First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement. This month we bring you the latest updates from “The Summer of the FSIA.” Over the last few weeks, we have seen a number of significant developments concerning the application of the Foreign Sovereign Immunities Act (FSIA) coming down from the federal appellate courts. We provide a rundown of several of these cases along with an update on the ability to obtain discovery in aid of investor-state arbitration.
The DC Circuit Weighs in on “Direct Effects”
The Court of Appeals for the DC Circuit recently decided three cases concerning the reach of the “most significant” of the FSIA's exceptions to sovereign immunity—the commercial activity exception.1 The commercial activity exception, as relevant here, permits lawsuits against sovereigns where the case involves “an act outside…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.”2 In this trio of new decisions, the DC Circuit provides additional guidance on exactly when an effect on the United States can be considered “direct.”
Most recently, the DC Circuit decided Exxon Mobil Corp. v. Corporacion CIMEX, S.A., No. 21-7127 (D.C. Cir. Jul. 30, 2024). 3 Steptoe has had the distinction of representing Exxon in this matter. Exxon involves claims against certain Cuban state-owned corporations that are “trafficking” in property that the Cuban regime confiscated from Exxon in violation of the Helms-Burton Act. Exxon argued that the commercial activity exception applied to CIMEX's trafficking activities —including operating service stations on the confiscated land that process remittance transactions from the United States and sell goods imported from the United States—because this conduct was commercial activity that had a direct effect in the United States. The district court ruled in Exxon's favor. The DC Circuit substantially agreed.
The court held that these trafficking activities were inherently commercial in nature and thus satisfied the definition of commercial activity. The court also agreed that the activities could have a direct effect in the United States. For example, CIMEX's operating a remittance business on the confiscated land enables transfers of money from the United States.4 The court reasoned that a “causing non-trivial outflow of money” constitutes a direct effect in the United States.5 Importantly, the court rejected CIMEX's argument that the effect is actually “indirect” because “it rests on intervening decisions of multiple third parties” (i.e., Americans must opt to send remittances to Cuba through CIMEX's business partner and the intended recipients in Cuba must decide to receive the remittances at a service station that is operating on confiscated land).6 The DC Circuit reasoned that the involvement of these third parties “is entirely foreseeable (and even an intended) consequence of CIMEX's actions,” especially in light of the fact that CIMEX “specifically targeted” the United States.7 The court ultimately remanded the case for further fact finding on “whether CIMEX's conducting of a remittances business at the… stations operated on former Exxon property, as opposed to CIMEX's remittances activity writ large, causes a direct effect in the United States.”8
Exxon also contained a notable dissent from Judge Randolph, who reasoned that the court did not need to consider direct effects (or the FSIA as a whole) at all. Looking to a recent line of cases from the US Supreme Court and DC Circuit, Judge Randolph noted that the Helms-Burton Act itself abrogates sovereign immunity because it expressly authorizes lawsuits against agencies and instrumentalities of foreign states.9 While the majority did not agree, Judge Randolph's opinion provides a cogent explanation for why the FSIA may not always be the “sole” basis by which plaintiffs can obtain US jurisdiction over sovereigns.
