Can You Be Sued Under The Foreign Sovereign Immunities Act?: A Primer For Foreign Governments And Their Agencies

• Published date: 26 January 2021
• Subject Matter: Government, Public Sector, Litigation, Mediation & Arbitration, Terrorism, Homeland Security & Defence, Sovereign Immunity: Public Sector Government, Trials & Appeals & Compensation
• Law Firm: Arnold & Porter
• Author: Mr John Bellinger, III, R. Reeves Anderson, Sally Pei, Stephen Wirth and Sean A. Mirski

The United States is well known globally as a forum for costly and protracted litigation. Each year, tens of millions of lawsuits are filed within United States borders, and even foreign governments are regularly caught in the crosshairs. Sometimes, the suits filed against foreign governments raise bona fide claims; other times, they are political theater intended only to harass or embarrass. But foreign governments, along with their ministries and state-owned companies, have one inherent advantage in litigation that most defendants do not: the shield provided by the Foreign Sovereign Immunities Act (FSIA), a federal statute that largely (but not entirely) reflects international-law rules about the immunity of a state in the courts of other states.

Foreign states and certain state agencies and companies are presumptively immune under the FSIA from state and federal court jurisdiction, meaning that American courts generally cannot hear cases brought against them. But the FSIA contains several enumerated exceptions. If a case falls within any one of those exceptions, the FSIA effectively strips foreign states of their immunity and allows them to be sued as if they were a private party, opening the door to years of often painful litigation.

In this advisory, we explain the basics of how the FSIA works and then take a look at five of its most significant exceptions: (1) the commercial activity exception, (2) the non-commercial torts exception, (3) the expropriation exception, (4) the waiver exception, and (5) the terrorism exception. By understanding where the law stands on each exception'and, equally important, where the law is trending'foreign governments can begin evaluating their litigation risk and thinking about what steps they can take to avoid ending up in court at all.

Arnold & Porter has represented dozens of foreign states'from every continent except Antarctica'in lawsuits throughout the United States. Having successfully defended lawsuits brought under each of the five FSIA exceptions discussed below, we offer this primer to help foreign sovereigns understand the most frequently invoked exceptions to sovereign immunity.

The Foreign Sovereign Immunities Act

For more than 150 years after the founding of the United States, foreign states were almost entirely exempt from the jurisdiction of US courts as a matter of comity (i.e., respect for the sovereignty of other nations).¹ But in the early-to-mid twentieth century, the US government began to join other states in recognizing that this "absolute" immunity was inappropriate in certain cases, especially those in which a foreign state was behaving less like a sovereign and more like a private actor.² In 1952, the State Department began informing federal courts that the immunity of foreign states was limited or "restricted" to situations where the foreign government engages in governmental functions. However, the State Department's determinations were inconsistent and occasionally colored by political considerations.³ In 1976, Congress responded to these problems by enacting the FSIA, which standardized the new, "restrictive" rules of immunity and assigned responsibility for determining immunity to the federal courts.

Since then, the FSIA has become a mainstay of foreign relations litigation. It makes foreign states, including their "political subdivision[s]" and "agenc[ies] and instrumentalit[ies]," presumptively immune from state and federal court jurisdiction.⁴ The FSIA also sets up a separate regime of immunity for the enforcement of judgments against foreign states.⁵ Furthermore, the FSIA indirectly governs the immunity of international organizations through a separate statute, the International Organizations Immunities Act, which incorporates the FSIA's immunity rules.⁶ However, the FSIA does not apply to foreign officials, who are instead governed by a separate common law of official immunity based in part on guidance provided by the Executive Branch.⁷

Despite its sweep, the FSIA does not provide immunity in every case involving a foreign state. In accordance with the "restrictive" theory of foreign sovereign immunity, the FSIA limits the immunity it confers through several exceptions.⁸ If a plaintiff can show that its case falls within one of those exceptions, then a court will automatically have jurisdiction over that case as well as over the foreign state defendant.

