Tag Archives: Sachs

Sachs’s Meritless Commercial Activity Argument

September 14, 2015 By in Uncategorized Tags: , , , , , , , , Leave a comment

Last week, I examined the problems with the main attribution argument advanced by OBB in the Supreme Court.  Now it is time to analyze the merits of one of the central commercial activity arguments proffered by Sachs. 

The first clause of the commercial activity exception requires that a plaintiff’s action be “based upon a commercial activity carried on in the United States by the foreign state.”  28 U.S.C. § 1605(a)(2).  As a result, to establish jurisdiction under section 1605(a)(2)’s first clause, Sachs must show that her action – which arises from a railway accident in Innsbruck, Austria – is based upon a commercial activity carried on in the United States by OBB.

In her merits brief, Sachs argues that her claims are based upon “OBB’s overall commercial railway enterprise.”  There are three problems with Sachs’s argument.

First, Sachs did not advance the argument below.  It may be that Sachs can avoid a claim of waiver because the issue relates to subject matter jurisdiction (cf. Fed. R. Civ. P. 12(h)(3)), but the fact that Sachs did not raise the argument before her merits brief in the Supreme Court does not inspire confidence.  Like OBB’s novel (and unsupported) agency argument, this was probably an idea that would have been best left on the cutting room floor.

Second, Sachs’s claim ignores a host of FSIA cases (which are also not cited in OBB’s reply on the merits).  Under established law, a plaintiff cannot rely on a sovereign’s alleged general commercial activities under the commercial activity exception.  As courts have repeatedly held for over thirty-five years, it is not the sovereign’s general commercial activities that matter for purposes of the exception:

The focus of the exception to immunity recognized in § 1605(a)(2) is not on whether the defendant generally engages in a commercial enterprise or activity. . . ; rather, it is on whether the particular conduct giving rise to the claim in question actually constitutes or is in connection with commercial activity, regardless of the defendant’s generally commercial or governmental character.

Arango v. Guzman Travel Advisors Corp., 621 F.2d 1371, 1379 (5th Cir. 1980); see also, e.g., Rush-Presbyterian-St. Luke’s Med. Ctr. v. Hellenic Republic, 877 F.2d 574, 580 n.8 (7th Cir. 1989) (same); Jungquist v. Sheikh Sultan Bin Khalifa Al Nahyan, 115 F.3d 1020, 1030 (D.C. Cir. 1997) (stating that the plaintiffs “confuse general activity related to the claim with the specific activity upon which the claim is based”); cf. Sun v. Taiwan, 201 F.3d 1105, 1109 (9th Cir. 2000) (holding that the “focus must be solely upon those specific acts that form the basis of the suit”).  In other words, if the Supreme Court accepts Sachs’s argument, it would be overturning decades of FSIA precedent.  The Court would also be swinging the gates wide open to jurisdiction under the first clause of the commercial activity exception, since plaintiffs’ lawyers can almost always conjure an underlying general commercial activity that can serve as a “basis” for their suits.

Finally, Sachs’s argument lacks merit because OBB “carries on” its “overall commercial railway enterprise” in Austria – and not, as the first clause of the commercial activity exception requires, “in the United States.”  28 U.S.C. § 1605(a)(2).  I understand that Sachs relies on section 1603(e), which defines a “commercial activity carried on in the United States by a foreign state” to mean “commercial activity carried on by such state and having substantial contact with the United States.”  28 U.S.C. § 1605(e).  However, Sachs cannot have it both ways.  If the commercial activity is deemed to be the ticket sale by the travel agency in Massachusetts (and that sale is attributable to OBB), then it may be true that the sale constitutes commercial activity carried on in the United States by OBB.  See Sachs v. Republic of Austria, 737 F.3d 584, 598-99 (9th Cir. 2013) (en banc).  Yet, for reasons I will explain in a subsequent post, Sachs’s lawsuit is not based upon the ticket sale.  And even if a plaintiff were not precluded under FSIA precedent from relying on a foreign state’s general commercial activity, OBB’s operation of its “overall commercial railway enterprise” is carried on in Austria; OBB is Austria’s national railroad company, and it appears undisputed that OBB does not have offices, employees or bank accounts in the United States. 

