United States: Foreign Sovereign Immunity Act (FSIA) - The World In U.S. Courts: Summer-Fall 2018

Last Updated: December 6 2018
Article by   Orrick

FSIA "Commercial Activity" Exception Applies to Transportation of Submarine Loaned to Australian National Museum at Nominal Cost

Anderson Trucking Service, Inc. v. Eagle Underwriting Group, Inc., US District Court for the District of Connecticut, August 23, 2018

A submarine owned by a US marine research facility and to be loaned to the Australian National Maritime Museum was damaged by fire while en route to Australia on one of Anderson's trucks. Anderson sought a declaratory judgment that it was not liable, and the defendants sought to dismiss the complaint on various grounds. As relevant here, the museum, a non-profit corporation that is an "agency or part" of the Commonwealth of Australia, argued that the FSIA prevented the suit from going forward.

The Court explained that a defendant like the museum that is considered a "foreign state" under the FSIA may not be sued in US courts unless one of the statute's exceptions applies. At issue was the "commercial activity" exception, which first requires that the conduct giving rise to the claim be among "the type of actions by which a private party engages" in trade or commerce. The Court found that the museum's actions in arranging for transport easily satisfied the test. It rejected the museum's argument that its conduct in borrowing the submarine for nominal cost to display at a national museum was not commercial on grounds that the nature of the actions, not their purpose, was relevant to the determination under the FSIA.

The Court next determined whether the commercial conduct satisfied the additional requirements that the conduct was the "basis" or "foundation" for the claim and that it either was carried out in the US or carried out elsewhere with "direct effects" felt in the US. The Court concluded that it had insufficient information about the museum's relationship to Anderson as shown in the relevant insurance, transport contracts, and bills of lading to make the determination. Although acknowledging that discovery against a sovereign to determine applicability of an FSIA exception should be ordered only sparingly, the Court found that Anderson had shown a "reasonable basis for asserting jurisdiction" and allowed the discovery to proceed.

"Commercial Activity" Exception to FSIA Applicable to Claims that Sovereign Wealth Fund "Hacked" Computers of Former Business Partner

Azima v. Rak Investment Authority, US District Court for the District of Columbia, April 13, 2018

Briefly (and simplifying somewhat a complex set of facts), the plaintiff Farhad Azima was an American citizen and resident who was employed for many years by the investment authority of Ras Al Khaimah, one of the UAE emirates (the investment authority is known as "RAKIA"). Azima and RAKIA engaged in several joint ventures and in 2015 and 2016 Azima played some role in trying to resolve a dispute between RAKIA and its former CEO. In March 2016 a business dispute between RAKIA and Azima was settled, with the settlement agreement also reciting as a basis for payment Azima's "informal" service in RAKIA's dispute with its former CEO. RAKIA's relationship with Azima was also then breaking down, however, and RAKIA terminated their relationship in July 2016. During this period, "multiple websites" appeared on the Internet disparaging Azima and containing documents and photographs that Azima alleged had been illegally stolen from his personal and professional computers through "hacking" orchestrated by RAKIA in 2015-2016. That hacking also allegedly resulted in Azima's computers losing data and being infected by malware. Azima then brought federal and state-law claims against RAKIA based on the alleged hacking in federal court in Washington, D.C.

As relevant here, the Court first considered RAKIA's motion to dismiss the complaint under the FSIA, a federal statute which, with some important exceptions, generally provides an immunity from suit in the US for activities of an arm of a non-US sovereign. The parties did not dispute the applicability of the FSIA to RAKIA as a general matter but contested whether the statute's "commercial activity" exception would prevent dismissal. The FSIA exceptions are famously complex, and as relevant here one would apply (and allow the suit to proceed) if Azima's claim was based upon an act performed by RAKIA (i) in the US, in connection with commercial activity in another country, or (ii) outside the US, in connection with ex-US commercial activity, where the act "causes a direct effect" in the US. Virtually every part of those alternative tests has been the subject of extensive judicial discussion and interpretation.

The Court found that both parts of the test were satisfied. It determined that "commercial activity" existed between RAKIA and Azima through their direct business dealings and as well as Azima's service in connection with RAKIA's dispute with its former CEO. And it found that the hacking and commercial disparagement allegedly conducted by RAKIA was "in connection with" this commercial activity, in the sense of allegedly being part of an effort by RAKIA to gain a commercial advantage over Azima in business negotiations, to compromise Azima in his role as a go-between in RAKIA's negotiations with its former CEO, and at one point to negotiate a settlement of claims of fraud against Azima. The requirement that ex-US activity cause a "direct effect" in the US was found satisfied through a conclusion that Azima's computers were in the US when they were hacked and in some cases damaged through the loading of malware on them. Because it found each of the "commercial activity" exceptions to FSIA immunity satisfied, the Court did not need to determine whether the alleged hacking occurred within or outside the US.

