New FSIA Decisions from U.S. Court of Appeals

So far in August, the U.S. Court of Appeals have issued several notable decisions regarding sovereign immunity. Most recently, in  Agudas Chasidei Chabad of United States v. Russian Federation, 2024 WL 3659318 (D.C. Cir. Aug. 6), vacated a default judgment and $175 million in sanctions against Russia by applying new precedents clarifying the FSIA expropriation exception. Zhongshan Fucheng Industrial Investment Co. LTD v. Federal Republic of Nigeria, 2024 WL 3733341 (D.C. Cir. Aug. 9), discussed the application of the arbitration exception to the Foreign Sovereign Immunity Act ("FSIA") to public-law disputes involving the sovereign acts of governments.

The FSIA Framework

Foreign sovereign immunity in the United States is a legal doctrine that generally protects foreign governments from being sued in U.S. courts. This principle is primarily governed by the Foreign Sovereign Immunities Act (FSIA) of 1976. Under the FSIA, foreign states are presumptively immune from the jurisdiction of U.S. courts unless a specific exception applies. These exceptions include situations where the foreign state has waived its immunity, engaged in commercial activities that have a direct effect in the United States, or committed certain acts such as torture, extrajudicial killing, or property expropriation in violation of international law. The FSIA establishes a framework for determining when U.S. courts can hear cases involving foreign sovereigns, aiming to balance respect for the sovereignty of other nations with the need to provide a forum for certain legal claims.

Agudas Chasidei Chabad of United States v. Russian Federation

In a legal saga going back to 2004, petitioner in this case secured default judgment agains the Russian Federation. After the sovereign ignored the ruling, the Court ordered sanctions, now totaling more than $175 million. Unable to execute directly on the sovereign's assets, petitioner sought to collect from entities in the United States with connections to the Russian state, such as Tenex-USA, a third-tier subsidiary of the Russian State Atomic Energy Corporation, and State Development Corporation VEB.RF (VEB), a Russian state development bank. The D.C. Circuit's latest opinion in this matter is related to petitioner's attempt to execute on these entities' assets. Although the district court for the District of Columbia stopped petitioner's attempts to do so because it had failed to give the sovereign notice of the sanctions judgments, it held that "Chabad had satisfied the FSIA's expropriation exception as to the Russian Federation, so the Federation lacked immunity with respect to the judgments entered against it[, and] that, for the most part, Chabad had satisfied a separate FSIA exception to the immunity from attachment that the FSIA otherwise confers on foreign state property." Respondents appealed.

Chabad opposed the appeal on a jurisdictional basis, claiming that respondents (1) cannot appeal the decision in their favor (since the motion was denied in the lower court); (2) improperly "seek[] to appeal the district court's reasoning, rather than its judgment"; (3) lack standing to raise the issue of the Russian Federation's immunity; and (4) should wait until district court's proceedings have come to an end to appeal the denial without prejudice of its attachment motion. The Court rejected these arguments. Specifically as to (3), the Court explained that "a nonparty may challenge an order on sovereign-immunity grounds if the nonparty 'has an interest that is affected' by the order—as long as it does so through an appropriate procedural vehicle." As opposed to an earlier case where the Court did not allow respondents to challenge the Court's order on sovereign-immunity grounds through a Rule 60(b) motion as a non-party, here, the district court's order "plainly affects" respondents' interest in its United States property.

The Court then moves on to vacate all judgments against the Russian Federation and thus hold that petitioner cannot attach respondents' assets to satisfy these judgments. The Court's decision rested on its holding that the expropriation exception did not apply in this case because "[t]he expropriated property those claims involve ... sits in Russia, not the United States. And as we have now held several times, expropriated property must be located in the United States for jurisdiction to lie under the expropriation exception over claims against a foreign state." The district court had based its jurisdictional finding in part on the D.C. Circuit's Chabad I case, but the appellate court observed that Chabad I has since been superseded by two other precedential D.C. Circuit holdings. Those rulings clarified that the FSIA's exception requires the property at issue to be based in the United States, but that is not the scenario in this case, since expropriated property is located in Russia.

Zhongshan Fucheng Industrial Investment Co. LTD v. Federal Republic of Nigeria

The Zhongshan opinion involves the arbitration exception to the FSIA and an arbitration award against Nigeria of $55.6 million in compensation from Nigeria and $75,000 in moral damages, along with interest and legal and arbitral fees. After Zhongshan filed a petition to confirm the arbitration award in the District Court for the District of Columbia, Nigeria moved to dismiss for lack of subject-matter and personal jurisdiction. The district court denied Nigeria's motion to dismiss, holding that Nigeria was not immune because the Final Award was governed by the New York Convention, and so fell within the FSIA's arbitration exception.