Five of the FSIA's exceptions are especially notable and provide the basis for most lawsuits against foreign states: (1) the commercial activity exception, (2) the non-commercial torts exception, (3) the expropriation exception, (4) the waiver exception, and (5) the terrorism exception.⁹ Each of these exceptions finds frequent favor among plaintiffs, and for that reason courts will continue hearing cases that flesh out the contours of these exceptions. On average, for example, the Supreme Court decides about one FSIA case every year, and many of its cases have concerned'and will continue to concern'these five exceptions.¹⁰

The Commercial Activity Exception

Of the various exceptions to foreign sovereign immunity, the "commercial activity" exception provides the basis for most lawsuits against sovereigns and their agencies and instrumentalities.¹¹ States have been sued under this exception (though not always successfully) for an extraordinarily wide array of activities, including the promotion of investment opportunities abroad,¹² the failure to warn of safety issues and product defects,¹³ and state involvement in fraudulent schemes.¹⁴ Plaintiffs have often invoked this exception to try to bring run-of-the-mill labor claims, including, for example, those under worker's compensation laws.¹⁵ Commercial activity suits related to contracts are also common, including, for example, a contract to manage a health-benefit plan,¹⁶ a contract to reimburse physicians for a kidney transplant,¹⁷ and a contract to sell a valuable art collection.¹⁸ It is especially common for plaintiffs to bring suits under this exception for claims relating to debts and bonds.¹⁹

States lose their immunity under the commercial activity exception in suits that are based upon (1) "a commercial activity carried on in the United States by a foreign state"; (2) "an act performed in the United States in connection with a commercial activity of the foreign state elsewhere"; or (3) "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."²⁰

Each clause provides a separate ground for US courts to exercise jurisdiction over a foreign sovereign. And although they differ with regard to the exact conditions that must be satisfied to support jurisdiction, all three clauses first require that the activity in question be "commercial" and that the action giving rise to the suit be "based upon" that commercial activity. Courts therefore generally proceed in three steps when considering the application of this exception.

First, they ask whether the activity of the foreign state is "commercial," rather than "sovereign," in nature. The FSIA defines "commercial activity" as either "a regular course of commercial conduct" or "a particular commercial transaction or act," but it also provides that courts must look to the nature of the activity rather than its purpose.²¹ That is, regardless of the foreign state's motive, courts must determine whether the conduct at issue is the type of conduct that private players in the market typically engage in.²² For example, the Second Circuit recently held that the Welsh Government's promotion of tourism through a photograph in a brochure qualified as commercial activity because private entities like airlines, hotels, travel agents, art festival sponsors, and operators of theme parks also promote tourism in the same way.²³ By contrast, the same court held a day later that Greece's attempt to nationalize historical artifacts and regulate their export and ownership did not qualify as commercial activity because no private party could undertake that same act.²⁴

Disagreement about what constitutes the "gravamen" of an action surfaced in OBB Personenverkehr AG v. Sachs, ²⁵ 2015 case in which the Supreme Court narrowed the scope of the "based upon" requirement and, with it, the commercial activity exception. There, a customer purchased a rail pass from a US travel agent and was then injured on a train platform in Austria. She sued OBB, the Austrian state-owned railway carrier, and argued that her claims were "based upon" the ticket transaction in the United States. The Court disagreed. It held that while Sachs's ticket purchase led to the conduct that eventually injured her, all of her claims were "based upon" the alleged tortious conduct of OBB that "plainly occurred abroad." It was not enough, the Court insisted, that one element of her claims was linked to the ticket purchase; otherwise, foreign states would be required to litigate in US courts despite there being only attenuated connections between the commercial activity and a plaintiff's cause of action.

Third, courts must determine whether the commercial activity upon which the plaintiff's suit is based is sufficiently connected to the United States. The FSIA sets forth three separate grounds that can provide the "jurisdictional nexus." The first deals with commercial activity "carried on" in the United States and requires a "substantial contact" between that activity and the United States.²⁶ An isolated contact, like a single transfer of funds to a US bank,²⁷ does not constitute activity "carried on" in the United States. But extensive contract negotiations²⁸'even if that contract is executed outside the United States--and ongoing solicitation of business from vendors in the United States ²⁹ can satisfy the requirement of substantial contacts. The second statutory nexus allows jurisdiction based on an act performed in the United...