On its face, this analysis may seem hyper-technical and unfair to Sachs.  The opposite is true.  It is Sachs who is trying to fit a square peg into a round hole.  Sachs’s claims, after all, arise from an alleged tortious act or omission occurring in Austria in connection with a commercial activity overseas.  Sachs should therefore be asserting jurisdiction under the third clause of the commercial activity exception.  Cf. 28 U.S.C. § 1605(a)(2) (third clause stating that a foreign state is not immune in any case based “upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States”).  Sachs is not doing so, presumably because she cannot demonstrate the requisite “direct effect in the United States” under existing law.  See, e.g., Zernicek v. Brown & Root, Inc., 826 F.2d 415, 418 (5th Cir.1987) (“consequential damages [from personal injury tort abroad] are insufficient to constitute a ‘direct effect in the United States’ for purposes of abrogating sovereign immunity”).  Sachs also cannot assert jurisdiction under the FSIA’s tort exception for her slip-and-fall case, because the alleged tortious conduct occurred overseas.  See  Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 441 (1989) (stating that the FSIA’s tort exception, 28 U.S.C. § 1605(a)(5), “covers only torts occurring within the territorial jurisdiction of the United States”).  As a result, to get around the requirements of the FSIA’s other (and more applicable) exceptions to sovereign immunity, Sachs is forced to proceed under the first clause of the commercial activity exception.  However, reliance on that clause does not work — at least not if Sachs’ argument is based on OBB’s general commercial activity of operating a national railway in Austria.

In the end, because she cannot rely on OBB’s general commercial activity in Austria, Sachs is stuck with arguing that her personal injury action is “based upon” the ticket sale in the United States.  As I will explain in subsequent posts, that should spell the end of Sachs’s lawsuit under existing Supreme Court precedent.

[Next week, I will examine why the Supreme Court’s decision in Saudi Arabia v. Nelson, 507 U.S. 349 (1993), should control the result in OBB v. Sachs.]

OBB’s Novel “Agency or Instrumentality” Argument Revisited

September 11, 2015 By in Agency Tags: , , , , , , , , , Leave a comment

OBB v. Sachs is scheduled for oral argument in the United States Supreme Court on October 5, 2015.  During the period leading up to oral argument, I intend to publish a series of posts regarding issues in the Sachs case.  My general view is that Sachs is an easy case to resolve under Saudi Arabia v. Nelson, 507 U.S. 349 (1993), but that there is potential for a major mistake by the Supreme Court on the critical issue of attribution.  I will provide more information on these key points in the upcoming weeks.

Today, I want to focus on an issue that I have discussed before, namely OBB’s argument that the determination of whether an entity is an “agent” of a foreign state should be resolved through the definition of “agency or instrumentality” set forth in 28 U.S.C. section 1603(b).  I will not revisit the points I made in previous posts (here and here).  I do, however, want to add three points:

(1) OBB did not raise its argument that section 1603(b) controls the inquiry of whether an entity is an “agent” of a foreign state during district court proceedings.  OBB also did not raise the argument in its main briefing before the Ninth Circuit Court of Appeals.  Instead, OBB raised the issue for the first time during oral argument on en banc rehearing, and was subsequently ordered by the Ninth Circuit to submit supplemental briefing addressing its new argument.  See Sachs v. Republic of Austria, 737 F.3d 584, 594 n. 7 (9th Cir. 2013) (en banc).  OBB’s novel argument – which was contrary to FSIA precedent – was thereafter squarely rejected by the Ninth Circuit.  Sachs, 737 F.3d at 594-98.  That OBB itself did not see fit to raise the issue until oral argument on en banc rehearing fails to inspire confidence, and a closer look shows why OBB’s novel interpretation of the FSIA should have remained on the cutting room floor.

(2) OBB’s argument would require an extremely strained (and confusing) interpretation of 28 U.S.C. section 1603.  The relevant portion of section 1603 states:

(a) A “foreign state”, except as used in section 1608 of this title, includes a political subdivision of a foreign state or an agency or instrumentality of a foreign state as defined in subsection (b).

(b) An “agency or instrumentality of a foreign state” means any entity—

. . .

(2) which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof

. . . .