The DC Circuit employed a similar “direct effects” analysis in EIG Engery Fund XIV v. Petroleo Brasilerio, S.A. There, an American investment fund lost $221 million after it invested in a project to exploit newly discovered oil reserves off the coast of Brazil because of an allegedly fraudulent scheme employed by the project's sponsor, Petrobras.10 Affirming the denial of Petrobras' motion for summary judgment on sovereign immunity grounds, the DC Circuit, as it did in Exxon, focused on the fact that Petrobras “specifically targeted” American investment.11 Before reviewing the evidence, the court cautioned that “targeting” is not the “touchstone” of the analysis and that direct effects can be proved in other ways. The evidence of targeting included Petrobras preparing lists of potential US investors and pitching the investment at two conferences hosted and attended by US investors.12 The court further reasoned that it was of no moment that the conferences were held in Brazil and attended by non-American investors because it was still clear that Petrobras contemplated and tried to attract US investment.13
Decided only a few weeks after EIG Energy, Wye Oak v. Republic of Iraqi provides a useful contrast with Exxon and EIG Energy.14 In Wye Oak, the plaintiff argued that the commercial activity exception applied to its claims that Iraq breached a contract by failing to pay plaintiff for certain work done refurbishing military equipment. Specifically, the plaintiff argued—and the district court agreed—that Iraq's breach had direct effects in the US, including: halting the development of certain software, disrupting certain expansion plans in the US, and impacting US diplomatic relations with Iraq.15 However, the DC Circuit disagreed. A central focus of the court's decision was that the dispute concerned a breach of contract. Thus, in contrast with Exxon and EIG Energy, the court's analysis focused heavily on the situs of the contractual relationship—i.e., on where the contract was formed, where it was principally performed, and where payment was (or was not) made—to assess whether the breach of contract had direct effects on the United States.16
The Latest on Sovereigns in Arbitration
The commercial activity exception was not the only portion of the FSIA on the dockets of the Courts of Appeal. In TIG Insurance Company v. Republic of Argentina,17 the DC Circuit examined the reach of the FSIA's arbitration exception, which, in relevant part, abrogates immunity for claims against sovereigns seeking to confirm an award made pursuant to an arbitration agreement.18 In TIG, an insurance company sued the Republic of Argentina—as the successor-in-interest to an Argentine company called Caja—for breach of certain reinsurance contracts made between TIG and Caja. Caja had become insolvent and through a serious of decrees Argentina assumed all of Caja's contractual liabilities.19
After obtaining a default judgment, TIG attempted to execute on the judgment in Washington, DC, but Argentina obtained a dismissal on sovereign immunity grounds.20 Reversing the district court's ruling, the DC Circuit concluded, among other things, that the agreement to arbitrate was “made by” Argentina even though Argentina had not actually signed the reinsurance contracts.21 Drawing on “ordinary principles of contract law,” the court explained that Argentina was a successor to Caja and had assumed Caja's legal obligations.22 Thus, Argentina has sufficiently “made” the agreement such that it was subject to the exception.
Meanwhile, in Webuild S.P.A. v. WSP USA Inc., No. 23-73, 2024 WL 3463380, at *1 (2d Cir. July 19, 2024), the Second Circuit considered whether an Italian builder, WeBuild, could obtain discovery in aid of ICSID23 arbitration against Panama from a New York-based engineering firm pursuant to 28 USC § 1782.24 The Second Circuit found WeBuild could not obtain discovery and affirmed the quashing of WeBuild's subpoena. The court's ruling turned on the US Supreme Court's recent ruling in ZF Automotive US Inc. v. Luxshare Ltd., which held that § 1782 “authorizes discovery orders only for use in proceedings before foreign or international tribunals that exercise governmental or intergovernmental authority.”25 The court found that the ICSID was not a “governmental or intergovernmental authority” and, thus, WeBuild could not seek discovery from the engineering firm in aid of arbitration.26 Among other arguments, the court rejected the argument that the ICSID receives certain funding from sovereign states. The court reasoned that there is funding to the Centre itself but the tribunal actually overseeing WeBuild's case is funded privately by arbitrator fees. It was likewise insufficient that the ICSID member states afforded higher deference to the enforcement of ICSID awards. In short, WeBuild was unable to show that member states intended to “imbue ICSID tribunals with governmental authority.”27
The US Supreme Court Takes Another FSIA Case
Before taking its summer recess, the Supreme Court agreed to review the DC Circuit's recent decision in Republic of Hungary v. Simon.28 The case—which has been pending for fourteen years and has been the subject of multiple appeals—involves claims brought by survivors or heirs of survivors of the Hungarian Holocaust “seeking to represent the thousands of other surviving victims and heirs of victims of the Hungarian Holocaust.”29 To pierce Hungary's sovereign immunity, plaintiffs have relied on the “expropriation exception” to the FSIA, which, as relevant here, permits lawsuits against sovereigns “in which rights in property taken in violation of international law are in issue and that property or any property exchanged for such property is present in the United States in connection with a commercial activity carried on in the United States by the foreign state.”30 Specifically, plaintiffs alleged that (i) their property was seized from them in violation of international law; (ii) the property was then liquidated into currency; (iii) currency in possession of the Hungarian state was historically commingled with other state funds; and (iv) a portion of those state funds are now being used in connection with commercial activity in the United States.
