The disadvantaged plaintiff: is it time to revisit the Foreign Sovereign Immunities Act?

• Author: Engellenner, Matthew

1. INTRODUCTION

   The Foreign Sovereign Immunities Act of 1976 (1) ("FSIA") provides the exclusive means for attaining jurisdiction over a foreign sovereign and its agencies and instrumentalities in U.S. courts. (2) The FSIA provides qualified foreign states a presumption of immunity from jurisdiction, attachment, and execution. (3) From these blanket rules of immunity, the FSIA establishes limited exceptions based on a restrictive theory of immunity that can subject foreign states to the jurisdiction of U.S. courts for claims arising out of commercial conduct. (4)

   Unfortunately, the FSIA has been exploited by foreign sovereigns seeking to avoid liability for almost all conduct. (5) In the thirty years since its enactment, foreign sovereigns have increasingly utilized discrete corporate structures to conduct their commercial affairs. (6) Despite their commercial characteristics and legally distinct personalities, these corporations enjoy a presumption of immunity under the FSIA. (7) By attaching the presumption of immunity to their commercial corporations, foreign sovereigns may extend sovereign immunity to their commercial counterparts while limiting their liability for commercial acts. (8)

   This Note addresses the confusion in the courts with respect to when a legally separate corporate entity should be considered an agency or instrumentality of a foreign state and discusses the inequitable effects that result from the broad presumption of immunity afforded to qualified corporate entities. (9) Part II traces the evolution of sovereign immunity in the United States, from its origin at common law to its statutory codification in the FSIA. (10) Furthermore, Part III explores the current legal framework for adjudicating claims against foreign sovereigns and the presumption of immunity the FSIA affords qualified corporate entities. (11) Additionally, it explores the procedural disadvantages for plaintiffs resulting from the FSIA's presumption of immunity as well as the structural contradiction that allows corporate defendants to enjoy sovereign characteristics for the purpose of jurisdictional immunity, while retaining a presumption of legal separateness for the purpose of limited liability. (12) Finally, Part IV of this Note discusses several reform proposals that would restore the balance between parties and simplify the rules governing liability of foreign corporations and their parent governments. (13)

2. HISTORY

   1. Background

      The Sovereign Immunities Doctrine is derived from the English common-law concept that "the king can do no wrong. "(14) The theory of absolute sovereign immunity that came to dominate Eighteenth and Nineteenth Century United States jurisprudence is based on this concept. (15) Absolute sovereign immunity is based on the theory that sovereign states should not be subject to suit in U.S. courts absent consent. (16) The Supreme Court affirmed absolute sovereign immunity in the seminal case of The Schooner Exchange v. McFaddon. (17) The Schooner Exchange Court considered whether the particular circumstances entitled a French naval vessel to immunity from suit in U.S. courts. (18) In an opinion written by Chief Justice John Marshall, the Court held that the principles of "perfect equality and absolute independence of sovereigns, and [a] common interest impelling them to mutual intercourse" dictated that armed public vessels were immune from jurisdiction. (19) Nonetheless, Chief Justice Marshall posited that certain exceptions to the rule of absolute immunity might exist in situations where the sovereign had engaged in commercial conduct. (20)

      In Chief Justice Marshall's opinion in Bank of the United States v. Planters' Bank of Georgia, (21) the Court invoked one of these exceptions, holding that state-owned corporations were not necessarily entitled to sovereign immunity. (22) In Planters' Bank, the Court reasoned that when the State of Georgia incorporated its bank, the bank became a separate legal identity and, thus, voluntarily waived its right to invoke the privileges of sovereign immunity. (23) Although the Court's decision did not rely on the commercial activity concept initially discussed in the Schooner Exchange, the application of the "separate legal entity" rule in the sovereign context theoretically limited the reach of absolute immunity. (24)

