In a new article, The Foreign Sovereign Immunities Act: ‘Bedlam’ Redux (Law360 Sept. 22, 2017), Robert Ludwig addresses a legal riddle that has long confounded courts, commentators, and the international law bar, and how the firm solved it.
From “Confusion” to “Bedlam,” to “Abuse of Trust” and Dithering by the Courts
“After four decades attempting to apply the commercial-activity exception of the Foreign Sovereign Immunities Act of 1976 (“FSIA”), the ‘most significant’ exception to sovereign immunity, indeed the ratio legis of the act, no court has ever decided the meaning of the heart of the exception, and with it the FSIA.” Its leading “clause one” withdraws immunity in any “action based upon a commercial activity carried on in the United States by a foreign state,” which as statutorily defined “means commercial activity carried on by such state and having substantial contact with the United States.” As Mr. Ludwig notes, “Remarkably, no court or commentator has ever been able to say what ‘substantial contact’ means, the primary nexus Congress prescribed for U.S. jurisdiction over foreign states.”
The transition from absolute immunity, by which foreign states could disown commercial obligations with impunity, to a new “restrictive theory” that developed in the 20th century, had by 1945 “engender[ed] much confusion and conflict” in the courts. Under the restrictive theory, a foreign state’s immunity is restricted to sovereign acts and does not extend to when it engages in commercial activity like any player in the marketplace. In 1952, the State Department stepped in, issuing “suggestions of immunity” to the courts which, as Justice Scalia summarized in 2014, “‘thr[ew] immunity determinations into [further] disarray.’”
Congress “abated the bedlam in 1976,” codifying the restrictive theory in the FSIA, replacing it with a “‘comprehensive set of legal standards governing claims of immunity’” in U.S. courts. In hearings on the FSIA bill, with remarkable prescience a subcommittee member remarked: “I hope that trust would not be abused by the courts” (June 2, 1976 Hearing, Rep. B. Jordan). That is just what they promptly did, leading to resurgent bedlam.
A “Statutory Labyrinth” and “Gordian Knot”
The FSIA was major remedial legislation enacted to bring U.S. practice in line with international law. 28 U.S.C. § 1602. Its purpose, stated in its history, “is simple: To assure that American citizens are not deprived of normal legal redress against foreign states who engage in ordinary commercial transactions or who otherwise act as a private party would.” A “constant bane of the federal judiciary,” it has been variously characterized as “remarkably obtuse,” a “statutory labyrinth” and a “Gordian knot.” Better described as a “marvel of compression,” it combines in interlocking provisions traditionally separate questions: the availability of immunity, subject matter jurisdiction over the action, and personal jurisdiction over the defendant—an “economy of decision” that came “at the price of considerable confusion” in the courts.
Superficial Textualism: “Substantial Contact” Must Be More than “Minimum Contacts”
As the article illustrates, the confusion stems largely from an early D.C. Circuit decision, Maritime Int’l Nominees Estab. v. Republic of Guinea, 693 F.2d 1094 (D.C. Cir. 1982) that “read ‘substantial contact’ as demanding more than ‘minimum contacts,’” and based on that superficial textual comparison declared: “in choosing those words, Congress made clear that the immunity determination under the first clause diverges from the ‘minimum contacts’ due process inquiry.” Not deciding what “substantial contact” meant, it reversed a district court finding that U.S. contacts were “more than sufficient” to satisfy clause one, and held it lacked jurisdiction to confirm a $25 million arbitral award. In a 1988 case the D.C. Circuit reaffirmed that substantial contact “is stricter than that suggested by the minimum contacts due process inquiry,” still not deciding what it meant.
Following Maritime, the Second Circuit declared “it is clear that Congress intended a tighter nexus,” and “the ‘substantial contact’ standard … requires a closer nexus than the ‘minimum contacts’ necessary for due process,” Shapiro v. Republic of Bolivia, 930 F.2d 1013 (2d Cir. 1991). Noting “caselaw giving content to the term ‘substantial contact’” was “scant” on this “critical question,” it supplied none itself.
Two decades after enactment, the D.C. Circuit acknowledged in 1998 it had “never decided precisely what ‘substantial contact’” means, but reasserted “it requires more than the minimum contacts sufficient to satisfy due process,” still not deciding it.