Are these allegations enough to get past the motion to dismiss stage? In a rare instance where the petitioner and respondent agreed that the Supreme Court should review this case, both parties answered “it depends.” In the DC Circuit, according to the parties, these allegations are sufficient because “a plaintiff can rest on plausible allegations” and does not need to affirmatively trace the confiscated assets to the funds which are currently being used in commercial activity in the United States.31 On the other hand, in the Second and Eleventh Circuits, a plaintiff must “make out a valid argument showing jurisdiction,” which would involve coming forward with some affirmative evidence that the property can be traced.32 The Second Circuit reasoned that this higher bar was based on its reading of the Supreme Court's decision in Bolivarian Republic of Venezuela v. Helmerich & Payne Int'l Drilling Co33, which “raised the bar that a plaintiff must clear to move beyond the pleadings stage.”34
The Supreme Court will answer this question in the next term to some extent. But, for practitioners and their clients, the key question will be – how far will the Supreme Court go? The Simon plaintiffs argue that the circuit split here is a narrow one, which can be resolved by determining the extent to which a plaintiff needs to “trace” assets to sufficiently plead the applicability of the expropriation exception. But Hungary has asked the court to go farther. They argue that the circuit split is much deeper, and the court should clarify the extent to which plaintiffs must offer affirmative evidence supporting the applicability of an FSIA exception at the pleadings stage. If the court were to weigh in on this more fundamental question, it could have profound effects on the ability to bring claims against sovereigns in a range of contexts, including commercial disputes and judgment enforcement.
Footnotes
1. Wye Oak Tech, Inc. v Republic of Iraq, No. 23-7009, 2024 WL 3418694 (D.C. Cir. July 16, 2024) (quoting Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 611 (1992)).
2. 28 USC §1605(2).
3. Exxon Mobil Corp. v. Corporacion CIMEX, S.A., No. 21-7127, 2024 WL 3573507, at *1 (D.C. Cir. July 30, 2024)
4. Id. at *12.
5. Id. at *13
6. Id.
7. Id. (internal quotations and citations omitted).
8. Id. at *15.
9. Id. at *17 (citing, inter alia, Dep't of Agric. Rural Dev. Rural Hous. Serv. v. Kirtz, 601 U.S. 42, 50 (2024), Turkiye Halk Bankasi A.S. v. United States, 598 U.S. 264, 278 (2023), and Mowrer v. U.S. Dep't of Transp., 14 F.4th 723, 729 (D.C. Cir. 2021)).
10. EIG Energy Fund XIV, L.P. v. Petroleo Brasileiro, S.A., 104 F.4th 287, 291-92 (D.C. Cir. 2024)
11. Id. at 294.
12. Id. at 296.
13. Id.
14. Wye Oak Tech., Inc. 2024 WL 3418694.
15. Id. at *3.
16. Id. at *5-6.
17. TIG Ins. Co. v. Republic of Argentina, No. 23-7064, 2024 WL 3573962 (D.C. Cir. July 30, 2024)
18. 28 USC § 1605(6).
19. TIG Ins. Co., at *1-2.
20. Id.
21. Id. at *4-5.
22. Id.
23. International Centre for the Settlement of Investment Disputes
24. Webuild S.P.A. v. WSP USA Inc., No. 23-73, 2024 WL 3463380, at *1 (2d Cir. July 19, 2024)
25. Id. (citing ZF Automotive US, Inc. v. Luxshare, Ltd., 596 U.S. 619 (2022))
26. Id. at *4-5.
27. Id.at *5.
28. No. 23-867 (cert. granted June 24, 2024).
29. Republic of Hungary, Respondents' Br. at 2 (filed May 24, 2024).
30. 28 U.S.C. § 1605(3).
31. Republic of Hungary, Petition at 23 (filed Feb. 7, 2024).
32. Id.
33. 581 U.S. 170 (2017)
34. Republic of Hungary, Petition at 22.
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