Understanding the Doctrine of Sovereign Immunity

The doctrine of foreign sovereign immunity provides that a foreign state generally is immune from the jurisdiction of the courts of another sovereign state. State immunity developed as an “undisputed principle of customary international law” and the law of nations based upon core aspects of sovereignty applicable in common law, civil law and other judicial systems. Until the mid-Twentieth Century, (GORDON 1977) sovereign immunity from the jurisdiction of foreign courts was almost absolute. However, as governments and state enterprises became more and more active in commercial activities in the modern era, private entities interacting with foreign states attacked complete sovereign immunity as fundamentally unfair in eliminating judicial recourse and favoring state companies.

Discussion

The United States and some Western European nations reacted by adopting a “restrictive” approach to foreign sovereign immunity. The restrictive theory of state immunity provided that foreign states were immune from jurisdiction relating to their “public acts” (acta jure imperii) but were not immune from jurisdiction for their “private acts” (Michael 2005) (acta jure gestionis) including commercial activities. The United States codified the restrictive approach to state immunity through the Foreign Sovereign Immunities Act of 1976 (the “FSIA”). Two years later, the United Kingdom passed similar legislation: the State Immunity Act of 1978.

In addition to domestic law, efforts were undertaken to develop multilateral treaties governing foreign sovereign immunity issues. The Council of Europe adopted a European Convention on State Immunity and an Additional Protocol that became effective in 1976 (the “European Convention”). Most recently, the United Nations, which had been working on state immunity issues for decades, finalized its own restrictive approach to state immunity through the United Nations Convention on Jurisdictional Immunities of States and Their Property (the “UN Convention”). The United Nations General Assembly passed the UN Convention on December 2, 2004 and the treaty is currently open for signatures through 2007. (The Belgian Constitution 2009) If widely adopted, the UN Convention may serve as a new international norm in the field of state immunity.

The reality of modern international dispute resolution is that foreign states and their subdivisions, agencies, instrumentalities, organs and state-owned enterprises are often engaged in transnational commerce. Such entities are active in: energy exploration, development and production; mining and other natural resources exploitation; banking; maritime, rail and aerial transportation; tourism; utilities including electricity, water, natural gas and sewage; industrial manufacturing; international trade; and many other sectors of important commercial activity. Given the prevalence of state actors in the world economy, lawyers practicing international law should be knowledgeable concerning state immunity. (Akehurst 1997)

The balance of this presentation will provide a broad overview of foreign sovereign immunity with special focus on the FSIA and United States state immunity law including:

Historical Development of United States Foreign Sovereign Immunity Law;

the United States Foreign Sovereign Immunities Act; and

State Immunity Approaches in Other Jurisdictions and Multilateral Treaties.

Historical Development of United States Foreign Sovereign Immunity Law

The United States Supreme Court’s 1812 decision, The Schooner Exchange v. McFadden, is the source of American foreign sovereign immunity jurisprudence. In that case, American plaintiffs claimed to be the rightful owners of an armed French ship found in a United States port. The plaintiffs sought execution on the vessel. (The Belgian Constitution 2009) Citing international custom, Justice Marshall determined that state immunity was based upon the “perfect equality and absolute independence of sovereigns and [a] common interest impelling them to mutual intercourse.” Referring to the importance of maintaining friendly relations with other nations, the Supreme Court confirmed that state immunity is based upon international comity among nations. The Supreme Court ultimately endorsed the suggestion of the Executive Branch and refused to permit the exercise of jurisdiction by a United States court over the French war ship.

Although The Schooner Exchange is usually cited for the proposition that the United States adopted a broad, absolute form of state immunity, Justice Marshall actually planted the seeds for the restrictive theory of foreign sovereign immunity by noting the distinction between an armed public vessel (such as the Schooner Exchange) (GORDON 1977) and private merchant vessels entering the United States for purposes of trade.