Today, four decades on, the two leading FSIA circuits have yet to decide the meaning of clause one. Yet the D.C. Circuit instructs district courts the FSIA is “not a particularly generous” basis for jurisdiction over a foreign state.
More recently, the Ninth Circuit en banc in Sachs v. Republic of Austria, 737 F.3d 584 (9th Cir. 2013), citing Maritime and Shapiro, concluded it’s “generally agreed” substantial contact “sets a higher standard for contact than the minimum contacts standard.” Far from “generally agreed,” as Mr. Ludwig writes, “the meaning of ‘substantial contact’ was and remains hopelessly divided and undecided.“
The lower courts anticipated 25 years ago that the Supreme Court would resolve the “thicket of statutory interpretation and gloss.” But it held in Saudi Arabia v. Nelson, 507 U.S. 349 (1993) that suit over police detention was “not based upon any commercial activity,” and thus it “need not reach the issue of substantial contact,” leaving for future resolution a four-way conflict, widened since. The Court had occasion again to address clause one in OBB Personenverkehr AG v. Sachs, 136 S. Ct. 390 (2015), but held suit was “based upon” the injury in Austria, not U.S. ticket sale, and rejected Sachs’ revised theory on the “requisite ‘substantial contact’” as “forfeited,” still not deciding what it means.
Reflecting the continuing bedlam and futility, the Sixth Circuit in Triple A Int’l Inc. v. Republic of the Congo, 721 F.3d 415 (6th Cir. 2013) insisted that “substantial contact” is “far from clear” and “only confuses [clause one]’s meaning,” indeed “make[s] nonsense of it.”
Obvious Meaning Hidden in Double Plain Sight
Mr. Ludwig points out: “Clearing up the decades of confusion, conflict and indecision could not be easier. It can be shown two ways: either through a simple overlooked pincite in the FSIA legislative history, or by the ‘settled meaning’ found throughout in personam jurisprudence that “substantial contact” means ‘minimum contacts.’”
“The legislative history, disdained by textualists and dismissed by the D.C. Circuit in Maritime, explained that the FSIA ‘provides, in effect, a Federal long-arm statute over foreign states,’ citing two seminal cases, International Shoe Co. v. Washington, 326 U.S. 310 (1945), and McGee v. International Life Ins. Co., 355 U.S. 220, 223 (1957). Most lawyers know International Shoe and its constitutional due process test, requiring ‘certain minimum contacts’ such that ‘suit does not offend traditional notions of fair play and substantial justice.’ Less known but as significant, McGee is the seminal case that first defined ‘minimum contacts’ a decade later. The House Report gave a pincite only to McGee, where it defined ‘minimum contacts’ as a “substantial connection” with the forum.”
“What Maritime did to this legislative history, as the saying goes, shouldn’t happen to a dog. Asserting the ‘history does not contradict the clear import of the words Congress chose,’ referring to substantial contact and its own textual assumption, the D.C. Circuit cited only International Shoe, ignoring McGee and its pincite which the D.C. Circuit entirely overlooked. The courts, practitioners and academy, mystified for decades over the meaning of ‘substantial contact’ and misled by Maritime, have all missed the obvious: that Congress lifted that term and the language of clause one almost verbatim from McGee, just as Congress made clear in the legislative history.”
“Alternatively,” the article explains, “two decades of controlling jurisprudence made the term plain and unambiguous in 1976, as have four more decades since. ‘Where Congress uses terms that have accumulated settled meaning,’ as it did in clause one, ‘a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning[.]’ McGee, a unanimous decision, defined ‘minimum contacts’ for the first time as a ‘substantial connection’ with the forum. The next year in Hanson v. Denckla, 357 U.S. 235, 252-53 (1958), another seminal decision, the Court reaffirmed McGee, using ‘substantial connection’ and ‘contact’ interchangeably. As should have been obvious, what Congress invoked 20 years later in requiring a ‘substantial contact’ with the forum was its settled meaning: ‘minimum contacts.’”