The Court next rejected RAKIA's argument that the case should be dismissed under the doctrine of forum non conveniens because it more appropriately should be litigated in the UK. It faulted RAKIA for not providing a factual predicate for satisfying the doctrine's requirements, including a requirement that the UK be an "adequate" alternative forum. And its own review suggested that UK law would not cover the computer-related conduct allegedly giving rise to Azima's injuries. Similarly, the Court rejected RAKIA's argument that its settlement agreement with Azima—which included a forum selection clause providing for disputes to be litigated under English law in the UK—either covered the present dispute or would satisfy the requirements of the forum non conveniens doctrine that the alternative proposed forum be "adequate."

[Editor's note: The Azima case also appears in the Personal Jurisdiction/Forum non Conveniens section of this report.]

FSIA Precludes Enforcement of Arbitral Award Against Property Held by the Government of India Outside the US

Hardy Exploration & Production (India), Inc. v. Government of India, US District Court for the District of Columbia, June 7, 2018

Hardy acquired an interest in a joint venture between the Government of India and private companies for the development of oil and gas reserves off the coast of India. A dispute arose, and an arbitration panel in India awarded Hardy damages, interest, and specific performance relating to the company's continuing exploration of the Indian territory. After much maneuvering and delay, Hardy filed an action in federal court in Washington, D.C. seeking an order confirming the arbitral award so that it could be enforced judicially against the Government of India.

After first deciding that it would not stay the case because of the pendency of related litigation outside the US, the Court stated that its ability to decline to enforce an arbitral award was limited—as relevant here, precluded only where enforcement would violate the US's "most basic notions of morality and justice, as defined by its laws and legal precedents." To determine whether this condition was met, the Court consulted the Foreign Sovereign Immunity Act ("FSIA"), which reflected a strong US policy against interfering with the sovereign acts of other nations. The relevant provisions of the FSIA permit the execution of arbitral awards against the property of non-US sovereigns under certain conditions. But they do not expressly apply to property held by the sovereigns outside the US, and the Court found US policy therefore was to refrain from interfering with governmental actions in such circumstances. It concluded that ordering the Government of India to permit Hardy to continue exploration in Indian waters would thus run contrary to the articulated policy of the US, and it declined Hardy's effort to enforce specific performance. The Court likewise rejected Hardy's request for interest on the award, finding the interest to be "inextricably intertwined" with the rejected request for specific performance and that the interest, if ordered, would operate impermissibly to "coerce" India into allowing Hardy to continue operations.

[Editor's note: The Hardy Exploration case also appears in the Arbitration section of this report.]

FSIA Commercial Activity Exception Inapplicable Because Plaintiff's Interest in Repayment of US Loans Was Indirect, and Plaintiff Otherwise Failed to Demonstrate Seizure of Bank was a Violation of International Law Rather than a "Regulatory Action"

Official Stanford Investors Committee v. Bank of Antigua, US District Court for the Northern District of Texas, August 17, 2018

This action was brought by OSIC, the receiver tasked with recovering money lost by individuals victimized by an enormous fraud orchestrated by Robert Stanford and related entities. OSIC alleged that Antigua and Antiguan entities seized the assets of Bank of Antigua, an institution owned by Stanford, to keep them out of the hands of law enforcement agencies and the courts. OSIC argued those assets should be available to the receivership estate. The defendants argued that the Court lacked subject matter jurisdiction over the suit under the FSIA. The parties agreed that the defendants were "foreign states" under the FSIA but disagreed about applicability of the FSIA's "commercial activity" and expropriation exceptions.

OSIC argued that the third clause of the commercial activity exception applied, authorizing jurisdiction where a claim is based on extraterritorial activities that cause a "direct effect" in the US. The Court explained that a "direct" effect of an act is one that "follows as an immediate consequence" "with no intervening element." While the effect need not be either "substantial" or "foreseeable," it cannot be "purely trivial." The Court recognized that the exception's requirements may often be met where a US plaintiff claims a right to have been paid in the US, or where a contract to be performed in the US was breached. In this case, by contrast, the alleged loss occurred as a result of the bank's inability to repay loans extended to it by Stanford. Because the plaintiffs were not directly owed money but were merely investors in entities that would have had more money if the loans had been repaid, the Court concluded that their loss was not sufficiently "direct" to satisfy the exception.

The Court then addressed the expropriation exception, which it described as having three elements that a plaintiff must satisfy: "that (1) rights in property are in issue, (2) the property was taken in violation of international law, and (3) one of the two nexus requirements [with the US] is satisfied." While OSIC argued that the second prong of this test was satisfied, the Court noted that the plaintiff had not identified a "particular international law" that had been violated. The Court further found that the defendants had shown that the seizure was merely a routine "regulatory activity."

With no FSIA exception applicable, the Court dismissed the case.

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