Jurisdictional Nexus in the United States

Foreign Sovereign Immunities Commercial Activity Exception

Jurisdictional Nexus

According to research about Jurisdictional Nexus from the Federal Judicial Center:Under § 1605(a)(2), a foreign state is not immune if the action brought against that state is based upon: (1) A commercial activity carried on in the United States by the foreign state; or (2) An act performed in the United States in connection with a commercial activity of the foreign state elsewhere (i.e., outside the United States); or 3) An act outside the United States that was taken in connection with a commercial activity of the foreign state outside of the U.S. and that caused a direct effect in the United States.143 These three alternatives reflect, in descending order, different degrees of jurisdictional connection to the United States. The first requires the most substantial contacts and would presumptively be satisfied by import–export transactions involving sales to or purchases from parties in the United States, the negotiation or execution of a loan agreement in the United States, or the receipt of financing from a private or public lending institution located in the United States. Here, the particular conduct giving rise to the claim must be part of the commercial activity having substantial contact with the United States.144 The second alternative might be satisfied by an act in the United States that violated federal securities laws or involved the unlawful discharge of an employee in the United States working on a commercial activity carried on in a third country. The Ninth Circuit recently distinguished the standards applicable to the three clauses of § 1605(a)(2) as follows: the first entails a “nexus” requirement; the second, a “material connection” requirement; and the third, a “legally significant acts” requirement.145 The third alternative has occasioned the most judicial analysis and commentary. In Republic of Argentina v. Weltover, the U.S. Supreme Court explained that a “direct effect” in the United States must follow “as an immediate consequence” of the defendant’s activity.146 However, some courts have declined to read “direct effect” quite so literally and, like the Ninth Circuit, instead require a “legally significant act” occurring in the United States before a “direct effect” can be found.Other courts have interpreted the “direct effect” test to require a contractual clause mandating the fulfillment of commercial obligations in the United States.148 For example, a default by a foreign state, agency, or instrumentality on a contractual obligation to pay in the United States has been held to have a direct effect in the United States.149 Alleged financial losses suffered in the United States as the result of a failed investment opportunity abroad, a foreign government’s default on bonds, or breach of a contract to be performed abroad have been held insufficiently direct to satisfy § 1605(a)(2).150 In 2010, the D.C. Circuit held that the alleged breach of a contract to provide cruise ship services in Canada had a direct effect in the United States because • the plaintiff experienced financial losses caused by the termination of the contract; • the contract had been negotiated in the United States; • one of the cruise ships under the contract would have traveled through United States waters; • the contract’s termination resulted in up to $40 million of lost cruise-related business in the United States; and • contracts related to the terminated contract called for performance in the United States.151 The Sixth Circuit has also taken a more liberal approach, holding that because notes issued by a foreign government allowed the holder to demand payment anywhere, the government’s failure to pay a demand in Ohio created a “direct effect” in the United States. In Agrocomplect, AD v. Republic of Iraq,153 the district court considered a claim by a Bulgarian corporation under a contract with an Iraqi government entity to perform work on a land reclamation project. The plaintiff’s machinery, production base, and camp facilities were allegedly destroyed by the U.S. military as a consequence of the Iraqi invasion and occupation of Kuwait. The court rejected arguments that the “direct effect” requirement was satisfied where (1) payment under the contract was to be made at least in part by and through banking institutions in the United States, (2) goods and services under the contract were to be supplied in part by commercial entities in the United States, and (3) the construction projects became “foreseeable targets of opportunity and necessity for the United States military.” As to payments, the court said, the direct effect test is properly interpreted to require an agreement that payment be made “through and into” a U.S. bank or to allow the party receiving payment the discretion to require payment in that fashion. In addition, use of American subcontractors and American supplies does not constitute a “direct effect” and neither does the destruction of American property abroad. In contrast, in Foremost-McKesson, Inc. v. Islamic Republic of Iran, the complaint alleged that the government of Iran had illegally divested a U.S. company’s minority interest in an Iranian entity, causing the interruption of a contractually required flow of capital, management personnel, engineering data, machinery, equipment, materials, and packaging between Iran and the United States.154 The D.C. Circuit found that the foreseeable interruption substantially and directly affected the United States and was sufficient to satisfy the commercial activities exception.

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