Sanchez v. Crocs, Inc.: The Tenth Circuit Addresses Extraterritoriality

Posted in Adjudication, International Practice

In Sanchez v. Crocs, Inc., 2016 U.S. App. LEXIS 13285 (10th Cir. 2016), the Tenth Circuit addressed whether, after Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), a plaintiff has standing, under § 10(b) of the Securities and Exchange Act (“Exchange Act”), to pursue claims in a United States federal court for its losses on investments in foreign contracts for difference (“CFDs”). (For a fuller discussion of Morrison v. National Australia Bank Ltd., see the discussion of subject matter jurisdiction in our e-book, International Practice: Topics and Trends.)

Sanchez arises from the rapid expansion of Colorado-based shoe manufacturer Crocs, Inc. (“Crocs”) in the years after its founding.  According to the plaintiffs’ complaint, Crocs continued to use “archaic, error-prone Excel spreadsheets” to track inventory and forecast sales, despite the fact that the company’s massively expanding business was quickly outpacing the usefulness of its inefficient system.  The plaintiffs alleged that, due to its disorganized methods for tracking inventory, Crocs not only frequently bulk-ordered unsalable shoes but also consistently failed to meet the demand for its best-selling shoes.

As a result of its inventory and distribution difficulties, Crocs sustained a four-fold increase in its inventory from August to December 2006, followed by similar increases throughout 2007 and into 2008. Nevertheless, the company valued its inventory at cost on both the 2006 and 2007 Form 10-Ks that it filed with the Securities and Exchange Commission (“SEC”).  Furthermore, in both years, Crocs’ auditor, issued unqualified audit opinions approving both Crocs’ financials and its internal controls.  Eventually, Crocs began disclosing its issues with its inventory and distribution, and by November 2008, the company wrote down the value of its inventory by over seventy million dollars.

In November 2007, several plaintiffs brought securities fraud class action lawsuits against Crocs. The district court consolidated the cases and named the Sanchez Group as lead plaintiff. The plaintiffs alleged, inter alia, that Crocs, its management, and Crocs’ auditor had violated § 10(b) of the Exchange Act by fraudulently representing both the value of Crocs’ inventory and the competence of its internal controls with regards to financial reporting. According to the complaint, Crocs knew well before 2008 that the “bulk” of its inventory could not be sold at cost because it “consisted of unsalable or unsuitable shoes.” Thus, the complaint alleged that Crocs violated generally accepted accounting principles (“GAAP”) by valuing its inventory at cost on the 2006 and 2007 Form 10-Ks. The plaintiffs also alleged that Crocs’ auditor was complicit in the fraud.

The defendants moved to dismiss the complaint for failure to state a claim. The district court granted their motion. Several appeals and related motions followed. The plaintiffs appealed the dismissal of their complaint, and one of the plaintiffs—the National Roofing Industry Pension Plan (“National Roofing”)—moved to dismiss the plaintiffs’ appeal for lack of jurisdiction. National Roofing also appealed the district court’s initial selection of the Sanchez Group as the lead plaintiff.

Eventually, the plaintiffs and the Crocs defendants agreed to a proposed settlement, for which the district court issued its final approval in September 2014. The court subsequently dismissed the action against the Crocs defendants, and National Roofing then voluntarily agreed to dismiss its appeal with prejudice. Thus, only National Roofing’s motion to dismiss and the claims against Crocs’ auditor appeared before the Tenth Circuit. It is the motion to dismiss that is of interest to this international practice blog.

National Roofing’s motion argued that, under Morrison, the Sanchez Group lacked standing to pursue its appeal of the district court’s decision. In Morrison, the Supreme Court held that § 10(b) of the Exchange Act reaches only the purchase or sale of a security listed on an American stock exchange and the purchase or sale of any other security in the United States. See 561 U.S. at 273.  According to National Roofing, because the Sanchez Group’s CFDs were not listed on a domestic exchange and were purchased  abroad, the Sanchez Group lacked standing under Morrison to pursue § 10(b) claims in a United States Court.

The Tenth Circuit ultimately found that, even under Morrison, the court had proper subject matter jurisdiction.  To reach that conclusion, however, the Court of Appeals first had to navigate the sometimes less-than-clear waters of federal and international civil procedure. Although the Tenth Circuit ultimately addressed National Roofing’s Morrison-based argument as part of National Roofing’s motion to dismiss, the appellate court found the motion was moot because National Roofing had included the motion’s Morrison-based argument within its appeal that it subsequently voluntarily dismissed with prejudice.

National Roofing initially intended for the Court to address its Morrison-based argument as part of its appeal of the district court’s selection of the Sanchez Group as the lead plaintiff. After the other parties opposed its suggestion for the Court to hear and decide that appeal first, however, National Roofing brought its motion to dismiss, as a way of ensuring that the Court would address the Morrison issue before the Sanchez Group could settle its claims with the defendants.

Eventually, the plaintiffs did in fact settle with most of the defendants, and National Roofing voluntarily agreed to dismiss its own appeal with prejudice. Thus, according to the Tenth Circuit, because “a stipulation of dismissal with prejudice…normally constitutes a final judgment on the merits” (quoting Astron Indus. Assocs., Inc. v. Chrysler Motors Corp., 405 F.2d 958, 960 (5th Cir. 1968), by voluntarily agreeing to dismiss its appeal (which raised the same Morrison-based argument as the motion to dismiss) with prejudice, National Roofing obtained “a complete adjudication on the merits” of its claim and removed itself from the litigation of the Morrison issue. Harrison v. Edison Bros. Apparel Stores, Inc., 924 F.2d 530, 534 (4th Cir. 1991).  Thus, the Tenth Circuit’s only course of action was to deny National Roofing’s motion to dismiss the appeal as it no longer had any “personal stake” in the dispute because its claim had already been fully adjudicated. Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523, 1530 (2013).

