Late last year, the United States Court of Appeals for the Fourth Circuit held in Blenheim Capital Holdings Limited. v. Lockheed Martin Corporation that South Korea’s procurement of F-35 fighter jets and a military satellite did not qualify as a “commercial activity” within the meaning of the Foreign Sovereign Immunities Act (“FSIA” or “Act”). The court ruled that the transaction—which was conducted under a highly regulated U.S. government procurement program—was not a commercial activity because private parties could not have participated in the program. Prior to Blenheim, it was widely accepted that a foreign sovereign’s procurement of goods and services—including military equipment—satisfied the commercial activity exception because a private actor could also purchase goods and services. In a break with this well-established body of case law, the Fourth Circuit held that where goods are purchased through a government procurement program not available to private actors, the commercial activity exception may not be satisfied.
Background
The FSIA provides the exclusive basis for obtaining jurisdiction against foreign sovereigns in U.S. courts. Foreign states are presumptively immune from jurisdiction unless one of the exceptions enumerated in the FSIA applies. The most commonly invoked exception is the “commercial activity” exception, 28 U.S.C. § 1605(a)(2), which abrogates sovereign immunity for claims based on a foreign state’s commercial (as opposed to sovereign) activity carried on in the United States by the foreign state, or for an act performed in the United States in connection with a commercial activity elsewhere, or, lastly, for an act outside the territory of the United States in connection with a commercial activity elsewhere that causes a direct effect in the United States. Many cases involving this exception turn on whether the sovereign defendant’s activity can be classified as “commercial.” The key question, as framed by the U.S. Supreme Court, is whether the “nature” of the activity is commercial—that is, “whether the particular actions that the foreign state performs (whatever the motive behind them) are the type of actions by which a private party engages in trade and traffic or commerce.” Republic of Argentina v. Weltover, 504 U.S. 607, 614 (1992).
The question of what constitutes “commercial activity” is particularly complex in cases involving government procurement contracts. In Weltover, the Supreme Court held that a contract to buy “army boots or even bullets” is a commercial activity “because private companies can similarly use sales contracts to acquire goods.” Following this lead, courts of appeals have generally treated government procurement contracts as “commercial.” The Fifth and Eighth Circuits, for example, have held that contracting to sell parts for fighter jets is commercial activity within the meaning of the FSIA, and the Eleventh Circuit ruled that contracting to import weapons and explosives also satisfied the FSIA test. In one recent case from the U.S. District Court for the District of Columbia, the court held that Hungary’s purchase of military equipment—including airplanes—from U.S. suppliers was a commercial activity within the meaning of the FSIA. Blenheim turns away from this line of precedent.
The dispute in Blenheim grew out of Lockheed Martin’s sale of fighter jets (F-35s) and a military satellite to South Korea. In 2011, South Korea began shopping for fighter aircraft, and eventually settled on purchasing Lockheed’s F-35 fighter jets. Because the transaction involved highly sensitive military equipment designed for the U.S. military, it needed to be structured as a “Foreign Military Sale” (“FMS”), subject to the approval and supervision of the U.S. Department of Defense. Regulations require that the U.S. government manage all aspects of an FMS transaction, including receipt and disbursement of payments to the foreign sovereign purchasing the military hardware. Here, the deal was structured to enable Lockheed to sell the planes to South Korea, with the U.S. Department of Defense acting as an intermediary. To sweeten the deal, Lockheed agreed to arrange an “offset transaction”—procuring for Korea a heavily discounted piece of military hardware—that would partially offset South Korea’s procurement expenditures. Lockheed engaged Blenheim—a broker specializing in such offset transactions—to facilitate the transaction. Under the resulting agreement, South Korea was to receive not only forty Lockheed fighter jets, but also a military satellite, manufactured by Airbus. The transaction was allegedly structured by Blenheim so that South Korea would make a discounted payment for the military satellite, and Blenheim would use this payment to finance the purchase of three satellites—two of which would be retained by Blenheim, and leased to cover the costs of satellite acquisition.
The deal fell apart in 2016, when Lockheed allegedly cut Blenheim out of the deal and proceeded with the transaction with Airbus and South Korea without Blenheim’s involvement. Blenheim sued in the U.S. District Court for the Eastern District of Virginia, alleging tortious interference, conspiracy, unjust enrichment, and antitrust claims. Blenheim alleged that South Korea was not immune from suit, because it engaged in a “commercial activity” under the FSIA by purchasing fighter jets and a military satellite. The district court disagreed, concluding that the commercial activity exception did not apply and that South Korea was therefore immune from suit.
Fourth Circuit Decision
The Fourth Circuit (Niemeyer, Gregory, Thacker, JJ.) unanimously affirmed.
Deviating from established precedent, the court narrowed its analysis to the Supreme Court’s observation in Republic of Argentina v. Weltover that the commercial activity exception does not apply to activities “peculiar to sovereigns.” The court noted that the foreign procurement of Lockheed’s fighter jets could be done only with the approval and supervision of the U.S. government and that the transaction was structured such that the U.S. government was itself an intermediary, collecting payments and disbursing them to the parties. Moreover, the court held, because the transaction furthered “mutual military cooperation between countries,” it was “clear” that a private party could not have made such a purchase. Given these factors, the Fourth Circuit concluded, the “South Korea did not act in the manner of a private party.”
The court did not engage with the contrary decisions of the Fifth and Eighth Circuits holding that the purchase of fighter jet parts is a commercial activity. Instead, the court focused on distinguishing the recent decision by the U.S. District Court for the District of Columbia in Simon v. Republic of Hungary, 443 F. Supp. 3d 88 (D.D.C. 2020), which had concluded that military procurement under the FMS program was commercial because “the ‘type of action’[the sovereign] engaged in” was “the purchasing of goods,” and “[m]aking purchases through [FMS] . . . is merely a means of executing the purchase but does not alter the type of action.” The Fourth Circuit rejected this analysis, concluding that Simon “gave scant attention to the manner in which Foreign Military Sales transactions are structured and regulated” and “the offset transaction in this case was not the type of activity in which a private party could have participated.” The key point for the Fourth Circuit was the heavy degree to which FMS transactions are regulated and supervised by the U.S. government, and the inability of private parties to purchase fighter jets and military satellites—points on which Simon didn’t focus.
Conclusion
The Fourth Circuit’s decision is a sharp turn away from the conventional analysis of whether procuring military equipment is a “commercial activity” under the FSIA. Courts have generally considered military procurement to be a commercial activity, and with good reason: allowing sovereigns to breach their contracts with impunity undermines the purpose of the FSIA, which was designed, in part, to facilitate sovereign commercial activity while providing an avenue for a sovereign’s counterparty to protect its rights.
While it is worth noting that in Blenheim the plaintiff was a foreign broker seeking to use the FSIA to assert otherwise jurisdictionally questionable claims and a result may have been different had the plaintiff been a U.S. arms manufacturer, the Fourth Circuit decision nevertheless creates risk for the U.S. defense contractors—at least until the Supreme Court reconsiders the issue. In the interim, the defense contractors may want to insist that sovereign counterparties agree to explicitly waive sovereign immunity in their contracts, but such a solution will not be feasible in all cases. Regardless, this issue is likely to be a source of future litigation, and given that the court’s decision creates a circuit split, the issue may have to be resolved by the U.S. Supreme Court.
