia, 5 Hackwork, Digest of International Law, 723-26 (1943) (“Under current international practice, punitive damages are usually not assessed against foreign states.”) (emphasis added).  Hackworth’s treatise, cited in the FSIA’s legislative history, stated the following:

[T]he refusal of international tribunals to assess punitive, vindictive, or exemplary damages, as such, against respondent governments may be explained in part by the absence of malice, or mala mens, on the part of the government of the respondent state.

5 Hackworth, Digest of International Law 723-26 (1943).  It is unclear whether a foreign state lacks “malice” in a cyberattack case, especially where the attack is significant and is intended to disrupt core economic or political activities in the other nation.

[26] See 28 U.S.C. §§ 1609-1611.

[27] 28 U.S.C. § 1610(a)(5).  The plaintiff in a cyberattack case proceeding under the tort exception will be limited to section 1610(a)(5), because the plaintiff likely would not be able to show that the foreign state has waived immunity (§ 1610(a)(1)), that “the property is or was used for the commercial activity upon which the claim is based” (§ 1610(a)(2)), that “the execution relates to a judgment establishing rights in property which has been taken in violation of international law or which has been exchanged for property taken in violation of international law” (§ 1610(a)(3)), that “the execution relates to a judgment establishing rights in property . . . which is acquired by succession or gift, or . . . which is immovable and situated in the United States” (§ 1610(a)(4)), that “the judgment is based on an order confirming an arbitral award rendered against the foreign state, provided that attachment in aid of execution, or execution, would not be inconsistent with any provision in the arbitral agreement” (§ 1610(a)(6)), or that “ the judgment relates to a claim for which the foreign state is not immune under section 1605A or section § 1605(a)(7) (as such section was in effect on January 27, 2008), regardless of whether the property is or was involved with the act upon which the claim is based” (§ 1610(a)(7)).  In his article, Mr. Gilmore does not address the difficulties caused by the FSIA’s attachment and execution provisions with respect to any cyberattack claim proceeding under the tort exception.  Gilmore, supra note 4, passim.  

[28] 28 U.S.C. § 1610(a)(7).

[29] The terrorism exception’s section 1610(g)(1), which was intended to remove the presumption of separate juridical status set forth in First Nat. City Bank v. Banco Para el Comercio Exterior de Cuba (“Bancec”), 462 U.S. 611 (1983), states the following in relevant part:

[T]he property of a foreign state against which a judgment is entered under section 1605A, and the property of an agency or instrumentality of such a state, including property that is a separate juridical entity or is an interest held directly or indirectly in a separate juridical entity, is subject to attachment in aid of execution, and execution, upon that judgment as provided in this section, regardless of–(A) the level of economic control over the property by the government of the foreign state;(B) whether the profits of the property go to that government;(C) the degree to which officials of that government manage the property or otherwise control its daily affairs;(D) whether that government is the sole beneficiary in interest of the property; or(E) whether establishing the property as a separate entity would entitle the foreign state to benefits in United States courts while avoiding its obligations.

28 U.S.C.A. § 1610.  Section 1610(g)(1) could be easily amended to over both terrorism cases (§ 1605A) and cyberattack cases (proposed § 1605C).

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.

Discovery Targeting FSIA Counsel

September 17, 2014 By in Discovery Tags: , , Leave a comment

A recent decision by the Second Circuit serves as a warning signal to foreign states and their attorneys in the United States.  In Mare Shipping Inc. v. Squire Sanders (US) LLP, No. 13-4426-CV, — Fed. Appx. —, 2014 WL 3733133 (2d Cir., July 30, 2014), the Second Circuit held that the FSIA does not preclude discovery requests targeting a foreign state’s counsel in the United States.  Relying on Rep. of Argentina v. NML Capital, Ltd., — U.S. —, 134 S.Ct. 2250, 2256, (2014), the court held that the FSIA’s “explicit definition” of a “foreign state,” by “its plain text, excludes a foreign sovereign’s U.S. counsel.”  Mare Shipping, 2014 WL 3733133, at *3. 

It is unclear what practical impact Mare Shipping will have, since documents and other information obtained by FSIA defense counsel from a foreign state would presumably remain protected by the attorney-client privilege.  In addition, FSIA counsel’s work should remain protected by the attorney work product doctrine.  However, in the event that such protections do not apply, defense counsel should be aware that they likely cannot rely upon the FSIA to fight discovery related to their representation of foreign states.

