US Supreme Court to address "agency" in commercial activity exception to sovereign immunity under the Foreign Sovereign Immunities Act

The Foreign Sovereign Immunities Act, 28 U.S.C. §§ 1602 et seq. ("FSIA") provides for limited statutory exceptions to the sovereign immunity of foreign states and their instrumentalities. Under § 1605(a)(2) of the FSIA, a foreign state is not immune from the jurisdiction of U.S. courts in claims "based upon a commercial activity carried on in the United States by the foreign state." The U.S. Supreme Court will soon have occasion to clarify when commercial activity by a separate entity may give rise to liability on the part of a foreign state for acts occurring outside the U.S.

On 23 January 2015 the U.S. Supreme Court granted certiorari in OBB Personenverkehr AG v. Sachs on the applicable standard for determining when a foreign state[1] may be liable for injuries suffered outside the U.S. Specifically, the questions presented to the Court are (1) whether the express definition of "agency" in the FSIA, the factors set forth in the seminal case of First National City Bank v. Banco para el Comercio Exterior de Cuba ("Bancec"), 462 U.S. 611 (1983), or common law principles of agency, apply to determine whether an entity is an agent of a foreign state; and (2) whether a tort claim for personal injuries suffered outside the US is "based upon" the sale of a ticket in the US.

Background of the case

While travelling on a Eurail Pass purchased online in the US from a Massachusetts travel agent, RPE, respondent Carol Sachs suffered serious injury upon attempting to board a train in Austria. Petitioner OBB Personenverkehr AG ("OBB") operates passenger rail service in Austria and is a subsidiary of OBB Holding Group, a joint-stock company created and wholly owned by the Republic of Austria. Sachs sued OBB in California (where she resides) for negligence, strict liability for design defects and failure to warn of design defects, and breach of implied warranties of merchantability and fitness.

The U.S. District Court for the Northern District of California dismissed the suit for lack of subject matter jurisdiction under the FSIA, holding that the commercial activity exception did not apply because OBB itself had not engaged in commercial activity in the US, and that RPE's sale of the Eurail pass could not be attributed to OBB.

The District Court's decision was affirmed on appeal to a panel of the Court of Appeals for the Ninth Circuit, but reversed upon rehearing en banc. The en banc Ninth Circuit applied common-law principles of agency, concluding that RPE was OBB's agent and thus an agent of Austria.[2]  It also observed that the Second Circuit and the D.C. Circuit had "applied the commercial-activity exception where the commercial act in the United States was that of a travel agent acting for the foreign sovereign."[3] The court distinguished Bancec on the basis that it "determined agency in the context of assessing responsibility of corporate affiliates."[4]

The Bancec guidelines

In relation to the first issue presented, the U.S. Supreme Court has previously provided guidance to determine if an entity is an agent of a foreign state in First National City Bank v. Banco para el Comercio Exterior de Cuba (Bancec), 462 U.S. 611 (1983). The Court first described the key features of a state instrumentality:

• creation by an enabling statute prescribing the powers and duties of the instrumentality;
• management by a board selected by the government, pursuant to such enabling statute;
• separate legal personality, including the powers to hold and sell property, and to sue and be sued;
• primary responsibility by the instrumentality for its own finances; and
• operation as a distinct economic enterprise not subject to the same budgetary and personnel requirements imposed on government agencies.

As for whether the acts of an instrumentality could give rise to liability by the state, the Supreme Court recognised a presumption that "government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such."[5] However, the Court held that this presumption may be rebutted where: (i) a corporate entity is so exclusively controlled by the state that a relationship of principal and agent is created; or (ii) recognising separate corporate personality would work fraud or injustice, including where the corporate form is interposed to defeat legislative policies.

The Supreme Court cautioned that its decision provided "no mechanical formula" but resulted from "the application of internationally recognized equitable principles to avoid the injustice that would result from permitting a foreign state to reap the benefits of our courts while avoiding the obligations of international law."