The appellate court affirmed the denial of Nigeria's motion to dismiss, rejecting Nigeria's argument that the commercial reservation limits the New York Convention to arbitral awards arising from direct transactions between a signatory state and a private party.

The Court held that the award "satisfies the Convention's requirements that the arbitrated dispute (1) 'aris[e] out of a legal relationship' that is (2) 'considered as commercial[.]'" Specifically, "Zhongshan and Nigeria shared a legal relationship because Nigeria owed Zhongshan legal duties under the Investment Treaty" at issue in the arbitration. The Court explained that "China and Nigeria negotiated a treaty that was intended to confer specified benefits upon investors. The Investment Treaty expressly guarantees Chinese investors protection of their investments and fair and equal treatment. ... Underscoring the point, the duties owed to investors are distinct from those owed to the signatory states." As for the second component of the commercial reservation, the Court explains, "the legal relationship the Investment Treaty created between Zhongshan and Nigeria is commercial in nature. The relationship exists because Zhongshan made a commercial investment, in a free-trade zone designed to facilitate commerce, under a bilateral treaty aimed at promoting commercial investment and protecting commercial investors."

However, Nigeria argues that the commercial reservation limits the New York Convention to arbitral awards arising from direct transactions between a signatory state and a private party, relying principally on the Federal Arbitration Act's requirement that the parties’ relationship be “considered as commercial, including a transaction, contract, or agreement described in section 2 of this title[.]” Section 2 of the Federal Arbitration Act, in turn, provides that “[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce” providing for arbitration “shall be valid, irrevocable, and enforceable[.]” Because the Investment Treaty itself is not a commercial transaction, and Zhongshan did not directly transact with Nigeria itself, Nigeria argues that the relationship between Zhongshan and Nigeria is not considered as commercial for purposes of the commercial reservation.

The Court rejected Nigeria's proposed reading, explaining that it "would artificially and extra-textually confine the commercial reservation to the scope of Section 2 of the Federal Arbitration Act," by replacing the commercial reservation's use of the word “including” with the words “limited to." The Court further explain that "nothing in this opinion suggests that the Investment Treaty is itself a commercial relationship. Instead, the Investment Treaty created a relationship between Nigeria and the commercial investor Zhongshan to promote commercial development. It is that relationship between Nigeria and Zhongshan that is considered as commercial."

Judge Katsas dissented, advancing the opinion that "[i]n its typical applications, the New York Convention governs awards arising from disputes between private parties. This case presents the question whether the Convention also governs awards arising from public-law disputes involving the sovereign acts of governments. In my view, the Convention's reference to “persons” does not extend to states acting in their sovereign capacity." The majority disagreed, explaining that "the Convention's drafters did not 'plainly' state an 'intent[ ]' to carve sovereign-act breaches against a private entity out of the New York Convention's scope and to categorically constrict the Convention's coverage to private acts."

The application of foreign sovereign immunity has significant implications for international relations and commerce. By limiting the circumstances under which foreign states can be sued, the FSIA helps to ensure that diplomatic and economic interactions between countries are not unduly disrupted by litigation. However, the exceptions to immunity recognize that there are instances where foreign states should be held accountable for their actions, especially when they engage in commercial activities or violate fundamental human rights. The U.S. courts have the challenging task of interpreting and applying these exceptions, often navigating complex questions of international law and foreign policy. As such, foreign sovereign immunity remains a critical and evolving area of law, reflecting the ongoing interplay between legal principles and the realities of global governance.

Samsung Group Investor Moves to Confirm Arbitration Award Against Korea

Mason Capital L.P. and Mason Management LLC filed a petition to confirm a $30 million arbitration award against the Republic of Korea before the U.S. District Court for the District of Columbia on Friday, May 24, 2024. Petitioners also seek to confirm an award of more than $10 million in costs and fees related to the arbitration.

The arbitration arose out of Petitioners investments subject to the Free Trade Agreement between Korea and the United States (the "FTA"). Specifically, Petitioners acquired publicly traded shares in Samsung Electronics, Inc. and Samsung C&T. Petitioners allege that they acquired shares in SEC and SC&T, believing that incoming reform to Samsung’s corporate governance would unlock value for all Samsung shareholders, including Mason itself. However, in 2014, Samsung began to change its governance structure and the market speculated that it would transition to a holding company structure. This happened in May 2015, when Samsung announced that Cheil Industries Incorporated will merge with Samsung C&T. At the time, financial experts advised Samsung C&T stockholders to vote against the merger as it grossly undervalued the company and was solely aimed to allow Samsung Electronics, Inc.'s Vice Chairman to strengthen his control over Samsung under his family's succession plan while avoiding tax liabilities, the petition alleges. The merger was approved because Korea's National Pension Service, Samsung C&T's largest individual stockholder, voted in favor of the transaction despite the analysts' warnings. According to the petition, it was subsequently revealed during criminal proceedings in Korean courts that the President of Korea, Park Geun-hye, had financial interests in approving the merger and used his political influence to push for a vote in favor of the merger.