NML Capital and FSIA Jurisdictional Discovery

July 25, 2014 By in Discovery Tags: , , , , Leave a comment

Following NML Capital, a significant issue is whether the Supreme Court’s holding applies with respect to FSIA jurisdictional discovery.  Some commentators believe that NML Capital indicates that “lower courts have been too generous in protecting foreign sovereigns from [jurisdictional] discovery requests.”   See Wuerth, Republic of Argentina v. NML Capital: Discovery and the Foreign Sovereign Immunities Act. Although the issue is complex and requires further analysis, this post sets forth my preliminary thoughts.

First, Argentina’s position in the NML Capital litigation was wholly unlike that of a foreign sovereign facing FSIA jurisdictional discovery.  Argentina had previously waived both immunity from jurisdiction and immunity from execution, and the Supreme Court concluded that the FSIA did not confer any immunity over Argentina’s overseas assets.  See The Republic of Argentina v. NML Capital, Ltd. (No. 12-842): Why Both Sides Are Wrong (“NML Article”) at 2-3; see also Republic of Argentina v. NML Capital, Ltd., 134 S. Ct. 2250, 2256, 2257 (2014).  The district court had held that it had subject matter jurisdiction over the action, a conclusion that was uncontested by Argentina.  NML Article at 3.  The district court had entered judgments against Argentina that were indisputably valid.  Id.  Argentina’s position had, in short, no similarities to that of a foreign sovereign that is presumptively immune from suit in a court where jurisdiction is in doubt.  See Saudi Arabia v. Nelson, 507 U.S. 349, 355 (1993) (“Under the Act, a foreign state is presumptively immune from the jurisdiction of United States courts; unless a specified exception applies, a federal court lacks subject-matter jurisdiction over a claim against a foreign state.”).  Given the contrast between Argentina’s position and the position of foreign sovereigns confronting the possibility of jurisdictional discovery, it would be injudicious to draw conclusions from the NML Capital case with regard to FSIA jurisdictional discovery.  See, e.g., Cohens v. State of Virginia, 19 U.S. 264, 399, 6 Wheat. 264, 399 (1821) (“It is a maxim not to be disregarded, that general expressions, in every opinion, are to be taken in connection with the case in which those expressions are used.” ); see also Armour & Co. v. Wantock, 323 U.S. 126, 132-33 (1944) (“words of . . . opinions are to be read in the light of the facts of the case under discussion . . . . General expressions transposed to other facts are often misleading.”).

Second, while plaintiffs’ counsel are likely to rely upon the Supreme Court’s discussion of Rule 69(a)(2) and its conclusion that the FSIA does not modify the Rule’s authorization of broad post-judgment discovery (cf. NML Capital, 134 S. Ct. at 2254-57), it is unclear whether the same analysis is applicable with respect to FSIA jurisdictional discovery.  To draw a sustainable analogy to NML Capital, a plaintiff’s attorney would need to show that the scope of discovery provided by Rule 26(b) applies where subject matter jurisdiction has not even been established.  This is a complicated issue that merits further examination, but there are reasons to believe that Rule 26(b) discovery is inappropriate if the district court has not yet resolved the issue of subject matter jurisdiction.  See Steven R. Swanson, Jurisdictional Discovery Under the Foreign Sovereign Immunities Act, 13 Emory Int’l L. Rev. 445, 457-58 (1999) (“[I]t has not always been clear whether the FRCP permit jurisdictional discovery.  After all, before jurisdiction has been established a court technically lacks power to order discovery.”); cf. Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 n.13 (1978) (indicating that discovery is available with respect to jurisdictional issues, without distinguishing between personal jurisdiction and subject matter jurisdiction); Insurance Corporation of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 701-03 (1982) (distinguishing subject matter jurisdiction from personal jurisdiction); see also, e.g., United States v. Sherwood, 312 U.S. 584, 589-90 (1941) (holding that the rules of civil procedure do not “modify, abridge or enlarge the substantive rights of litigants or  . . . enlarge or diminish the jurisdiction of federal courts”); Am. Telecom Co., L.L.C. v. Republic of Lebanon, 501 F.3d 534, 538-39 (6th Cir. 2007) (“Courts are constituted by authority and they cannot [go] beyond the power delegated to them. If they act beyond that authority, and certainly in contravention of it, their judgments and orders are regarded as nullities. They are not voidable, but simply void, and this even prior to reversal.”); Rolls Royce Indus. Power (India) v. M.V. Fratzis M. Stratilatis Navigation Ltd., 905 F. Supp. 106, 107 (S.D.N.Y. 1995) (declining to order discovery in the absence of subject matter jurisdiction).

