Overview
First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement.
Last month, we reported on the Netherlands’ new draft model BIT, which may affect the Netherlands’ attractiveness for foreign investors who have long taken advantage of Dutch treaty protections. This is part of an emerging trend of criticism of the investor-state arbitration system. With more uncertainty, investors may consider advancing claims for expropriation and other violations of international law in national courts. Ordinarily, the United States is a good forum for such disputes; however, recent cases, particularly in the US Supreme Court, have narrowed the Foreign Sovereign Immunity Act’s (FSIA) exceptions to immunity and limited the extraterritorial application of US law.
Continuing with that trend, on June 1, the DC Circuit in Schubarth v. Fed. Republic of Germany, 891 F.3d 392 (D.C. Cir. 2018) followed de Csepel v. Republic of Hungary, 859 F.3d 1094 (D.C. Cir. 2017) and held that the FSIA’s expropriation exception for a foreign state is very narrow but slightly less so for an agency or instrumentality of the foreign state.
According to the DC Circuit, to satisfy the expropriation exception against a foreign state, the property at issue must be (1) present in the United States and (2) used in connection with a commercial activity carried on in the United States. Thus, not only does the property at issue need to be in the United States, the commercial activity must be in the United States and connected with the property at issue.
The expropriation exception as against agents and instrumentalities is different according to the DC Circuit: if the property at issue is owned by an agent or instrumentality that is engaged in commercial activity in the United States, the exception can be satisfied. Thus, unlike foreign states, for agents or instrumentalities, the property need not be in the United States and the commercial activity in the United States need not have a nexus to the specific property.
The 2017 DC Circuit case de Csepel, which Schubarth followed, has a petition for writ of certiorari to the Supreme Court pending. The cert petition is based on a circuit split between the DC and Second Circuits on the one hand (endorsing a narrower reading of the expropriation exception) and the Ninth Circuit on the other (holding foreign states to the same standards as agents and instrumentalities). If the DC Circuit’s reasoning is adopted by the Supreme Court, the US would not be a suitable forum for expropriation claims against foreign states for property located outside of the United States, though claims against agents and instrumentalities may be feasible if they engage in commercial activity in the United States.
Recently, the Supreme Court has construed strictly the exceptions to the FSIA and limited the application of US law extraterritorially. The Supreme Court limited the “commercial activity exception” of the FSIA, ruling that even though a California woman purchased a Eurorail pass in the United States, her lawsuit was not “based upon a commercial activity carried on in the United States by a foreign state” because the gravamen of her complaint occurred in Austria where she was injured trying to board a train. OBB Personenverkehr AG v. Sachs, 136 S. Ct. 390 (2015). In 2017, the Supreme Court strictly construed the expropriation exception to apply only if the property rights at issue were taken in violation of international law. Bolivarian Republic of Venezuela v. Helmerich & Payne Int’l Drilling Co., 137 S. Ct. 1312 (2017). And, in 2018, the Supreme Court held that the terrorism exception “does not provide a freestanding basis for parties holding a judgment . . . to attach and execute against the property of a foreign state, where immunity of the property is not otherwise rescinded under a separate provisions within” the FSIA. Rubin v. Islamic Republic of Iran, 138 S. Ct. 816, 827 (2018).
Also, in other areas of the law, the Supreme Court similarly has held that the presumption against extraterritorial application limits the scope of US law to issues occurring abroad. In 2010, the Supreme Court held that the Securities Exchange Act does not apply extraterritorially for misconduct in connection with securities traded on foreign exchanges. Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010). In 2013, the Court held that the presumption against extraterritoriality constrain courts from hearing cases under Alien Tort Statute. Kiobel v. Royal Dutch Petroleum Co., 569 U.S. 108 (2013). In 2016, the Court held that to assert a RICO claim, a private plaintiff must demonstrate “a domestic injury to its business or property;” the statute “does not allow recovery for foreign injuries.” RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090 (2016).
Considering this trend, it is unsurprising that the DC Circuit would narrow the scope of the expropriation exception in the two most recent cases it considered: de Csepel and Schubarth.
Schubarth involved Mady Marieluise Schubarth’s pursuit of compensation for land allegedly seized from her family at the beginning of the Cold War by East Germany. Id. at 394. The complaint was filed against Germany and the German state-owned corporation that allegedly markets and manages the relevant property, the “BVVG.” The District Court dismissed the complaint. Following de Csepel v. Republic of Hungary, 859 F.3d 1094 (D.C. Cir. 2017), the DC Circuit affirmed the dismissal as to Germany but reversed as to BVVG because the expropriation exception for foreign states versus agents and instrumentalities of a foreign state is different.
