Suing Foreign States in U.S. Courts

Two Second Circuit Decisions Shed Light on the Fine Line between a Foreign State’s “Commercial” and “Sovereign” Activity

For most of U.S. history, federal courts afforded absolute immunity to foreign sovereigns out of respect for the equality and independence of states. This “absolute immunity” doctrine recognized that, as a matter of comity, one nation’s courts should not sit in judgment of another. However, since the enactment of the Foreign Sovereign Immunities Act (FSIA) in 1976, foreign sovereigns have become subject to a number of statutory exceptions to immunity in U.S. courts. The most significant exception is for when the foreign nation conducts “commercial activity” with a U.S. nexus. This has raised a difficult question: how should courts delineate between the “commercial” acts of a foreign state and its sovereign activity?

The courts tasked with drawing this distinction under the FSIA will inevitably make decisions with consequences for U.S. relations with foreign states. Indeed, Congress enacted the FSIA to shift decision-making regarding foreign sovereign immunity from the executive branch to the judiciary. The State Department endorsed this new paradigm at least in part to relieve itself of the burden of making these decisions, as it could then tell foreign nations that “the question of immunity is entirely one for the courts.”

While this complex and delicate task has fallen to the federal courts for over 40 years, the FSIA remains a deeply unsettled area of law. Two recent decisions by the Second Circuit Court of Appeals expose the difficulty in defining the nature of “commercial” activity, but also offer some useful guidance on how the exception is applied.

The History of Foreign Sovereign Immunity and the Commercial Activities Exception

Courts faced with claims against foreign states approach the commercial activity exception as a matter of statutory interpretation, yet there is a broader history and context to how the exception arose that is worthy of examination. The FSIA sought to balance two competing interests — the foreign relations concerns that stem from challenging the sovereign acts of foreign states in U.S. courts, and the rights of Americans to vindicate their rights in the judicial system.

Though the U.S. Constitution empowers federal courts to hear claims involving “foreign states” (Art. III, Sec. 2), in its 1812 The Schooner Exchange v. McFaddon decision, the Supreme Court declared a mandate of foreign sovereign immunity derived from the “perfect equality and absolute independence of sovereigns.” Emperor Napoleon’s navy had seized an American vessel in international waters and recommissioned it as a warship. The Schooner Exchange later docked in Philadelphia to escape a storm, prompting the original owners to sue the French Empire to reclaim it. Chief Justice Marshall held that France and its warships lay outside the Court’s jurisdiction: “the sovereign power of the nation is alone competent to avenge wrongs committed by a sovereign,” a matter “for diplomatic rather than legal discussion.”

This position of absolute foreign sovereign immunity remained in effect until the latter half of the twentieth century. Considering sovereign immunity’s origins in international and foreign relations law, courts deferred to the executive branch on whether a particular defendant should be entitled to immunity from suit. Then, in 1952, State Department Legal Adviser Jack Tate announced the State Department’s adoption of a “restrictive” theory of sovereign immunity. Under this approach, the State Department would only request immunity for a foreign state’s public acts while permitting cases to proceed for claims based on the state’s commercial acts. However, State Department officials soon realized that they did not want to stay in the business of making these determinations, and supported the FSIA as an escape hatch to avoid the “pressures by foreign states to suggest immun­ity and from any adverse consequences resulting from the un­willingness of the Department to suggest immunity.”

The FSIA was enacted in 1976 to codify this restrictive view of sovereign immunity. Specifically, it laid out the circumstances under which U.S. courts could exercise jurisdiction over foreign states. The most important exception to immunity — the “heart” of the restrictive theory embodied in the FSIA — is that foreign states (and their agencies and instrumentalities) do not enjoy immunity from suits arising from commercial activities with a nexus to the United States (see section 1605(a)(2)). Congress viewed the FSIA as “urgently needed legislation” precisely because “American citizens are increasingly coming into contact with foreign states and entities owned by foreign states” in commercial contexts.

The enactment of the FSIA meant that federal judges, not State Department officials, would be responsible for determining whether a foreign sovereign was engaged in “commercial” activity. At the same time, the statute gave limited guidance on what precisely this meant. The statute defines “commercial activity” in circular terms: “a regular course of commercial conduct or a particular commercial transaction or act.” The FSIA explains that the “commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose” (emphasis added). This opaque distinction between “nature” and “purpose” unsurprisingly produced a series of early cases that, as one scholar notes, “lacked consistency and led to unpredictable outcomes.”

The Supreme Court weighed in on the definition of “commercial activity” with two canonical decisions in 1992 and 1993. In Republic of Argentina v. Weltover (1992), the Court determined that Argentina’s issuance of bonds — and its default on them — were “commercial activities” because Argentina was acting “not as regulator of a market, but in the manner of a private player within it.” Notwithstanding that the purpose of the bond program was to address the “public” issue of Argentina’s sovereign debt crisis, the Court concluded that the nature of the activity was “commercial” because these are “the type of actions by which a private party engages in trade and traffic or commerce.” In 1993, the Supreme Court in Saudi Arabia v. Nelson came out the other way, holding that a plaintiff’s wrongful imprisonment and torture by Saudi police did not fall under the exception. As the Court explained, “a foreign state’s exercise of the power of its police has long been understood for purposes of the restrictive theory as peculiarly sovereign in nature” and the “commercial activity” inquiry poses “a question of behavior, not motivation.”