In the decades after The Schooner Exchange decision, the doctrine of foreign sovereign immunity gradually evolved in the United States to give more and more deference to the Executive Branch in the decision-making process of whether immunity should be afforded. Until 1952 the Executive Branch, through the United States Department of State, “followed a policy of requesting immunity in all actions against friendly sovereigns.” (Michael 2005) During World War II, United States courts abdicated almost all judicial decision-making with respect to state immunity and instead determined that position statements (sometimes called “suggestions of immunity”) from the State Department were dispositive of a foreign state’s immunity. If the State Department suggested immunity, (Akehurst 1997) immunity was granted; if not, immunity was not afforded.

Meanwhile, for various reasons governments were increasingly becoming engaged in state-trading and various commercial activities. Lawyers, scholars and private parties urged that the complete immunity of states engaged in commercial activities was not required by international law and was undesirable because such absolute immunity (even for friendly nations) deprived private parties that dealt with state enterprises of judicial remedies and gave state businesses an unfair competitive advantage. Some countries, notably Belgium and Italy, started to implement a restrictive approach to state immunity by denying immunity in cases stemming from commercial activity. (The Belgian Constitution 2009)

The United States adopted a restrictive approach to state immunity in 1952 through issuance of the so-called Tate Letter. In that correspondence, the Legal Adviser for the State Department wrote:

A study of the law of sovereign immunity reveals the existence of two conflicting concepts of sovereign immunity, each widely held and firmly established. According to the classical or absolute theory of sovereign immunity, a sovereign cannot, without his consent, be made a respondent in the courts of another sovereign. According to the newer or restrictive theory of sovereign immunity, the immunity of a sovereign is recognized with regard to sovereign or public acts (jure imperii) of a state, but not with respect to private acts (jure gestionis)…. [I]t will hereafter be the [State] Department’s policy to follow the restrictive theory ….(The Belgian Constitution 2009)

Under this new policy, the State Department retained initial responsibility to decide questions of sovereign immunity using the new restrictive immunity framework. However, application of the Tate Letter policy proved difficult and unpredictable. The State Department did not always opine in cases involving foreign sovereigns. Further, the State Department sometimes was guided by political or diplomatic considerations rather than the restrictive immunity approach.

While the United States was struggling to implement the new restrictive state immunity principle, (Michael 2005) other nations (notably in Europe ) had also begun to formulate their own restrictive foreign sovereign immunity approaches. After more than a decade of study, the Council of Europe concluded the first comprehensive multilateral treaty on foreign sovereign immunity, the European Convention on State Immunity and Additional Protocol, in 1972. The European Convention entered into force on June 11, 1976 between eight European nations.

At almost the same time, the United States Congress passed the FSIA to provide a statutory framework for resolving issues of sovereign immunity through the judicial branch without exclusive reliance upon the State Department. In general, the FSIA codified the restrictive theory of sovereign immunity and brought the United States into alignment with other developed nations in implementing limited sovereign immunity approaches. (Akehurst 1997)

The United States Foreign Sovereign Immunities Act

A. General Scope of the FSIA

Enacted in 1976, the FSIA contains “a comprehensive set of legal standards governing claims of immunity in every civil action against a foreign state or its political subdivisions, agencies or instrumentalities.” The FSIA “codifie[d], as a matter of federal law, the restrictive theory of sovereign immunity and transferred primary responsibility for immunity determinations from the Executive to the Judicial Branch.” The FSIA mosaic contains the “sole basis for obtaining jurisdiction over a foreign state in federal court.” Thus, the FSIA “must be applied by the District Courts in every action against a foreign sovereign, since subject matter jurisdiction in any such action depends on the existence of one of the specified exceptions to foreign sovereign immunity.” (Michael 2005)