Recognition in Sachs Colloquy that “Substantial” Means “Minimum”
After the Ninth Circuit en banc cited the confusion over “substantial contact” without defining it, the petitioner in Sachs did not raise the question in the Supreme Court. Another pending petition Ludwig & Robinson filed did, in a case arising in the D.C. Circuit, Odhiambo v. Republic of Kenya, 764 F.3d 31 (D.C. Cir. 2014), that 30 years earlier in Maritime had created much of it.
As Mr. Ludwig recounts, “Hours after oral argument in Sachs, which focused on points raised by Odhiambo and not Sachs, the court invited the solicitor general to file a brief in response to Odhiambo’s petition.” Odhiambo’s petition evidently resonated with justices at the outset of the Sachs argument. Justice Kagan remarked: it “doesn’t seem … that wording is very different from … that we’ve used in specific jurisdiction cases. … There’s the insistence on … a minimum contact, and … on a … relationship between that contact … and the claim. … I’m having trouble of thinking why… there would be a different test.” Justice Scalia generally agreed: “The definition is, “…having substantial contact with the United States.” That sounds to me like … the due process test.” Justice Sotomayor recognized: “Isn’t the work in substantial contact with the United States? Isn’t that what we should be looking at instead?”
“Indeed,” Mr. Ludwig makes clear, “the courts should be looking at ‘substantial contact.’ As several justices recognized, it is the due-process test of ‘minimum contacts.’” Though the Court later followed the solicitor general’s recommendation (focused on international comity) to deny Odhiambo’s petition, long on the SCOTUSblog “watch list,” its resolution of “substantial contact” evidently was viewed by justices as being correct. And the test the D.C. Circuit imposed on Odhiambo, insisting it was “correct,” was overruled by the Sachs Court as “flatly incompatible” with Nelson, as Odhiambo argued.
Staggering Costs of Judging without Deciding
The article then shows, “The costs of leaving “substantial contact” unexamined and undecided for 40 years are staggering, and three-fold.”
“First, circuit courts routinely uphold dismissals and reverse findings of jurisdiction without deciding what clause one means. … With each passing decade, yet more U.S. companies and citizens are left at the courthouse door, in cases Congress plainly intended the courts to hear.”
“Second, using a placeholder without deciding ‘substantial contact,’ the courts have turned the entire commercial-activity exception on its head. For decades its primary prong, providing ordinary transacting business (clause one) jurisdiction, has been seldom applied; single act (clause two) jurisdiction … has been rarely invoked; and effects (clause three) jurisdiction, ordinarily a residual basis, has become the default into which most cases are shoehorned by the courts. This skewed application, contrary to the language, purpose, structure and history of the act, is the exact reverse of how long-arm jurisdiction customarily is applied.”
“Third, the federal courts … ‘possess no warrant to create jurisdictional law of their own.’ Yet that is what they’ve done for 40 years, creating a parallel universe of jurisdictional case law, … one governing the vast majority of cases against domestic and foreign defendants including those half-owned by foreign states, and another for cases against foreign states and their majority-owned enterprises.”
Time to Abate the Resurgent Bedlam and Finally Decide the Heart of the FSIA
Mr. Ludwig concludes, “Nothing in the FSIA permits such dismissals, skewed application, and parallel universe.” “That the courts have done just what Congress feared, abusing the trust placed in them … for decades, is astounding. But that the courts (with practitioners and commentators) have missed for so long two basic exegeses in plain sight — a simple pincite and classic meaning, abdicated for 40 years their obligation to decide and exercise jurisdiction given, and imposed through mere textual assumption such staggering costs on parties and federal case law, is a veritable legal disgrace.”
“It’s past time to cut the FSIA’s most basic ‘Gordian knot,’ to ‘vindicate the Congressional purposes behind the Act,’ and actually decide it. After Congress abated the ‘bedlam’ over sovereign immunity in 1976 and placed its trust in the courts, bedlam redux has raged ever since. Proper construction and application of the long-arm statute Congress enacted could not be more straightforward, and ‘critical.’ It still awaits decision, 40 years later.”
This blog is excerpted from Robert Ludwig’s article, © 2017 All rights reserved. For further information, contact Mr. Ludwig at email@example.com or 202-289-7603.
Robert W. Ludwig is a founding member of Ludwig & Robinson PLLC, a law firm based in Washington, D.C., with an office in Detroit and affiliate in Germany. The firm has a national and international practice in trial and appellate litigation.