Application of Bancec

Over the three decades since Bancec was decided, U.S. courts have found subject matter jurisdiction under the commercial activity exception where, for example, the government controlled the instrumentality's routine business decisions in addition to injuring some of the corporation's own shareholders through a corporate policy guided by government representatives.[6] It is clear, however, that ownership alone is insufficient to rebut the presumption of separate legal personality. "If majority stock ownership and appointment of the directors were sufficient, then the presumption of separateness announced in Bancec would be an illusion."[7]

The Bancec guidelines have also been clarified as not extending to central banks,[8] and are now subject to the Terrorism Risk Insurance Act,[9] which was enacted to enable victims of terrorism to satisfy judgments rendered in their favour "through the attachment of blocked assets of terrorist parties."[10]

OBB before the US Supreme Court

Despite having argued that certiorari should not be granted, the U.S. Solicitor General has recently filed an amicus brief supporting reversal of the Ninth Circuit's decision. The Solicitor General's brief argues that while the Ninth Circuit correctly applied common-law agency principles to hold that a foreign state may carry on commercial activity in the US through an agent acting on its behalf, it erred in finding that respondent's claims in this case were "based upon" such commercial activity.

The Governments of the Netherlands and Switzerland have jointly submitted an amicus brief arguing that the Ninth Circuit's construction of the FSIA was inconsistent with international law and practice, which takes into account "geographical limitations of jurisdiction". The joint amicus brief cautions that the Ninth Circuit's decision is "an unwarranted exercise of extraterritorial jurisdiction" that would have "risks for international relations."

OBB v. Sachs does not present the same element of injustice that was at play in Bancec; neither OBB nor the Austrian government would be benefiting from U.S. judicial process while evading their obligations under international law. RPE, a travel agent selling tickets online, is also at least two degrees removed from the Austrian state. It may be anticipated that the Supreme Court is more likely to reverse than uphold the Ninth Circuit's decision. Given that this case sits at the intersection of foreign relations, comity, and internet commerce, the Supreme Court's decision and reasoning will have significant commercial and foreign relations implications.  

For more information, please contact Laurence Shore, Partner, Liang-Ying Tan, Associate, or your usual Herbert Smith Freehills contact.

[1]        Under §1603(a), "foreign state" includes an agency or instrumentality of a foreign state. §1603(b) defines an "agency or instrumentality of a foreign state" as any separate legal entity which is an organ of the foreign state or "a majority of whose shares or other ownership interest is owned by" the foreign state.

[2]        "Common sense also tells us that an agent that carries on commercial activity for a foreign sovereign in the United States does not need to be an agency or instrumentality of a foreign state under § 1603(b). Foreign sovereigns invariably must act through agents, and if they engage in commercial activity in the United States it will necessarily be through an agent, whether that agent is its own employee or a separate company in an agency or subagency relationship." Sachs v. Republic of Austria, 737 F.3d 584, 595 (9th Cir. 2013) cert. granted sub nom. OBB Personenverkehr AG v. Sachs, 135 S. Ct. 1172, 190 L. Ed. 2d 929 (2015).

[3]        Sachs v. Republic of Austria, 737 F.3d 584, 592 (9th Cir. 2013) cert. granted sub nom. OBB Personenverkehr AG v. Sachs, 135 S. Ct. 1172, 190 L. Ed. 2d 929 (2015).

[4]        Sachs v. Republic of Austria, 737 F.3d 584, 594 (9th Cir. 2013) cert. granted sub nom. OBB Personenverkehr AG v. Sachs, 135 S. Ct. 1172, 190 L. Ed. 2d 929 (2015).

[5]        First National City Bank v. Banco para el Comercio Exterior de Cuba (Bancec), 462 U.S. 611, 626-627 (1983).

[6]        McKesson Corp. v. Islamic Republic of Iran, 52 F.3d 346, 352 (D.C. Cir. 1995).

[7]        Seijas v. Republic of Argentina, 502 F. App'x 19, 21 (2d Cir. 2012), quoting Transamerica Leasing, Inc. v. La Republica de Venezuela, 200 F.3d 843, 849 (D.C.Cir.2000)

[8]        "…foreign central banks are not treated as generic “agencies and instrumentalities” of a foreign state under the FSIA; they are given “special protections” befitting the particular sovereign interest in preventing the attachment and execution of central bank property. Plaintiffs cannot evade this statutory requirement by using Bancec to turn assets that would otherwise be considered property of a central bank held for its own account into property of the Republic that is not entitled to immunity."  NML Capital, Ltd. v. Banco Cent. de la Republica Argentina, 652 F.3d 172, 188 (2d Cir. 2011) (citation omitted).

[9]        Pub.L. No. 107–297, 116 Stat. 2322 (2002).

[10]       Estate of Heiser v. Islamic Republic of Iran, 885 F. Supp. 2d 429, 436 (D.D.C. 2012) aff'd sub nom. Heiser v. Islamic Republic of Iran, 735 F.3d 934 (D.C. Cir. 2013).