Despite the guidance from Weltover and Nelson, the distinction between the sovereign or commercial “nature” of a foreign state’s activity remains difficult to parse. This analysis frequently presents in “cross-over” cases, as one scholar has termed them, where the challenged conduct involves a mix of sovereign and commercial functions. For example, where the state abuses its “police powers” — as in Nelson — the activity is generally treated as sovereign in nature. But that rule is not uniformly followed, and courts recognize exceptions where the factual context renders the challenged activity more akin to private conduct. Thus in Guevara v. Republic of Peru, the Eleventh Circuit found that Peru’s offer of a monetary reward for information leading to the capture of a fugitive was “‘commercial activity”’ because “the underlying activity at issue—the exchange of money for information—is commercial in nature and of the type negotiable among private parties.” Similarly, while courts have held that the expropriation of private property is a quintessentially sovereign act, in Siderman v. de Blake the Ninth Circuit treated the seizure and continued operation of a private hotel by Argentina’s military junta as a commercial act because Argentina’s “continuing management” of the hotel and “its receipt of profits from the company’s operations” were “clearly activities of a kind in which a private party might engage.” These decisions, which underscore the difficult task courts face in interpreting the FSIA, ultimately turn on the specific factual context of the state acts and whether the legal challenge invoked their commercial or sovereign character.

The Second Circuit’s Recent Decisions

Against this backdrop, the two Second Circuit decisions — one finding that the exception applied and the other finding that it did not — offer some clarification on the fault lines between commercial and sovereign activity. As one observer noted, though the divergent outcomes “might seem only to add to the confusion,” they actually “can be harmonized in a way that offers guidance to litigants.” While the cases are only binding authority for the federal courts in the Second Circuit, they offer some insight into how the exception has been interpreted.

The relevant activity in both cases had commercial aspects. Pablo Star Ltd. v. Welsh Government involved a copyright dispute over the Welsh Government’s use of the likeness of the poet Dylan Thomas in promotional materials for Welsh culture. Barnet v. Ministry of Culture and Sports of the Hellenic Republic arose out of Greece’s demand that Sotheby’s repatriate an ancient bronze figurine (a trust that claimed ownership of the figurine brought a claim against a Greek ministry, arguing that Greece had acted “without lawful justification” and seeking a declaration that the trust was the true owner).

Applying the nature-purpose distinction, the Second Circuit in Pablo Star focused not on the “purpose” of the promotional materials, but instead on the “means” employed by the state actor. The Welsh Government’s use of the photograph was therefore commercial activity because “there is nothing quintessentially governmental about using a photograph in a printed brochure or on a web page or distributing the photograph to newspaper outlets to advertise or promote travel and tourism,” acts regularly undertaken by “private-sector businesses.” By contrast, in Barnet, the Second Circuit upheld Greece’s immunity even though, as the district court had noted, sending a demand letter “to intervene in the market to assert and enforce [] purported property rights … is clearly the type of activity that private person can, and often do, engage in.” Here, however, because Greece’s Ministry of Culture “undertook the act of sending the letter … pursuant to its patrimony laws,” the ministry’s claim to the figurine was of a “sovereign nature.”

The distinction between the facts of these cases is subtle but important. The Second Circuit’s approach highlights that the “nature” of the act cannot be viewed in a vacuum (which the district court had done in Barnet). Rather, as the court instructs in Pablo Star, “[s]eparating the ‘nature’ from the ‘purpose’ of an activity may require a nuanced examination of the context of the acts involved.” That context is necessarily informed by “the level of generality at which the conduct is viewed,” or in other words, what features of the act matter to the claim. The fact that Greece’s claim to ownership derived from national legislation made Greece’s demand letter to the auction house a sovereign activity, whereas the Welsh Government’s use of the copyrighted photograph in a brochure, even in service of the state’s objectives, lacked a sovereign basis.

Ultimately, as the Second Circuit observed in Pablo Star, the nature-purpose distinction is a “standard more easily stated than applied,” and will result in divergent decisions. Congress left the courts with little guidance but, as Justice Souter noted in Nelson, courts do not “have the option to throw up our hands,” and the term “has to be given some interpretation.”

Of course, cases against foreign states can give rise to foreign relations concerns. Many foreign states simply refuse to show up when they are sued in U.S. courts. If the plaintiffs do receive a judgment (whether by default judgment or after trial), they can then try to seize the foreign sovereign’s assets around the globe — a chase that, in one famous instance, involved the attempted seizure of an Argentine warship. However, the objective of the FSIA was that the courts, not the State Department, would make the determinations regarding foreign sovereign immunity.

Given the complexity of interpreting the statute and the stakes involved, it may be time for the Supreme Court to accept certiorari on a new case that would lead to the development of the law concerning what constitutes commercial activity. Barring that, litigants and other courts would be well-served to consider the Second Circuit’s the careful application of the standard in Pablo Star and Barnet for determining when foreign state actors may find themselves subject to the jurisdiction of American courts.

Image: Looking up at Thurgood Marshal Courthouse where the Second Circuit and the U.S. District Court for the Southern District of New York hear cases. (Photo TJ Bickerton, via Wikimedia Commons)

 

About the Author(s)

Sam Kleiner

Attorney at Boies Schiller Flexner LLP, Author of "The Flying Tigers", Former Law Clerk on the Second Circuit Court of Appeals, Former Senior Policy Advisor in the Office of the United States Trade Representative

Julian Beach

Associate, Boies Schiller Flexner LLP.