Petitioners initiated arbitration under the FTA, which concluded in their favor. The tribunal held that Korea breached the FTA in connection with the investments by Mason in Samsung and imposed on Korea obligations to pay Mason over $30 million in damages for losses, with interest, €630,000.00 in arbitration costs, with interest; and over $10 million in legal fees and expenses.

The case is Mason Capital L.P. et al. v. Republic of Korea, No. 24-cv-1551. Petitioners are represented by Abid R. Qureshi and Joseph V. Langkilde from Latham & Watkins LLP.

The petition can be downloaded below.

D.D.C. 24-cv-01551 dckt 000001_000 filed 2024-05-24.pdf

Download PDF • 232KB

D.C. Circuit Affirms Denial of Romania Attempt to Avoid Arbitral Award by Micula Brothers

Yet another appeal in the Micula v. Romania saga was rejected by the D.C. Court earlier today. After the confirmation of the arbitration award in 2019, Romania appealed the District Court for the District of Columbia's decision, arguing that the Court did not have subject matter jurisdiction over the matter, arguing that the arbitration provision in the Sweden-Romania BIT was void as of Romania’s 2007 accession because EU law prohibits intra-EU agreements to arbitrate EU law disputes between a member state and the citizens of another member state. The D.C. Circuit affirmed the confirmation of the award in 2020, agreeing with the lower court's ruling thatEU law was inapplicable because the parties’ dispute predated Romania’s EU membership and the award did not “relate to the interpretation or application of EU law." The parties found themselves before the D.C. Circuit court twice more in relation to discovery sanctions and accrued sanctions. The D.C. Circuit ruled in favor of the Micula brothers both times.

In 2022, Romania filed a motion under Rule 60(b) seeking relief from the 2019 confirmation of the award and the ensuing sanctions,  arguing that two decisions of the EU’s highest court in 2022 held, “[i]n unequivocal terms,” that “the agreement to arbitrate in the [Sweden-Romania] BIT was void the moment that Romania entered the EU.” The district court denied the Rule 60(b) motion, concluding that the CJEU Decisions did not hold Romania’s accession retroactively voided its pre-EU consent to arbitrate and “the jurisdictional fact . . . that there was a valid agreement to arbitrate before Romania acceded to the EU — remains undisturbed.” This appeal ensued.

The D.C. Circuit denied Romania's fourth appeal. As to Romania's arguments under Rule 60(b)(4)--requiring relief when the judgment is void--the Court found that Romania did not make a showing, as required, that the district court lacked even an arguable basis for jurisdiction in confirming the award. Romania maintained that even so there is no arguable basis for jurisdiction because the “sole basis” for the district court’s determination that jurisdiction existed under the FSIA was an erroneous “interpretation and application of EU law." The appellate court rejected that, explaining that the district court’s jurisdictional analysis in 2019 was not premised on the “interpretation and application of EU law,” but that the district court independently found the requisite “jurisdictional fact[]” under the arbitration exception of an agreement to arbitrate with the Miculas, through the 2002 Sweden- Romania BIT and the Miculas’ 2005 request for arbitration. Further, the Court explained that the 2022 CJEU decisions on which Romania relies do not support the interpretation that its 2007 accession to the EU retroactively rendered the preexisting agreement to arbitrate with Swedish investors “void ab initio.”

As to Romania's arguments under Rule 60(b)(5)--which provides relief from certain judgments, including a judgment “based on an earlier judgment that has been reversed or vacated” or where “applying it prospectively is no longer equitable"--the Court rejected the notion that the district court judgments are based on a judgment of the General Court that the CJEU reversed or vacated. The Court explained that the district court’s subject matter jurisdiction, contrary to Romania’s view, did not “depend” on the 2019 General Court decision, but simply on the fact that the dispute pre-dated Romania's ascension to the EU. In fact, the district court's decision to confirm the award never even referred to the 2019 General Court decision.

Lastly, as to Romania's arguments under Rule 60(b)(6)--which provides relief from a judgment for “any other reason that justifies relief"--the D.C. Circuit found it to be barred because it simply repackaged the same arguments under Rules 60(b)(4) and (5).

The appeal is captioned Micula et al. v. Gov't of Romania, No. 23-7008.