Structurally, the FSIA is a patchwork of provisions that appear in different sections of Title 28 of the United States Code. Together, these sections address: subject matter and personal jurisdiction (§§ 1330(a) and 1332(a)(4)); venue and removal to federal court (§§ 1391(f) and 1441(d)); procedural issues (§§ 1330(a) and 1608); the general principle of immunity for foreign states (§ 1604); exceptions to immunity (§§ 1605 and 1607); extent of liability (§ 1606); and execution upon property of foreign states (§§ 1609-1611). The various sections of the FSIA “work in tandem.” (Akehurst 1997)

Although all of these provisions are intertwined in a sometimes Byzantine fashion that is “hardly a model of statutory clarity,” the general thrust is clear. Under the FSIA, foreign states are presumed to be immune from the jurisdiction of United States courts and from liability in United States lawsuits unless a statutory exception to liability applies. Whether or not foreign states are immune from jurisdiction and liability, the FSIA also affords foreign states certain protections including a more formalized service of process regime, additional time to respond to actions, (The Belgian Constitution 2009) the right of removal to federal court, the right to decision by a judge instead of a jury, and certain rights with respect to attachment and execution on property of the foreign state.

B. Applicability of the FSIA: Foreign States

Because virtually all of the FSIA protections (including the core immunity provisions) apply only to a “foreign state,” the threshold issue for application of the FSIA is whether or not the entity claiming FSIA protections is a “foreign state.” The entity asserting FSIA protection bears the burden of making a prima facie showing of “foreign state” status.

The phrase “foreign state” is defined somewhat cryptically and circularly in Section 1603(a) of the FSIA as follows:

A ‘foreign state,’ except as used in section 1608 of this title, includes a political subdivision of a foreign state or an agency or instrumentality of a foreign state.

In turn, Section 1603(b) provides that an “agency or instrumentality of a foreign state” means any entity:

which is a separate legal person, corporate or otherwise, and

which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state… and

which is neither a citizen of a State of the United States… nor created under the laws of any third country.

The FSIA does not define “political subdivision” or “organ.” Further, there are no specific references with regard to whether the FSIA applies to individual government officials (i.e., head of state immunity). Although application of the FSIA to the state qua state (i.e., the People’s Republic of China or the Bolivarian Republic of Venezuela) is virtually self-evident, (GORDON 1977) numerous issues have arisen in FSIA litigation concerning whether different types of entities qualify as “foreign states” entitled to FSIA protection.

Political Subdivisions of a Foreign State

Rather than naming the state itself, sometimes government ministries, embassies, consulates, militaries or other related subdivisions of states are separately named as parties in FSIA litigation. Whether such entities are actually separate from the state itself may depend upon the unique factual situation presented. However, as a general rule, government ministries, embassies, (Michael 2005) consulates and militaries are usually afforded FSIA protection as foreign states or political subdivisions or agencies or instrumentalities of foreign states.

Tiered State-Owned Companies

State-owned companies are often organized in complex legal structures with holding companies and numerous tiers of subsidiaries partly or fully owned by the parent. This is particularly the case in the energy and natural resources sector. For example, Mexico, which is the sole owner of that nation’s petroleum, restructured its ownership by establishing a holding company and several operating subsidiaries. (Akehurst 1997) Venezuela’s national energy company, Petróleos de Venezuela S.A., is similarly structured as a fully state-owned holding company that owns numerous operating subsidiaries in multiple tiers. The Republic of Honduras holds interests in the lumber industry through multiple corporate layers. These complex state-parent-subsidiary relationships have spawned substantial litigation concerning the applicability of the FSIA. Until recently, the position of the majority of courts was that corporations indirectly owned by a foreign state through intermediary parent corporations fall within the FSIA.