28 U.S.C. § 1603(a), (b)(2).  For OBB’s argument to work, the term “foreign state” in section 1603(b) must include “agencies or instrumentalities” of foreign states; otherwise, under OBB’s framework, an “agency or instrumentality” of a foreign state could never be held to have an “agent.”  Yet, as applied to OBB’s situation (that is, the question of whether an entity is an agent of an agency or instrumentality), OBB’s interpretation would effectively yield a statute that states the following:

(b) An “agency or instrumentality of [an agency or instrumentality of] a foreign state” means any entity—

. . .

(2) which is an organ of [an agency or instrumentality of] a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by [an agency or instrumentality of] a foreign state or political subdivision thereof

. . . .

Such a reading of section 1603(b) is not only deeply confusing, but it is also inconsonant with the statute’s use of the term “political subdivision thereof” (since agencies or instrumentalities of a foreign state do not have “political subdivisions”).  In other words, when section 1603(b) used the term “foreign state,” it was referring to foreign states proper – such as the Republic of Austria – and not to agencies or instrumentalities of a foreign state.  That is, in fact, exactly what the FSIA’s legislative history demonstrates.  See H.R. Rep. No. 94-1487, at 15 (1976) (stating that an agency or instrumentality must “be either an organ of a foreign state (or of a foreign state’s political subdivision), or that a majority of the entity’s shares or other ownership interest be owned by a foreign state (or by a foreign state’s political subdivision)”).  It is also what the Supreme Court concluded in Dole Food Co. v. Patrickson, 538 U.S. 468 (2003), when the Court held “that only direct ownership of a majority of shares by the foreign state satisfies the statutory requirement [set forth in section 1603(b)(2)].”  Id. at 474 (emphasis added).

There is, in short, no statutory support for OBB’s approach.  Nothing in the FSIA indicates that a court first needs to examine section 1603(b) to determine whether the defendant (like OBB) is an agency or instrumentality of a foreign state, and then re-examine section 1603(b) to determine whether the putative agent is an “agency or instrumentality” of the “agency or instrumentality.”  No court has ever adopted that type of circular analysis under section 1603, and for good reason: it makes no sense. 

(3) OBB’s agency or instrumentality argument fails for another reason: it would render far too many entities incapable of being deemed an “agent” of a foreign state, and thereby deeply undermine the FSIA’s commercial activity exception.

Consider the following scenario: through individual intermediaries, a foreign state creates a separate corporation in New York State.  The foreign state exercises extensive day-to-day control over the corporation, which engages in a series of commercial transactions in the United States.  After the corporation’s conduct leads to multi-million dollar losses for a number of United States citizens, the individuals damaged file suit against the corporation and the foreign state.  Their main jurisdictional argument under the FSIA is that the corporation was an agent of the foreign state through the latter’s exercise of day-to-day control, and that the corporation’s conduct is attributable to the foreign state for jurisdictional purposes. 

Under OBB’s (mis)interpretation of section 1603(b), the plaintiffs in this scenario could not proceed against the foreign state itself because the corporation does not meet the definition of an agency or instrumentality under the FSIA.  The corporation was created in New York, not in the foreign state, and therefore could never (under OBB’s theory) be an agent of a foreign state.  See 28 U.S.C. § 1603(b)(3) (stating that an “agency or instrumentality of a foreign state” means any entity which, inter alia, “is neither a citizen of a State of the United States as defined in section 1332(c) and (e) of this title, nor created under the laws of any third country”).  The same would hold true if the foreign state created the entity under the law of a third country, such as the law of the Bahamas or Panama.  In fact, OBB’s formulation would provide a blueprint to foreign states about how to engage in commercial activity in the United States without risking the possibility of litigation: if the foreign state engages in commercial activity through a corporation created under the law of the United States or a third country, it will never be held to engage in commercial activity in the United States — even if the foreign state exercises day-to-day control over the corporation created, and effectively engages in extensive commercial activity in the United States through the nominally separate corporation.

OBB’s position, in other words, would profoundly undermine the effectiveness of the FSIA’s commercial activity exception.  Where a foreign state dominates a separate corporation to such an extent that a principal-agent relationship is created, courts must be permitted to attribute the corporation’s conduct to the foreign state for jurisdictional purposes.  Otherwise, the first clause of the commercial activity exception would contain a loophole that would swallow the exception itself.

[Next week, I will examine Sachs’s argument that OBB’s “overall commercial railway enterprise” satisfies the “commercial activity” requirement under the first clause of the FSIA’s commercial activity exception.]