U.S. courts recognize that in many circumstances foreign sovereigns are immune from suit in the United States. The Foreign Sovereign Immunities Act (“FSIA”) codifies that immunity and its exceptions, including the “commercial activity” exception. This exception abrogates sovereign immunity in suits based on a sovereign entity’s commercial (as opposed to sovereign) activity that relates to the United States.
The U.S. Court of Appeals for the D.C. Circuit recently narrowed this commercial activity exception, creating an acknowledged conflict with the Fourth Circuit. In Wye Oak Technology, Inc. v. Republic of Iraq, 24 F.4th 686 (D.C. Cir. 2022), the court ruled that the text of the second clause of the commercial activity exception—which abrogates sovereign immunity for “an act performed in the United States in connection with a commercial activity of the foreign state elsewhere”—refers to an act by the foreign state in the United States, and does not include an act by another party, such as the plaintiff. This decision creates a circuit split and will make it more difficult for plaintiffs to invoke the commercial activity exception: a foreign sovereign that does not commit an act in the United States will now lose its sovereign immunity under the commercial activity exception only if that sovereign’s foreign act has a direct effect in the United States.
Background
The FSIA’s commercial activity exception, 28 U.S.C. § 1605(a)(2), abrogates the sovereign immunity of a foreign state or instrumentality in an action based on the state’s commercial activities. The exception addresses three alternative scenarios, depending on the location of the commercial activity and the “act” that led to the lawsuit. Under the first clause, a state loses sovereign immunity for commercial activities carried on in the United States. Under the third clause, a state loses sovereign immunity for an act committed outside the United States in connection with a commercial activity and that has a “direct effect” in the United States. Finally, the second clause abrogates immunity for “an act performed in the United States in connection with a commercial activity of the foreign state” outside the United States.
The primary question addressed by the D.C. Circuit was whether, for the second clause, the “act performed in the United States” need be an act performed by the defendant sovereign entity, or whether that act could be performed by another party—in this case, a contractual counterparty.
The plaintiff, Wye Oak Technology, Inc., is an American private defense contractor that contracted with the Iraqi government. In 2009, after Iraq failed to make payments under the contract, Wye Oak sued in the U.S. District Court for the Eastern District of Virginia, and Iraq moved to dismiss on both venue and sovereign-immunity grounds. The district court denied Iraq’s sovereign-immunity defense and transferred venue to the District of Columbia. According to the court, Wye Oak had pleaded that Iraq was subject to jurisdiction under the second clause of the commercial activity exception—for “act[s] preformed in the United States”—by alleging that Wye Oak engaged in accounting, managed employees, and coordinated sales in the United States in performing its contract with Iraq.
Iraq appealed the denial of its sovereign immunity. In a 2–1 decision, the Fourth Circuit affirmed, agreeing with the district court that the requirements of the second clause of the commercial activity exception were satisfied by Wye Oak’s acts in the United States. The majority determined it had jurisdiction to hear the appeal—despite the usual rule that an appellate court loses jurisdiction when venue is transferred to a district court outside its purview—over a dissent that noted the risk of creating a circuit split within the same case.
Fast forward to 2019, when the parties concluded a bench trial in the District of Columbia. The district court’s post-trial decision once again considered Iraq’s sovereign-immunity claims. The court held that it was bound by the Fourth Circuit’s decision, and that, regardless, the Fourth Circuit was correct to rule that Wye Oak’s acts in the United States fulfilled the requirements of the commercial activity exception’s second clause.
The D.C. Circuit’s decision
The D.C. Circuit unanimously reversed.
The court first ruled that the Fourth Circuit’s prior decision on sovereign immunity was not binding “law of the case.” Because the Fourth Circuit’s decision evaluated only the sufficiency of the parties’ pleadings on sovereign immunity (not the full trial record, as was now available), the D.C. Circuit explained, the two Courts were addressing different questions. The D.C. Circuit acknowledged that reevaluating Iraq’s legal arguments created the risk of “a circuit split in the same case,” but seemed unperturbed, suggesting that the Fourth Circuit’s decision on the second clause of the commercial activity exception was “clearly erroneous and would work a manifest injustice” if left to stand.
Turning to the commercial activity exception, the D.C. Circuit held that the second clause of the exception—which, as noted above, requires “an act performed in the United States in connection with a commercial activity of the foreign state elsewhere”—requires the referenced “act performed in the United States” to be performed by the sovereign defendant. That reading, the court reasoned, is consistent with the first and third clauses of the commercial activity exception, which have been interpreted to refer to the conduct of the sovereign defendant. The reading avoids the anomaly of having the second clause be the only part of the commercial activity exception that causes sovereigns to lose immunity because of someone else’s acts. The court concluded that Wye Oak’s acts in the United States could not waive Iraq’s immunity under the exception’s second clause.
Although the court declined to apply the second clause of the commercial activity exception to Iraq, it did not hold that Iraq was necessarily immune from suit. Instead, the court noted that Wye Oak might benefit from the third clause—which requires an act committed outside the United States in connection with a commercial activity and that has a “direct effect” in the United States—and remanded the case to the district court to determine whether Iraq’s actions had such an effect.
Conclusion
The D.C. Circuit’s decision will tighten the scope of the commercial activity exception, especially when a foreign sovereign entity is not alleged to have committed any act in the United States. The only argument now available to plaintiffs in that situation is that a foreign act of the sovereign entity, committed in connection with a commercial activity, had a “direct effect” in the United States.
The D.C. Circuit’s decision is also remarkable for creating an acknowledged split with the Fourth Circuit—within the same case—a result that was foreshadowed by the dissent in the Fourth Circuit decision more than ten years ago.
Finally, we note that this is not the only circuit split over the scope of the commercial activity exception. The Supreme Court is currently considering a petition for certiorari, filed in Jam v. International Finance Corporation, which explains that the circuits are divided over whether, to meet the commercial activity exception’s requirement that a suit be “based upon” a commercial activity or act, that act must be the most direct cause of the harm suffered by the plaintiff. If the Court grants certiorari, it may provide some guidance on the question here.
