Opinion ID: 543051
Heading Depth: 2
Heading Rank: 5

Heading: Application of the Section 1605(a)(2) Commercial Activity Exception

Text: 44 Subject matter jurisdiction in a civil action against a foreign sovereign depends on whether one of the exceptions to immunity applies. See 28 U.S.C. Sec. 1330(a). In the instant case, the District Court concluded that for jurisdictional purposes on the facts alleged by Foremost, Iran lacks sovereign immunity under the third clause of 28 U.S.C. Sec. 1605(a)(2). The third clause deprives a foreign sovereign of immunity for actions based upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States. 28 U.S.C. Sec. 1605(a)(2). Iran contests both the classification of the acts as a commercial activity and the existence of any direct effect.
Commercial activity is defined in FSIA as 45 either a regular course of commercial conduct or a particular commercial transaction or act. The commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose. 46 28 U.S.C. Sec. 1603(d). According to Iran, the complaint states a claim for expropriation--a governmental act, not a commercial one--and hence jurisdiction cannot obtain under the commercial activity exception of FSIA. 47 In rejecting Iran's argument, the District Court reasoned that there had been no formal declaration by the Government of Iran nationalizing Pak Dairy and that the nature of the actions complained of by Foremost sound in the nature of a corporate dispute between majority and minority shareholders. Foremost III, slip op. at 9, reprinted in App. 11. According to the District Court, Foremost's claim essentially involves allegations that Iran, acting through its various co-defendants on Pak Dairy's Board of Directors, used its majority position to lock Foremost out of the management of the company and deny Foremost its share of the company's earnings in the form of dividends. Id. at n. 12. 48 It seems plain that Foremost's complaint alleges actions that are both commercial and governmental in nature. It is also clear that in determining its jurisdiction the District Court may consider only those actions that are commercial in nature. Millen Indus., Inc. v. Coordination Council for No. Am. Affairs, 855 F.2d 879, 885 (D.C.Cir.1988) (when a transaction partakes of both commercial and sovereign elements, jurisdiction will not obtain if the cause of action is based on a sovereign activity). But [o]ne allegation of the complaint ... may be sufficient to create jurisdiction. Id. Here, some of the alleged acts that provide the basis for Foremost's cause of action are commercial in nature, as even Iran admits. See Brief for Appellant at 26-27. Moreover, Iran has offered no countervailing evidence indicating that these alleged commercial acts were subsumed within a sovereign activity. 49 There is no indication that Iran nationalized Pak Dairy by taking it over through a process of law. Indeed, in its amended answer to the complaint, Iran denies Pak Dairy is controlled by Iran or that it is an agency or instrumentality of Iran, as defined in 28 U.S.C. Sec. 1603(b). Amended Answer of Defendant Islamic Republic of Iran p 11, reprinted in App. 124. Nor have the parties pointed to any statutory restrictions or governmental decrees or directives depriving persons outside Iran of the right to sell or transfer shares in an Iranian enterprise or of a government policy curtailing the payment of dividends. The Claims Tribunal determined that Foremost had not proved the existence of any statutory restriction on its right to sell or otherwise dispose of its shares. Foremost-Tehran, Inc. v. Iran, 10 Iran-United States Claims Trib. Rep. at 250, reprinted in App. 78. In the absence of such countervailing evidence, the District Court properly concluded that the actions alleged were sufficiently commercial in nature to withstand Iran's motion to dismiss. 15
50 In further defense against the appellee's claim under section 1605(a)(2), Iran contends that none of the alleged acts of the sovereign had a direct effect in the United States. Without reaching the merits of the issue, we find no error in the District Court's determination that the facts alleged by Foremost exhibit sufficiently direct effects to confer subject matter jurisdiction under the third clause of section 1605(a)(2). 51 In support of its position, Iran cites Zedan v. Kingdom of Saudi Arabia, 849 F.2d 1511 (D.C.Cir.1988), in which the court held that a direct effect for purposes of the commercial activity exception to immunity is one that is substantial and foreseeable, id. at 1514. Iran's reliance on Zedan is futile. In Zedan, this court concluded that the suffering of financial hardship in the United States from events that take place abroad is not, alone, sufficient to establish direct effects. See id. at 1514, 1515. While in Saudi Arabia, Zedan--an American citizen--contracted to work for an agency of the government. He had not received the payment due under the contract at the time he returned to the United States. Zedan claimed that he suffered financial loss when the defendant-foreign sovereign failed to forward to the United States money owed him. Id. at 1512. The court concluded that the effects were not foreseeable. Id. at 1515. 52 Here, the effects alleged were foreseeable, substantial and direct. As to foreseeability, according to Foremost, there was a constant flow of capital, management personnel, engineering data, machinery, equipment, materials and packaging, between the United States and Iran to support the operation of Pak Dairy. See Complaint at p 17, reprinted in App. 28. Foremost owned shares and had representation on the Board. It is hardly convincing that, with the close commercial ties alleged here, it would be unforeseeable that actions taken by the Government of Iran within its borders would have effects in the United States. In Maritime Int'l Nominees Establishment v. Republic of Guinea, 693 F.2d 1094, 1111 (D.C.Cir.1982), cert. denied, 464 U.S. 815, 104 S.Ct. 71, 78 L.Ed.2d 84 (1983), this court concluded that the financial effects on the United States company were fortuitous, since it was not contemplated in the original agreement that the United States company would share in the profits. By contrast, where a Mexican bank, the foreign instrumentality, had engaged in a regular course of business conduct with [the American purchaser of certificates of deposit] over a several-year period, the Fifth Circuit found direct effects. Callejo v. Bancomer, S.A., 764 F.2d 1101, 1112 (5th Cir.1985). In the instant case, Foremost alleges that the involvement of Foremost was contemplated in the original agreement and extended over a period of years. 53 Nor does case law support the conclusion that the effects alleged are insubstantial or not direct. The alleged effects of freezing-out American corporations in their ownership of Pak Dairy are at least as substantial and direct as effects alleged in prior cases in which this court and other circuits have found direct effects. For example, the Callejo court determined that a foreign instrumentality-bank's breach of contract regarding payment of principal and interest on certificates of deposits had direct effects on their United States-resident owner within the meaning of FSIA. Callejo, 764 F.2d at 1110 12. In Texas Trading & Milling Corp v. Federal Republic of Nigeria, 647 F.2d 300, 312-13 (2d Cir.1981), cert. denied, 454 U.S. 1148, 102 S.Ct. 1012, 71 L.Ed.2d 301 (1982), the Second Circuit determined that, under either a breach of contract or breach of letters of credit theory, Nigeria's unilateral alteration of the letters of credit and cancellation of contracts had direct effects on the United States companies that were suppliers under the contracts. And in Transamerican S.S., 767 F.2d at 1004, this court determined that the effects of the foreign agency's detention of an American ship, which caused the American corporation to incur debt, and the agency's demand for payment in the United States were both direct and substantial within the meaning of the FSIA. Adhering to this line of precedent, we find no infirmity with the District Court's determination that the alleged effects were sufficiently direct to survive Iran's motion to dismiss.