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U.S. Supreme Court Makes More Difficult Expropriation Lawsuits Against Foreign States

  • United Kingdom
  • USA
  • International arbitration
  • Investment treaty arbitration
  • Litigation and dispute management

18-05-2017

The United States Supreme Court has made it more difficult for plaintiffs to sue foreign states in US courts under the exception to sovereign immunity applicable to “any case . . . in which rights in property taken in violation of international law are in issue. . . . .”   Bolivarian Republic of Venezuela v. Helmerich & Payne Int’l Drilling Co., 137 S. Ct. 1312 (May 1, 2017). 

The question before the Court was whether the exception, one of several in the Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. § 1604 et seq., requires merely a “non-frivolous” argument that the case falls within the exception, or something more.  In an 8-0 decision (Justice Gorsuch did not participate), the Court held that a “non-frivolous” argument is not sufficient.  Rather, the court in which the case is filed must find that the plaintiff’s factual allegations make out a valid claim that property rights have been taken in violation of international law – not just that they might have been – and the court must resolve any relevant factual disputes “as near to the outset of the case as is reasonably possible.”  If the decision on jurisdiction happens also to dispose of the case on the merits, the Court noted, “so be it.”  

The plaintiffs in the case were a US company and its Venezuelan subsidiary.  The subsidiary had for decades supplied oil rigs to entities owned by the Venezuelan government, and it was undisputed that by early 2010 the Venezuelan government had failed to pay the subsidiary some US$10 million it was owed.  At that point, the government sent troops to the equipment yard and issued a “Decree of Expropriation” nationalizing the rigs.  The subsidiary and its parent filed an action in the U.S. District Court for the District of Columbia, seeking to travel under the FSIA’s exception for cases “in which rights in property taken in violation of international law are in issue,” 28 U.S.C. § 1605(a)(3).  Venezuela claimed that the exception did not apply to either plaintiff’s claims:  the subsidiary was a Venezuelan company and thus international law did not apply to Venezuela’s actions with respect to it, and the parent had no “rights in property” at issue. 

The district court agreed with Venezuela about the subsidiary, but concluded that Venezuela’s actions had deprived the parent of its rights as the subsidiary’s sole shareholder and that that was sufficient to bring the parent’s claim within the FSIA exception.  Both sides appealed to the Court of Appeals for the District of Columbia Circuit.  The Court of Appeals applied its rule that in a case based on alleged violations of international law, only a non-frivolous argument that a property right has been taken in violation of international law is required to confer jurisdiction.  (That court has always applied a different and more demanding standard in cases in which violations of international law are asserted only as a jurisdictional basis, while other substantive claims (under a contract, for example) are made against the defendant.  The Supreme Court highlighted that two-standard approach in scrapping the non-frivolous argument standard.)  In the case at hand, the Court of Appeals decided that both the parent and the subsidiary could rely on the FSIA exception, because each had made out a non-frivolous argument that it had lost a right in property in violation of international law. 

The Supreme Court rejected the non-frivolous argument standard.  Noting that the FSIA “starts with a premise of immunity and then creates exceptions to the general principle,” consistent with considerations of international comity, the Court found that the statutory language demands at the threshold the existence of, not just an argument about, a taking of property rights in violation of international law.  The D.C. Circuit’s application of a different jurisdictional standard, and especially its application of two different standards depending on whether the jurisdictional and merits inquiries overlapped, was not supported by the language of the statute. 

And requiring only a non-frivolous argument that property has been taken in violation of international law would, as a practical matter, “embroil the foreign sovereign in an American lawsuit for an increased period of time” compared with requiring the court to determine at the beginning of the case whether the exception’s requirements are met.  In that connection, the Court noted that a decision finding a violation of international law as a matter of jurisdiction would be immediately appealable by the foreign state, whereas the denial of an early motion to dismiss the case on the merits would not be.  Accordingly, and whether or not it also brings an early end to the case on the merits, a US court must decide whether a property right has been taken in violation of international law at the outset of any case relying on the exception to sovereign immunity provided in 28 U.S.C. § 1605(a)(3). 

The standard announced by the Court essentially collapses the merits and jurisdictional inquiries in cases in which an investor bases an expropriation claim solely on international law.  The rule announced by the Court should reduce the number of such cases filed in US courts, but should streamline the litigation of those that are filed.       

The Alternative: Using Bilateral Investment Treaties

In light of the Supreme Court’s decision, companies operating abroad should be mindful of the procedural and substantive rights potentially available in investment treaty arbitration:

  • First, investment treaties often grant qualifying investors the right to bring a claim involving a violation of international law, including the taking of property by a sovereign State, before an independent panel of adjudicators.
  • Second, as regards nationality requirements, investment treaties usually define “investor” broadly, often including companies in the host State which are – like the Venezuelan subsidiary at issue in Helmerick & Payne – owned and controlled abroad.  Companies also can potentially avail themselves of investment treaty protection under a treaty not concluded between the host state and the would-be claimant’s home state, as in the Mobil Cerro Negro arbitration between Venezuela and several Mobil entities, including US companies, under the Netherlands-Venezuela BIT.

As for the plaintiffs’ claims against Venezuela in the Helmerich & Payne case itself, the Supreme Court has remanded the case for application of the proper jurisdictional standard, so it is not yet clear whether either of both of the plaintiffs’ claims will remain in US court.

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