Third, the “Civil Rule vs. FSIA” conflict advanced by Argentina – which was the “single, narrow question” resolved by the Supreme Court (NML Capital, 134 S. Ct. at 2255) – is a red herring in the context of FSIA jurisdictional discovery.  The issue is not whether the FSIA itself governs jurisdictional discovery; indeed, as the Supreme Court correctly pointed out, the FSIA only expressly addresses discovery in a very limited way.  NML Capital, 134 S. Ct. at 2256; see also 28 U.S.C. § 1605(g).  Instead, the question is whether a district court should exercise its discretion to limit any jurisdictional discovery ordered against a foreign sovereign.  See Crawford-El v. Britton, 523 U.S. 574, 598 (1998).  In this regard, two important observations are in order:

  • District courts limit FSIA jurisdictional discovery in recognition of the fact that (1) a foreign sovereign is presumptively immune from discovery at the beginning of the litigation (cf. NML Article at 12-13) and (2) the court’s subject matter jurisdiction is in doubt. That is true not only with respect to jurisdictional discovery under the FSIA, but also in other circumstances where a defendant is presumptively immune or jurisdiction has not yet been established.   In fact, there are strong similarities between the rules applied in FSIA jurisdictional discovery cases and the rules applied in other situations where a court confronts the propriety of jurisdictional discovery.  See, e.g., Freeman v. United States, 556 F.3d 326, 342 (5th Cir. 2009); St. Clair v. City of Chico, 880 F.2d 199, 202 (9th Cir. 1989); Razore v. Tulalip Tribes of Wash., 66 F.3d 236, 240 (9th Cir. 1995); Encompass Office Solutions, Inc. v. Ingenix, Inc., No. 4:10-CV-96, 2010 WL 2639563, at *2 (E.D. Tex. June 28, 2010); Dichter-Mad Family Partners, LLP v. United States, 707 F. Supp. 2d 1016, 1053-54 (C.D. Cal. 2010).  Because precedent regarding FSIA jurisdictional discovery does not rely on any textual analysis of the FSIA – but instead relies upon well-established precedent regarding the propriety of discovery prior to a resolution of immunity or a determination of subject matter jurisdiction – such precedent remains unaffected by NML Capital.
  • The Supreme Court in NML Capital expressly recognized that comity considerations govern discovery requests targeting foreign sovereigns. See NML Capital, 134 S. Ct. at 2258 n. 6 (“Although this appeal concerns only the meaning of the Act, we have no reason to doubt that . . . other sources of law ordinarily will bear on the propriety of discovery requests of this nature and scope, such as . . . the discretionary determination by the district court whether the discovery is warranted, which may appropriately consider comity interests and the burden that the discovery might cause to the foreign state.”).  In support of this proposition, the Supreme Court cited Société Nationale Industrielle Aérospatiale v. USDC, 482 U.S. 522, 543-44, and n. 28 (1987).  In the portion of Société Nationale relied upon by the NML Capital Court, the Supreme Court stated that factors relevant to “any comity analysis” include “(1) the importance to the . . . litigation of the documents or other information requested; (2) the degree of specificity of the request; (3) whether the information originated in the United States; (4) the availability of alternative means of securing the information; and (5) the extent to which noncompliance with the request would undermine important interests of the United States, or compliance with the request would undermine important interests of the state where the information is located.”  Société Nationale Industrielle Aérospatiale v. USDC, 482 U.S. at 544 n.28.  Because these are similar to factors considered in a traditional FSIA jurisdictional discovery analysis, a plaintiff would at best be jumping from the frying pan (FSIA jurisdictional discovery precedent) into the fire (international comity analysis).  Regardless of which mode of analysis is utilized, it is unlikely to make a material difference in any given case.

In short, a plaintiff seeking to rely upon NML Capital to argue for broader jurisdictional discovery is unlikely to succeed.  Foreign sovereigns – like other similarly situated litigants – should continue to enjoy discovery protections in the context of a challenge to a district court’s jurisdiction under the FSIA.

Republic of Argentina v. NML Capital, Ltd. (No. 12-842): The Supreme Court (and this Website) Got It Right

June 17, 2014 By in Discovery Tags: , , , , , , , , Leave a comment

Yesterday, the Supreme Court ruled against the Republic of Argentina (7 to 1) in the NML case.  In correctly rejecting Argentina and the United States’ interpretation of the Foreign Sovereign Immunities Act, Justice Scalia’s majority opinion echoed the arguments made on this website two months ago.