      However, due in part to the Court not addressing the application and limitation of the separate entity rule nor elaborating further on the commercial activities exception presented in The Schooner Exchange, the theory of absolute immunity prevailed in the lower courts for the better part of a century. (25) Indeed, in Berizzi Bros. Co. v. The Pesaro, (26) the Supreme Court explicitly endorsed the theory of absolute immunity. (27) The Court stated that the Pesaro, a commercial vessel owned and operated by the Italian government and engaged in wholly commercial activities, should enjoy the same immunity as an armed ship of war, such as the Schooner Exchange. (28) The Pesaro Court held that sovereign governments should be immune from suit in U.S. courts irrespective of the nature of their activities, thus eroding any commercial activity exception envisioned by Chief Justice Marshall a century earlier in Schooner Exchange (29)

      While the absolute immunity theory prevailed, the "separate entity rule" applied in Planters' Bank seemed to endure alongside it, creating significant confusion and contradiction among the courts. (30) This confusion was compounded by the fact that the courts viewed sovereign immunity as a matter of national interest best left to the executive branch because of a decision's potential impact on international relations. (31) Accordingly, when confronted with questions of sovereign immunity, the courts deferred to "suggestions" issued by the executive branch in accordance with the unique diplomatic objectives presented in the case. (32) In effect, these executive suggestions were binding on the court. (33)

      Initially, the executive branch issued suggestions in accordance with the absolute theory of immunity. (34) However, the United States began to retreat from the absolute theory of immunity in the case of the Republic of Mexico v. Hoffman, (35) where the Supreme Court held that a sovereign vessel, operated by a privately-owned Mexican company engaged in commercial activities, was not entitled to immunity from suit. (36) The Court held that no clear policy or common law precedent existed for affording immunity to a sovereign based on title alone. (37) Furthermore, the Court stated that the State Department's refusal to certify immunity for the Mexican government-owned vessel was indicative of a "national policy" against affording immunity based on title. (38) The Court's holding shifted the focus of sovereign immunity from legal title to possession and nature of conduct, thus signaling a shift towards a restrictive theory of foreign sovereign immunity, which permits suits arising out of a foreign state's commercial activities. (39)

      The Hoffman Court's adoption of the restrictive theory was officially endorsed in a 1952 letter from State Department Advisor Jack Tate (the "Tate Letter"). (40) Despite the fact that the Tate Letter signaled a distinct policy shift, the executive branch's determinations and suggestions with respect to sovereign immunity essentially remained political and often inconsistent with the rationale of the restrictive theory espoused in the Tate Letter. (41) In recognition of these inconsistencies and the inequitable effects of the judiciary's exposure to diplomatic influences, Congress enacted the FSIA to "transfer the determination of sovereign immunity from the executive branch to the judicial branch ... [to] assur[e] litigants that these ... decisions are made on purely legal grounds and under procedures that insure due process." (42)

   2. The FSIA

      In the House Report on the matter, Congress cited four objectives that it designed the FSIA to remedy. (43) The first objective was to codify a restrictive theory of sovereign immunity that would limit immunity to only suits involving a foreign state's public acts, and providing no such protection for suits based on the commercial or private acts of states. (44) The second objective was to ensure that these restrictive principles were applied in litigation before United States courts with the goal of making uniform and consistent decisions based strictly on legal grounds and without interference from diplomatic or political pressures. (45) The third objective was to provide a statutory procedure for serving process and obtaining jurisdiction over a foreign state. (46) Finally, the fourth objective was to empower judgment creditors with rights of execution. (47)

      While the FSIA has helped to add clarity to the law and provide certainty with respect to specific areas previously prone to judicial conflict, the FSIA has also caused much confusion and its application can lead to inequitable results. (48) In particular, the FSIA's definition of "foreign state" has entitled a broad group of legally separate entities with a presumption of immunity that is at odds with the separate entity rule. (49) This presumption of immunity provides sovereign defendants with a number of advantages that are not available to other market participants. (50) Similarly, the presumption of immunity allows state-owned companies to enjoy dual identities under the FSIA: one of sovereign characteristics with the benefit of jurisdictional immunity, and another of legal separateness with the benefit of limited liability. (51)

      1. The Presumption of Immunity

         The FSIA defines the foreign state to include the sovereign's political subdivision and its agencies and instrumentalities. (52) This definition allows foreign entities to avail themselves of the same immunity protections afforded to the sovereign state itself under the FSIA. (53) For the purposes of the FSIA, an "agency or...