In the most important recent development in United States sovereign immunity law, the Supreme Court reversed this presumption in Dole Food Co. v. Patrickson and held that indirect ownership is not sufficient under the FSIA. The Supreme Court concluded that “the state must itself own a majority of the shares of a corporation if the corporation is to be deemed an instrumentality of the state under the provisions of the FSIA.” This decision has been characterized by some commentators as “severely limit[ing]” (The Belgian Constitution 2009) the protections of the FSIA for state-owned companies and likely to result in state-owned companies being sued more often in the “less predictable atmosphere of state courts.” (GORDON 1977) The opinion may also cause ironical results. For example, under Patrickson an entity that is just 51% directly owned by a foreign state would qualify for FSIA protection. However, an entity that is 100% owned by a foreign sovereign, but held through another 100% owned holding company, would not receive FSIA protection even though the foreign state’s real interests may be greater than in the case of direct partial ownership. In order to ensure FSIA protection, state-owned companies in tiered organizations may need to consider the benefits of restructuring with direct state ownership of all companies in the corporate group. (Michael 2005)

Organs of a Foreign State

The FSIA does not define the term “organ” as used in Section 1603(b)(2). However, the FSIA’s legislative history suggests that “Congress intended the terms ‘organ’ and ‘agency or instrumentality’ to be read broadly.” In the absence of a statutory definition, certain appellate courts have had occasion to construe the phrase: “organ of a foreign state” as used in the FSIA. In determining whether an entity is an “organ of a foreign state,” primary consideration should be given to “whether the entity engages in a public activity on behalf of the foreign government.” (Akehurst 1997)

Time for Determination of Foreign State Status

Foreign states, particularly agencies or instrumentalities such as state-owned companies, are not static. To the contrary, foreign states frequently create new entities and change their ownership percentages in existing entities. Until recently, there was a split of authority in United States courts concerning when foreign state status should be assessed: as of the date of the contract or tort forming the basis of the lawsuit; as of the date that the underlying claim arose; or as of the date the lawsuit was filed. The Supreme Court answered this question definitively in Patrickson. (The Belgian Constitution 2009) An entity’s status as a foreign state under the FSIA should be considered as of the date that the lawsuit is filed. Thus, an entity may qualify as a foreign state at the time a contract is executed but be stripped of FSIA protection by reason of subsequent divestiture by the foreign state prior to the commencement of litigation.

C. The General Rule of Immunity for Foreign States

Under the FSIA, immunity remains the rule rather than the exception. Section 1604 of the FSIA expressly provides that:

a foreign state shall be immune from the jurisdiction of the courts of the United States… except as provided in sections 1605 to 1607 of this chapter. (The Belgian Constitution 2009)

The FSIA immunity is immunity from jurisdiction and liability as well as from the burdens of litigation itself (i.e., cost, time, discovery, motions practice etc…). Accordingly, a foreign state is “presumptively immune under the statute and remains so unless one of the specific statutory exceptions applies.” Once an entity makes a prima facie showing of immunity (i.e., that it is a foreign state), the party seeking to litigate in the United States then has the burden of showing that an exception to immunity applies.

D. The Exceptions to FSIA Immunity

The heart of any FSIA case is whether the claimant can establish an exception to immunity. If so, the case may proceed and “the foreign state shall be liable in the same manner and to the same extent as a private individual under like circumstances.” (Akehurst 1997) If not, the case should be dismissed based upon immunity for lack of subject matter and personal jurisdiction.

Conclusion

State immunity is an important issue in international litigation and can sometimes have case dispositive impact. Because of the pervasiveness of foreign states, subdivisions, agencies, instrumentalities, organs and state-enterprises in the world economy, many disputes are likely to involve sovereignty issues. The United States and most other nations have endorsed a restrictive form of sovereign immunity pursuant to which the “public acts” of foreign states are immune from jurisdiction in another state but the “private acts” (particularly commercial activity) of the foreign state may be subject to jurisdiction in another state. In the United States, (Michael 2005) state immunity is based upon the FSIA. Some other countries have similar legislation. The UN Convention, which was only recently approved by the General Assembly, may serve as an important multilateral treaty governing the field. Regardless of what happens to the UN Convention, the legal landscape for state immunity has experienced dramatic change in the last several decades both in the United States and internationally. (GORDON 1977) Evolution of the sovereign immunity doctrine will undoubtedly continue in the future.