Recap: In the NML case, Argentina and the United States argued that the district court’s order permitting broad discovery regarding Argentina’s extraterritorial assets violated the FSIA.  The key premise of Argentina and the United States’ contention was that the FSIA conferred execution immunity over a foreign state’s property held overseas.  See Brief for Petitioner on the Merits (No. 12-842), filed Feb. 24, 2014, at 6, 21; Brief for the United States as Amicus Curiae in Support of Petitioner (No. 12-842), filed Mar. 3, 2014, at 12, 18.  Argentina and the United States advanced their argument by largely ignoring the plain language of 28 U.S.C. section 1609, which conferred execution immunity only upon a foreign state’s property “in the United States.”  28 U.S.C. § 1609 (emphasis added); see also The Republic of Argentina v. NML Capital, Ltd. (No. 12-842): Why Both Sides Are Wrong (“NML Article”) at 6, 7 n.9.

While NML raised the section 1609 argument (Brief for Respondent on the Merits (No. 12-842), filed Mar. 26, 2014 (“NML Br.”) at 9, 46, 52), it was not the focus of its brief in the Supreme Court.  NML Br., passim.

On April 11, 2014, I posted the NML Article on this website.  In the article and a follow-up post regarding Argentina’s reply brief, I made three major contentions regarding Argentina and the United States’ position.  First, I argued that “the threshold issue” in the NML case was “whether foreign assets are accorded a statutory presumption of immunity from execution” under the FSIA.  NML Article at 1.  I stated that “[u]nder section 1609’s plain language, the FSIA does not accord Argentina’s foreign assets with presumptive immunity from execution.  Since Argentina’s property overseas is not presumptively immune under the FSIA, the FSIA does not provide such property with protection from discovery.”  NML Article at 5; see also id. at 5-10.

Second, with regard to Argentina’s contention in its reply brief that pre-FSIA common law controls, I stated that “Argentina nowhere shows that the pre-FSIA regime accorded immunity to a foreign state’s property abroad.  In the absence of such a showing, it is just as likely that immunity issues relating to foreign property were treated as matters of foreign law before the FSIA’s enactment, just as they are now.”  See Republic of Argentina v. NML Capital, Ltd.: Reaction to Argentina’s Reply Brief.

Third, I argued that “[s]ince the FSIA does not accord presumptive sovereign immunity upon a foreign state’s assets overseas, the discovery dispute between Argentina and NML should not be analyzed under the FSIA.  Instead, the Supreme Court’s decision in Société Nationale Industrielle Aérospatiale v. USDC,  482 U.S. 522 (1987), controls.”  NML Article at 2; see also id. at 14-19.  I also noted that while NML cited Société Nationale Industrielle Aérospatiale in its Supreme Court brief, neither party had raised the Société Nationale Industrielle Aérospatiale comity issue in the district court or in the Second Circuit.  Ibid. at 18-19 n.27.

The Supreme Court’s Opinion: In rejecting Argentina and the United States’ position, the Supreme Court’s opinion echoed the analysis I set forth in the NML Article and the subsequent post. 

First, the Supreme Court concluded that the plain language of the FSIA undermined the central premise of Argentina and the United States’ position.  The Supreme Court squarely held that section 1609 “immunizes only foreign-state property ‘in the United States’” and thus does “not shield from discovery a foreign sovereign’s extraterritorial assets.”  Republic of Argentina v. NML Capital, Ltd., No. 12-842, 573 U.S. ___ (2014) (slip op., at 9) (emphasis in original).

Second, with regard to pre-FSIA common law immunity, the Supreme Court observed that “Argentina cites no case holding that, before the Act, a foreign state’s extraterritorial assets enjoyed absolute execution immunity in United States courts. No surprise there. Our courts generally lack authority in the first place to execute against property in other countries, so how could the question ever have arisen?”  NML Capital, 573 U.S. ___ (slip op., at 9).

Third, the Supreme Court agreed that Société Nationale Industrielle Aérospatiale applies with regard to NML’s discovery requests.  See NML Capital, 573 U.S. ___ (slip op., at 11-12 n.6).

Final Thoughts Regarding Argentina and the United States’ Argument: In the end, the NML case was not a close call.  Argentina and the United States’ position – that the FSIA conferred execution immunity over a foreign state’s extraterritorial assets – was simply irreconcilable with the plain language of section 1609.  While I understand why Argentina nevertheless made the argument given the precarious legal situation that it finds itself in, I am disappointed that the Solicitor General supported a position that was contrary to the plain language of the FSIA.  The United States’ untenable legal position may have been driven by overarching political and economic concerns, but the Solicitor General’s brief was, in my view, inconsistent with the responsibilities of the “Tenth Justice” of the Supreme Court.   