The FSIA’s expropriation exception is 28 U.S.C. § 1605(a)(3), which the DC Circuit described as “abstruse,” provides as follows:
(a) A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case –
...
(3) 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; or that property or any property exchanged for such property is owned or operated by an agency or instrumentality of the foreign state and that agency or instrumentality is engaged in a commercial activity in the United States.
Under the DC Circuit’s reading of §1605(a)(3), to satisfy the exception against a foreign state, the property at issue must be present in the United States in connection with a commercial activity carried on in the United States. By contrast, the exception can be satisfied as against an agent or instrumentality if it owns the property at issue‑‑even if not located in the United States‑‑and the agent or instrumentality is engaged in a commercial activity in the United States.
Schubarth followed the analysis in de Csepel, a DC Circuit decision decided last year in June 2017. de Csepel also involved claims against a foreign state (Hungary) and its agents and instrumentalities. The de Csepel family sought to recover an art collection that the Hungarian government and its Nazi collaborators seized during the Holocaust and provided to state-owned Hungarian museums. de Csepel, 859 F.3d at 1097. The DC Circuit held that Hungary was immune but that the agents and instrumentalities of Hungary met the exception.
The Court explained that under the expropriation exception, a foreign sovereign loses its immunity if (1) “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.” By contrast, an agent or instrumentality of the foreign state loses its immunity if (2) “that property or any property exchanged for such property is owned or operated by an agency or instrumentality of the foreign state and that agency or instrumentality is engaged in a commercial activity in the United States.” In other words, the nexus required for a foreign state to lose its immunity is very narrow because it requires that the property be present in the United States and connected to a commercial activity carried on in the US by the foreign state.
The de Csepel family petitioned for writ of certiorari to the Supreme Court, which remains pending. On June 25, 2018, the Supreme Court invited the Solicitor General to file a brief expressing the views of the United States. Notwithstanding the pending petition, the DC Circuit followed de Csepel and dismissed the Schubarth’s case as to Germany but sustained the case as to the agents and instrumentalities of Germany.
As the petition for certiorari argues, there is a circuit split on this issue with the DC and Second Circuits taking a narrow view of the expropriation exception and the Ninth Circuit taking a broader view. In Altmann v. Republic of Austria, 317 F.3d 954, 958 (9th Cir. 2002), amended on denial of reh’g, 327 F.3d 1246 (9th Cir. 2003), aff’d, 541 U.S. 677 (2004) and Cassirer v. Kingdom of Spain, 616 F.3d 1019, 1032-34 (9th Cir. 2010), cert. denied, 564 U.S. 1037 (2011), the Ninth Circuit sustained claims against foreign states on the basis that the second prong of the expropriation exception were met. In those cases, the Ninth Circuit construed the FSIA’s expropriation exception essentially to read as follows: A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case – … (3) 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 owned or operated by an agency or instrumentality of the foreign state and that agency or instrumentality is engaged in a commercial activity in the United States. In other words, a foreign state can be liable for expropriation under the Ninth Circuit’s reading in cases where the agent or instrumentality owns the property at issue and engages in commercial activity in the United States.
Both the Second Circuit, see Garb v. Republic of Poland, 440 F.3d 579, 589 (2d Cir. 2006), and the DC Circuit have rejected this reading because under it, “a plaintiff would be able to sue a foreign state with no commercial activity in the United States so long as the agency or instrumentality owning the property in issue is engaged in a commercial activity in the United States. In other words—and counterintuitively—a plaintiff … could more easily obtain jurisdiction over a foreign state if the expropriated property is possessed not by it, but by one of its agencies or instrumentalities . . . .” de Csepel, 859 F.3d at 1108.
Investor-state protections are going through a period of uncertainty and transformation. If the Supreme Court weighs in on the FSIA’s expropriation exception, it could determine whether the United States becomes an attractive forum to sue foreign states as an alternative to investor-state arbitration. If the DC Circuit’s holdings stand, the United States would not be a good forum for claims against foreign states for property located outside of the United States. There may be better prospects for claims against agents and instrumentalities, even under the DC Circuit’s narrow reading of the expropriation exception. In the current investor-state environment, pre-transaction advice on how best to manage political risk in international investments and provide for available remedies—including the possibility of US courts or elsewhere—is of paramount importance.
