U.S. Supreme Court Expected to Rule on FSIA Pleading Standards and Expropriation Exception
On 2 November 2016, the U.S. Supreme Court (the Supreme Court) heard the oral arguments in a case where it was asked to clarify the pleading standards and the “expropriation” exception of the U.S. Foreign Sovereign Immunity Act of 1976 (FSIA).
The case arose in the context of a dispute between Helmerich & Payne International (HMI) – an American company – and Helmerich & Payne de Venezuela (HMV) – a subsidiary of HMI incorporated under the laws of Venezuela – on one hand, and the Venezuelan government and the national petroleum company PDVSA, on the other hand.
HMI had been operating – for half a century – oil-drilling businesses in Venezuela through its local subsidiaries, the most recent of which was HMV. The drilling services were conducted for the benefit of PDVSA.
In 2009, however, HMV decided to stop its activities, disassembled its drilling rigs, stacked its equipment in its yards, and did not renew its contractual arrangements with the Venezuelan government due to payments owed by PDVSA (a total of USD 100 million). On 29 June 2010, the then-Venezuelan President Hugo Chavez issued a Decree of Expropriation against HMV.
In opposition to this alleged illegal seizure, HMI and HMV filed a lawsuit against Venezuela and PDVSA in September 2011 before the U.S. District Court for the District of Columbia arguing that the expropriation of their property had been done in violation of international law.
In response, the Venezuelan government and PDVSA moved to dismiss all claims arguing that the FSIA prevented a foreign sovereign nation (or its political subdivisions, agencies or instrumentalities) from being sued in U.S. courts. In addition they also argued that the act-of-state doctrine (i.e. the doctrine according to which U.S. courts should refrain from inquiring into the validity of official public acts taken by a foreign government on its own territory) also applied.
According to HMI and HMV, however, the U.S. courts should have jurisdiction pursuant to the “expropriation” exception under section 1605(a)(3) of the FSIA which provides that “a foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case […] in which rights in property taken in violation of international law are in issue“.
Moreover, HMI and HMV also argued that the alleged breach of the drilling contracts and their non-payment demonstrated that Venezuela exercised a “commercial activity” within the meaning of section 1605(a)(2) of the FSIA. This provision also provides for an exception to the principle that foreign states may not be sued before U.S. courts in the case where a foreign State’s commercial conduct caused a direct effect in the United States.
The District Court’s judgment
The U.S. District Court for the District of Columbia denied Venezuela’s motion to dismiss and ruled that the case could move forward.
Although the District Court found that HMV could not rely on the “expropriation” exception of the FSIA since that entity was a Venezuelan national, it accepted HMI and HMV’s claim that the seizure of drilling equipment belonging to HMV had “caused a direct effect” in the United States. This causal relationship therefore allowed the United States – pursuant to section 1605(a)(2) of the FSIA – to exercise jurisdiction on Venezuela on the basis of the “commercial activity” exception of the FSIA.
The Court of Appeal’s judgment
On appeal brought by both the Venezuelan government and PDVSA, the U.S. Court of Appeals for the District of Columbia Circuit (the Court of Appeal) conducted a substantive assessment of both exceptions to the FSIA.
With regard to the “expropriation” exception in section 1605(a)(3) of the FSIA, the Court of Appeal firstly held that the U.S. District Court should not have granted Venezuela and PDVSA’s motion to dismiss based on HMV’s nationality. According to the Court of Appeal, it is only possible to grant a motion to dismiss for lack of jurisdiction if the claim is “wholly insubstantial or frivolous“. In the case at hand, the Court of Appeal found that HMV had satisfied this test by showing evidence of discriminatory treatments that occurred during the events that led to the expropriation decision. With regard to the “expropriation” exception claim brought by HMI, however, the Court of Appeal affirmed the denial of Venezuela’s motion to dismiss on the basis that HMI had “property rights” in HMV within the meaning of section 1605(a)(3) of the FSIA. Consequently, at the end of the day, the Court of Appeal found that both HMI and HMV could rely on the “expropriation” exception of the FSIA and the claims could go forward.
With regard to the commercial activity exception in section 1605(a)(2) of the FSIA, the Court of Appeal referred – among other case-law – to Republic of Argentina v. Weltover where the Supreme Court delineated both notions of “commercial activity” and “direct effect“. On this basis, the Court of Appeal reversed the conclusion of the District Court and found that Venezuela’s breach of the drilling contracts and the non-payment of drilling services by the Venezuelan government for previous services did not have a “direct effect” in the U.S. The Court of Appeal was indeed unconvinced that HMV’s failure to renew third party contracts, which was allegedly caused by the breach and non-payment of PVDSA, constituted a “direct effect” in the United States. Because the “direct effect” requirement is a condition that should have been satisfied for the application of the commercial activity exception of section 1605(a)(2) of the FSIA, the Court of Appeal ruled that Venezuela and PDVSA’s motion to dismiss was valid on this point only.
Arguments before the Supreme Court
Following this judgment, Venezuela subsequently petitioned the Supreme Court for a writ of certiorari in order to reverse the finding of the Court of Appeal on the “expropriation” exception.
Before the Supreme Court, Venezuela argued that the required threshold needed to meet the “expropriation” exception under section 1605(a)(3) of the FSIA should be much higher than merely presenting non-frivolous allegations. According to Venezuela, in order to validly raise the “expropriation” exception of the FSIA, a plaintiff must plead rights in property that were effective and legally recognized in the country where the taking occurred. In addition, this taking should be a violation of customary international law.
Importantly, the United States government filed an amicus curiae in support of Venezuela’s position.
The Supreme Court is expected to render its opinion in 2017.
This case is another illustration of the fact that issues relating to foreign immunities have become a source of concern for the Obama administration and U.S. diplomacy. Earlier this year, Congress passed the Justice Against Sponsors of Terrorism Act after overriding President Barack Obama’s veto. This Act effectively allows survivors of the 9/11 terrorist attacks to sue Saudi Arabia before U.S. courts on allegations that it financed the attacks (see here).
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