Note: I will post another article regarding the NML case in the next few weeks, this time focused on the effect (if any) of the decision with respect to FSIA jurisdictional discovery.

Republic of Argentina v. NML Capital, Ltd.: Reaction to Argentina’s Reply Brief

April 15, 2014 By in Discovery, Uncategorized Tags: , , , , , , , , , , Leave a comment

I only have time for a short post today, but — especially in light of my article about the NML case last week (“NML Article”) — I wanted to share my thoughts about the reply brief filed by Argentina yesterday.

Argentina repeats its claim that “the FSIA make all foreign-state property presumptively immune from judgment execution.”  Reply Brief for Petitioner (“Arg. Reply”) at 3 (emphasis added); see also id. at 14.  As I explained in my article, Argentina’s contention is untenable given the plain language of the FSIA.  NML Article at 5-9.  Section 1609, the statutory provision that confers presumptive execution immunity on a foreign state’s property, is expressly limited to property “in the United States.”  28 U.S.C. § 1609 (emphasis added).  Contrary to Argentina’s argument, nothing in the FSIA confers presumptive immunity upon foreign state property throughout the world. 

Argentina’s response to section 1609’s clear limitation appears to be relegated to a footnote in the middle of its brief, where it states the following: “NML is wrong that foreign-state property outside the United States is not ‘immune,’ but in any event does not dispute that U.S. courts may not execute on such property, and acknowledged as much to the Second Circuit.”  Arg. Reply at 10 n.4 (emphasis in original) (citations omitted).  The fact that Argentina did not even repeat the full argument it made to the Second Circuit on the issue does not, in my opinion, bode well for its position in the Supreme Court.  Cf. NML Article at 7-8.  Moreover, as I stated last week, section 1609’s “in the United States” limitation means that it “neither provides immunity to foreign property nor empowers U.S. courts to order execution against assets held abroad.”  NML Article at 8.  That the FSIA fails to accord United States courts with the power to execute upon property located in foreign jurisdictions does not mean that such property receives “presumptive immunity” under the statute.  Instead — and as Argentina has previously conceded in this litigation — the status of foreign state property overseas is simply a matter of foreign law properly resolved by foreign courts.  Cf. NML Article at 7-8.

Argentina also appears to argue that the pre-FSIA common law should govern with respect to a foreign state’s property overseas.  Arg. Reply at 4-5, 11.  But principles of statutory construction — including those relating to adherence to pre-statutory common law — do not trump a statute’s plain language.  Cf. Sebelius v. Cloer, — U.S. —, 133 S. Ct. 1886, 1895-96 (2013).  Moreover, Argentina nowhere shows that the pre-FSIA regime accorded immunity to a foreign state’s property abroad.  In the absence of such a showing, it is just as likely that immunity issues relating to foreign property were treated as matters of foreign law before the FSIA’s enactment, just as they are now.

Finally, Argentina’s waiver argument (Arg. Reply at 20-23) — which disregards that the issue of waiver with respect to foreign assets is a question of foreign law — fails for the reasons I explained more fully in my article last week.  See NML Article at 10-11.

Republic of Argentina v. NML (No. 12-842) – Why Both Sides Are Wrong

April 11, 2014 By in Discovery Tags: , , , , , , , , , , , , , , , , , , Leave a comment

NML, a Cayman Islands hedge fund, obtained numerous federal judgments against Argentina arising out of Argentina’s default on payment of its public debt. Argentina refuses to satisfy any of the judgments. Because NML has had little success in finding Argentinian assets in the United States subject to execution under the Foreign Sovereign Immunities Act (FSIA), the district court granted NML broad discovery from non-party banks relating to Argentina’s assets overseas. The discovery dispute between NML and Argentina is currently pending in the United States Supreme Court, with oral argument scheduled for April 21, 2014.

The FSIA has been called a “statutory labyrinth” with “many deliberately vague provisions.” While that characterization may hold true regarding certain sections of the FSIA, the statute is a model of clarity and simplicity with respect to the threshold issue in this case: whether foreign assets are accorded a statutory presumption of immunity from execution. Section 1609 provides that only a foreign state’s property “in the United States” is presumptively immune from execution. Nowhere does the FSIA confer presumptive immunity on a foreign state’s assets held outside the United States.

