Navigating the Contours of the FSIA “Commercial Activity” Exception

To what extent do we shield foreign sovereigns from the jurisdictional reach of domestic courts on a theory that to implead the sovereign could upset friendly relations of the “states” involved? This question, it is said, is the most litigated international issue in the United States. Under the Foreign Sovereign Immunities Act, 28 U.S.C. §§ 1602-11 (hereinafter, “FSIA”), a federal court has subject matter jurisdiction over a claim against a foreign state- defined by § 1603 as a political subdivision, agency or instrumentality of a foreign state- only if that claim falls within one of the FSIA’s narrow exceptions to immunity.

In Wye Oak Tech., Inc. v. Republic of Iraq, 666 F.3d 205 (4th Cir. 2011), American defense contractor Wye Oak Technology, Inc. (hereinafter, “Wye Oak”) brought suit against the Republic of Iraq, claiming breach of contract entered into by Iraq’s Ministry of Defense (hereinafter, “IMOD”) for the refurbishment and disposal of Iraqi military equipment. The Fourth Circuit ruled that the FSIA, not the law of Iraq, would govern whether Iraq and IMOD are separate legal entities. To determine whether an entity is legally separate from a foreign state for purposes of FSIA immunity, courts look to the core functions of the entity; that is, “whether the core functions of the foreign entity are predominantly governmental or commercial.” Id. at 214 (quoting Transaero, Inc. v. La Fuerza Aerea Boliviana, 30 F.3d 148, 151 (D.C. Cir. 1994)). If the core functions are commercial, then the courts treat the entity as legally separate from the foreign state. If, on the other hand, the core functions are governmental, courts treat the entity as a political subdivision not legally separate from the foreign state. Id.

Following the “core functions” test, the Fourth Circuit found that the core functions of IMOD are (1) waging war and (2) defending the state- both of which are inherently governmental. Id. at 215 (citing Transaero, 30 F.3d at 153 (“[A]rmed forces are as a rule so closely bound up with the structure of the state that they must in all cases be considered as the ‘foreign state’ itself, rather than a separate ‘agency or instrumentality’ of the state”)). Accordingly, the Fourth Circuit held that “for purposes of the FSIA- including application of the commercial activity exception- IMOD is a political subdivision of Iraq and thus Iraq and IMOD are legally one and the same.” Id. Thus, if Wye Oak’s claim against Iraq falls within the “commercial activities” exception, then the courts have federal subject matter jurisdiction to hear the claim.

The commercial activities exception provides:

 A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case . . . in which the action is based [1] upon a commercial activity carried on in the United States by the foreign state; or [2] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [3] 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.”

28 U.S.C. § 1605 (a).

The essence of this exception is that when a foreign state acts as a private participant within a market (as opposed to a market regulator) the foreign state’s actions are commercial. Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 614 (1992). It is nature of the course of conduct or particular transaction that determines commerciality- not the purpose of the act. Id. In Wye Oak, the claim alleged that Iraq, though its armed forces, engaged in the participation for the sale of scrap metal in Iraq and that Wye Oak performed acts in the United States including accounting, computer programming, and contacting agents of foreign nations, “in connection with” the scrap metal business in Iraq. On these facts, the Court found it sufficient for Wye Oak to show that its breach of contract claim against Iraq falls within the commercial activity exception of the FSIA. Wye Oak Tech., Inc. v. Republic of Iraq, 666 F.3d at 216; see 28 U.S.C. § 1605 (a).

For an interesting discussion on the place of foreign sovereignty in a jurisdictional analysis, please view my previous blog, New Channels Carved in the River of Commerce, and the comments that follow.

2 comments

  1. In Terenkian v. Republic of Iraq, 686 F.3d 1061, 1073 (9th Cir. 2012), the Ninth Circuit clarified what it means for an activity to be “in connection with a commercial activity of the foreign state” under the 28 U.S.C. § 1605 (a) commercial activity exception. The Court held that even if a foreign state regularly conducts a commercial activity in United States, that activity must have a direct connection with or relationship to conduct that gave rise to the plaintiff’s cause of action. Otherwise, it will not suffice to abrogate sovereign immunity under the FSIA. At issue here were contracts between two Cyprus oil brokerage companies (Pentonville Developers, Ltd., and Marblearch Trading, Ltd.) and Iraq, for the purchase and sale of Iraqi oil pursuant to the United Nations’ Oil for Food Program.

    Even though the Oil for Food Program was administered in New York- where Iraq’s participation in the Oil for Food Program was solely due to its status as sovereign- nothing about the Oil for Food Program itself gave rise to the Complaint. First, the contracts did not require Iraq to undertake any activities in New York; to the contrary, the contracts required Iraq to deliver oil in either Iraq or Turkey. Second, there was no evidence that Iraq signed contracts in United States or that substantial prior contractual negotiations occurred in United States. Finally, Iraq’s cancellation of contracts occurred in Iraq, and companies had no contractual obligations to any United States buyers. For this reason, the Ninth Circuit held that the alleged effects in the United States of Iraq’s termination of the contracts for sale of Iraqi oil were not sufficiently direct to establish “commercial activity carried on in the United States,” for purposes of the FSIA’s commercial activity exception.

  2. Like I’ve said in earlier posts, I believe the FSIA, in and of itself, is (currently) more than sufficient in appropriately addressing the modern notion of sovereignty, but that may not be the case in near future. In the increasingly (or decreasingly?) global, political economy, notions of sovereignty are not the same as they were before the financial crisis of 2007-20??, and they will not be the same in five or ten years from now. In fact, I would argue that sovereignty is more significant now (i.e. in the financial crisis/austerity-era) than it was in say the late 1990s. Nonetheless, I will be interested to see how the law, specifically the FSIA, will adjust to the seemingly ever-volatile conception of sovereignty.

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