Notwithstanding section 1609’s plain language, the central contention advanced in the Supreme Court by Argentina and the United States (as amicus) is that Argentina’s assets overseas are entitled to presumptive statutory immunity and, as a result, are immune from discovery under the FSIA. Because Argentina and the United States’ argument cannot be squared with section 1609 itself, it is wrong as a matter of law.

Since the FSIA does not accord presumptive sovereign immunity upon a foreign state’s assets overseas, the discovery dispute between Argentina and NML should not be analyzed under the FSIA. Instead, the Supreme Court’s decision in Société Nationale Industrielle Aérospatiale v. USDC, 482 U.S. 522 (1987), controls. The district court and the Second Circuit should have reviewed NML’s discovery requests under the comity analysis set forth in Société Nationale, which is broad enough to accommodate all of the interests and policy considerations raised by the parties and the United States.

With regard to NML’s main argument in the Supreme Court, NML fails to recognize the protections afforded by immunity under United States law. NML contends that because the text of the FSIA does not mention “discovery,” the FSIA does not limit the discovery available to plaintiffs in post-judgment proceedings. With respect to domestic assets, NML’s contention is contrary to settled law. Under Supreme Court and circuit precedent, protection from discovery inheres in the very concept of immunity itself. Moreover, with regard to foreign assets, NML does not undertake the comity analysis required under the Supreme Court’s decision in Société Nationale.

In the end, while the discovery dispute between NML and Argentina may be of critical importance to the parties, this case does not belong in the Supreme Court. There is no circuit split with regard to the threshold issue, namely whether foreign assets are protected from execution under the FSIA. Instead, the NML case simply involves the lower courts’ erroneous failure to apply the Société Nationale comity analysis to NML’s discovery requests targeting Argentina’s assets overseas. To avoid issuing an unnecessary decision in the sensitive area of foreign sovereign immunity law, the Supreme Court should consider remanding the matter with instructions to analyze the requested discovery under Société Nationale.

Read the full article via the PDF version below:

Monetary Contempt Sanctions in FSIA Litigation

February 10, 2014 By in Discovery Tags: , , , , , , , , , , Leave a comment

On January 24, 2014, United States District Judge Richard M. Berman found the Republic of Iraq, the Ministry of Industry of the Republic of Iraq, and the attorneys for the Republic and the Ministry in contempt of court for failure to comply with a discovery order dated August 29, 2012.  Servaas v. Republic of Iraq, Case No. 09 Civ. 1862(RMB), 2014 WL 279507 (S.D.N.Y. Jan. 24, 2014).  The court held that the “sanction imposed upon Iraq is $2,000 per day effective Friday, January 24, 2014, and continuing for each day that Iraq continues to fail to comply with the Discovery Order.”  Id. at *5.  The sanction imposed upon the sovereign defendants’ attorneys requires the payment of all reasonable attorneys’ fees and costs associated with the plaintiff’s pursuit of post-judgment discovery.  Id.  In an order dated February 7, 2014, the court found that the attorneys’ fees/cost amount was $70,422.13.  Docket No. 146.

Servaas is not the first case in which substantial sanctions have been imposed for discovery violations in FSIA cases.  For example, in FG Hemisphere Associates, LLC v. Democratic Republic of Congo, 637 F.3d 373 (D.C. Cir. 2011), the D.C. Circuit affirmed a finding of contempt of court against a foreign sovereign that failed to comply with a discovery order.  The court upheld monetary sanctions of up to $80,000 per week until the foreign sovereign complied with outstanding discovery requests.  Id. at 376.

I do not intend to examine here whether or not monetary contempt sanctions are permissible under the FSIA.  While the FSIA itself is silent on the issue, the FSIA’s legislative history states that “appropriate remedies would be available under Rule 37, F.R. Civ. P., for an unjustifiable failure to make discovery.”  H.R. Rep. 94-1487, at 23 (1976).  The D.C. Circuit strongly rejected the argument that monetary contempt sanctions could not be imposed under the FSIA.  See FG Hemisphere Assoc., 637 F.3d at 376-80.  However, the court’s conclusion is inconsistent with Fifth Circuit law (cf. Af-Cap, Inc. v. Republic of Congo, 462 F.3d 417, 428-29 (5th Cir. 2006)), and the United States Executive Branch has persuasively argued that any monetary contempt sanction would be unenforceable against a foreign sovereign.  See Brief of the United States as Amicus Curiae, filed on October 7, 2010, in FG Hemisphere Assoc. (“U.S. Amicus Brief”), at 7-14. 

Assuming arguendo that monetary contempt sanctions are permissible under the FSIA, the question remains whether such a step is an advisable exercise of a federal court’s power.  In the underlying discovery order, the Servaas court characterized the discovery dispute between the parties as a “routine matter[].” Docket No. 86, at 1 n.2.  However, there is nothing “routine” about ordering wide-ranging discovery against a foreign sovereign.  The language of the earlier order, and the lack of detailed analysis in the recent contempt order, suggest that the district court in Servaas did not appreciate the significance of imposing monetary contempt sanctions upon a foreign sovereign for failure to comply with a discovery order. 

At the very least, a court contemplating the imposition of monetary contempt sanctions against a foreign state for discovery violations should consider a range of issues, including:

1.  Is the contempt order enforceable against the foreign sovereign and, if not, does it constitute a proper exercise of the district court’s power?  Just as with any other form of equitable relief, enforceability should be a prime consideration for the court.  See In re Estate of Ferdinand Marcos Human Rights Litig., 94 F.3d 539, 548 (9th Cir. 1996) (holding that where a court was without power to enforce an injunction against a foreign sovereign, the court “abused its discretion by issuing a futile injunction”); see also Virginian Ry. Co. v. Sys. Fed’n No. 40, 300 U.S. 515, 550 (1937) (“a court of equity may refuse to give any relief when it is apparent that that which it can give will not be effective or of benefit to the plaintiff”).  If the district court cannot enforce a monetary contempt sanction against a foreign sovereign, it generally should not impose such a sanction.

2.  Is the contempt order imposed in the context of post-judgment proceedings or jurisdictional discovery?  Given that a foreign sovereign’s presumptive immunity from suit includes immunity from all of the burdens of litigation (Kelly v. Syria Shell Petroleum Dev., 213 F.3d 841, 849 (5th Cir. 2000)), it would appear that a district court’s discretion to impose monetary contempt sanctions should be limited to the post-judgment context – where the sovereign has already been held not to be immune.  Absent extraordinary circumstances, such sanctions should not be imposed in the context of FSIA jurisdictional discovery.

3.  Is the contempt order the sole remaining option, or are there other possible means to encourage compliance with the discovery order?  Since this is an important issue even outside of the FSIA context, it would appear particularly relevant in cases involving a foreign sovereign.  Cf. Hicks on Behalf of Feiock v. Feiock, 485 U.S. 624, 637 n.8 (1988) (stating that “in wielding its contempt powers, a court must exercise the least possible power adequate to the end proposed”) (citations and quotations omitted).

4.  Does the case involve a foreign sovereign or an agency/instrumentality of a foreign sovereign?  Given the policies underlying the FSIA, courts should be much more wary about imposing monetary contempt sanctions upon a foreign sovereign itself (as opposed to an agency or instrumentality).  Cf. H.R. Rep. No. 94-1487, at 11 (stating that the service provisions applying to foreign sovereigns were intended “to minimize potential irritants to relations with foreign states”).  Moreover, FSIA practitioners should be aware that “a court may not sanction a foreign instrumentality for discovery violations committed by its sovereign.”  Thai Lao Lignite (Thailand) Co., Ltd. v. Gov’t of Lao People’s Democratic Republic, 10 CIV. 5256 KMW DCF, 2013 WL 3970823, at *6 (S.D.N.Y. Aug. 2, 2013).

5.  Is the contempt order consistent with international law and international practice?  Given the prevailing rules in the international realm, and the fact that the FSIA was intended to be consistent with international law (cf. H.R. Rep. No. 94-1487, at 7), this factor would generally counsel against the imposition of monetary contempt sanctions against a foreign sovereign.  See, e.g., European Convention on State Immunity, Article 18 (E.T.S. No. 074); United Nations Convention on Jurisdictional Immunities of States and Their Properties, Article 24(1); UK State Immunity Act, § 13; Canadian State Immunity Act, §§ 12(1), 10(1); Singapore State Immunity Act, § 15; Pakistan State Immunity Ordinance, § 14; Australian Foreign States Immunities Act of 1985, § 34; see also U.S. Amicus Brief at 21-24.

6.  Is the contempt order consistent with the United States’ policy to encourage foreign states to appear in court?  It is well-established that it is in “the interest of United States’ foreign policy to encourage foreign states to appear before our courts in cases brought under the FSIA.”  Hester Int’l Corp. v. Fed. Republic of Nigeria, 879 F.2d 170, 175 (5th Cir. 1989).  The United States government itself is not subject to monetary contempt sanctions in domestic courts.  U.S. Amicus Brief at 25-26.  Because the unequal treatment of foreign sovereigns in this regard is likely to be a significant foreign relations irritant, the policy of encouraging sovereigns to appear in United States courts generally does not appear well-served by the imposition of monetary contempt sanctions.

7.  What was the nature of the underlying discovery order?  If the underlying discovery order permitted wide-ranging and intrusive discovery against the sovereign, non-compliance with that order should rarely give rise to monetary contempt sanctions.  In this respect, the Servaas case is particularly troubling.  The underlying discovery order had granted the plaintiff’s motion to compel a wide range of discovery, including discovery relating to the sovereign defendants’ “‘assets and commercial activities with ties to the United States,'” requests “relating to the ‘formation of the [Ministry and Iraq’s Ministry of Trade and their] State Owned Enterprises and other agencies and/or instrumentalities,’ the ‘financial activity of the Ministry, including but not limited to all budget documents, balance sheets, income statements, and asset listings,’ and the ‘source of operating funds’ of the Ministry and Iraq’s Ministry of Trade.”  Docket No. 86, at 5 (brackets in original).  On its face, the scope of the discovery order is much too broad – both because it does not appear tailored to discover evidence relevant to the post-judgment proceedings and because it seeks sensitive (and presumably confidential) documents from Iraq’s Ministry of Trade.  Those factors alone should strongly counsel against the imposition of monetary contempt sanctions against the sovereign for failure to comply with the discovery order.

8.  Is the contempt order consistent with the doctrine of reciprocity?  Foreign sovereign immunity derives in part from “fair dealing” and “reciprocal self-interest.”   Republic of Philippines v. Pimentel, 553 U.S. 851, 866 (2008) (quotations and citations omitted).  That doctrine appears especially applicable in this context.  To provide a hypothetical, suppose that the United States is sued in foreign courts for the eavesdropping activities of the National Security Agency (“NSA”).  If the foreign court orders the United States to provide all NSA documents relevant to the particular lawsuit, the United States would almost certainly object and refuse to turn the documents over.  Under Servaas and other similar cases, the foreign court could then impose a major monetary sanction against the United States for the lack of compliance.  “In the field of international law, where no single sovereign reigns supreme, the Golden Rule takes on added poignancy.”  De Sanchez v. Banco Cent. De Nicaragua, 770 F.2d 1385, 1398 (5th Cir. 1985).  Before courts in the United States impose monetary contempt sanctions on foreign sovereigns, they should consider whether it is in the United States’ interest to face similar treatment overseas.

All of the foregoing issues should be properly taken into consideration by a court imposing monetary contempt sanctions upon a foreign sovereign; unfortunately, it does not appear that the Servaas court undertook such an analysis, and for that reason its opinion is disturbing.

Finally, as noted above, the Servaas court imposed sanctions exceeding $70,000 upon the attorneys defending Iraq and the Ministry.  Courts that contemplate imposing sanctions against FSIA defense counsel should consider that a foreign sovereign is not a typical client.  For example, with respect to discovery, a sovereign may take a principled stance that certain documents should not be turned over: “it is important to recognize the strongly held view of many foreign states that they are not subject to coercive orders by a U.S. court. Absent specific evidence to the contrary, the refusal of a sovereign state to conform to a judicial directive should not be considered as an expression of scorn or contempt for which such sanctions are normally imposed. Rather, such a refusal may reflect a determination by that foreign state that a U.S. court lacks power to control its conduct.”  U.S. Amicus Brief at 17.  It would be unfortunate if private attorneys are punished for such decisions made by foreign sovereigns, particularly since the sovereign is equal to the United States as a matter of international law – and is, unlike typical private parties in litigation, entitled to decide that it will not follow the directive of a United States court.  The sovereign itself may have to face the consequences of that decision, but the sovereign’s attorneys should not.

The Supreme Court’s Grant of Certiorari in Republic of Argentina v. NML Capital, Ltd.

January 10, 2014 By in Discovery Tags: , , , , , , , Leave a comment

The United States Supreme Court granted certiorari today in Republic of Argentina v. NML Capital, Ltd., Case No. 12-842.  For all of the reasons I discussed in a previous post, the NML Capital case has the potential of becoming a major development in FSIA jurisprudence, particularly with respect to the “nuts and bolts” of federal litigation involving foreign sovereigns.