Despite its holding that National Roofing’s motion to dismiss was moot, the Tenth Circuit acknowledged that, even in a filing not properly before the Court, the Court has an independent obligation to determine whether subject-matter jurisdiction exists where a party raises a jurisdictional challenge. See United States v. Rubio, 231 F.3d, 709, 711 n.1 (10th Cir. 2000).  Thus, although the Tenth Circuit was not resolving the motion itself, it was required to assess whether Morrison did actually impact its jurisdiction over the case.

The Tenth Circuit held that Morrison did not impact its jurisdiction over the case.  The appellate court explained that, contrary to National Roofing’s argument, Morrison explicitly held that the territorial reach of § 10(b) is a merits issue—not a jurisdictional one. In addition, the Tenth Circuit referred to its own reaffirmation of Morrison in CGC Holding Co. v. Broad & Cassel, 773 F.3d 1076, 1096 (10th Cir. 2014), where it held that “the extent to which a statute applies extraterritorially proceeds exclusively as a merits issue, not a question of jurisdiction.”

In the end, the court denied as moot National Roofing’s motion to dismiss and, after addressing the merits of the plaintiffs’ appeal, affirmed the district court’s dismissal of the plaintiffs’ complaint.

Special thanks to Mark Sanchez*¥ for his assistance in creating this blog post.

*Not admitted to the practice of law
¥No relation to the Sanchez Group as mentioned above.

Another District Court Examines Extraterritoriality of the Alien Tort Statute

Posted in Adjudication, International Practice

Ates v. Gülen, 2016 U.S. Dist. LEXIS 84685 (M.D. Penn. June 29, 2016),  is one of the recent cases to examine the Alien Tort Statute (ATS) since the Supreme Court’s decision in Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659 (2013). (For a more in-depth analysis of Kiobel and its implications, please see our posting, “Extraterritoriality Becomes Focus of Kiobel Supreme Court; Are We Headed for Morrison II?” Likewise, for a more in-depth analysis of the ATS in general, please see our e-book, International Practice: Topics and Trends.) In Gülen, the Middle District of Pennsylvania addressed the threshold for displacement of the ATS’s presumption against extraterritoriality.

In December 2015, the plaintiffs Bunyamin Ates, Turgut Yildirim, and Murat Ozturk, all Turkish nationals, filed a complaint against Muhammed Fethulla Gülen and Does 1-50. The plaintiffs alleged, pursuant to the ATS, that the defendants had persecuted members of their religious organization in addition to arresting and detaining the plaintiffs arbitrarily. The plaintiffs also asserted counts of false imprisonment and civil conspiracy pursuant to Pennsylvania state law. Gülen moved to dismiss the complaint. For the reasons described below, the District Court granted Gülen’s motion. Continue Reading

The Supreme Court Considers Extraterritoriality of RICO

Posted in Adjudication, International Practice

RJR Nabisco, Inc. v. European Cmty, 26 Fla. L. Weekly Fed. S 263, is one of the rare cases by the Supreme Court that addresses an important issue of international practice. The case arises from a suit brought by the European Community and 26 of its member states against RJR Nabisco, Inc. alleging violation of the Racketeering Influenced and Corrupt Organizations Act (RICO). The complaint detailed a variety of alleged activities, all of which occurred extraterritorially.

The European Community and its member states brought suit in the United States District Court for the Eastern District of New York, which dismissed the RICO claims as impermissibly extraterritorial.  On appeal, the Second Circuit reinstated the RICO claims, holding that Congress had intended RICO’s substantive prohibitions to apply extraterritorially.

The Supreme Court granted certiorari on whether RICO can be applied extraterritorially. The Second Circuit’s judgment was reversed in a 4-3 judgment. The majority opinion was authored by Justice Alito. Justice Ginsburg and Justice Breyer filed two opinions concurring in part, dissenting in part, and dissenting from the judgment.

The Court divided this question into two issues: whether RICO’s substantive prohibitions apply to conduct that occurs in non-U.S. countries and whether RICO’s private right of action applies to injuries suffered in countries other than the United States. As to the first issue, the Court held in the affirmative. As to the second, however, the Court held in the negative. Both Justice Ginsburg and Justice Breyer concurred in part and dissented in part, with both Justices’ dissents addressing only the second issue. Continue Reading

District Court Confirms an International Arbitration Award Granted Under the New York Convention

Posted in Arbitration, International Practice

Belize Bank Ltd. v. Gov’t of Belize, No. 14-cv-659 (D.D.C., 2016), is one of several recent cases in which the District Court for the District of Columbia ordered the Government of Belize (“Belize”) to pay an arbitration award. In this case, the Court addressed questions of when federal courts can enforce arbitration awards granted outside the U.S. For a fuller discussion of where arbitral awards can be enforced, see the discussion of “Enforcement and Recognition of Arbitral Awards” in our e-book, International Practice: Topics and Trends.

In 2007, The Belize Bank Limited (“Bank”) initiated arbitration proceedings at the London Court of International Arbitration (“LCIA”) against Belize, who failed to pay the Bank debts originating from a loan payment guarantee signed by then Belizean Prime Minister Said Musa. Because Belize did not initially participate in the proceeding, the LCIA appointed an arbitrator, Zachary Douglas, on behalf of Belize. In 2013, the LCIA ordered Belize to pay the Bank BZ$36,895,509.46 plus interest. In 2014, the Bank filed a petition to enforce the 2013 award in the District of Columbia. Belize moved to dismiss the petition.

Continue Reading

District Court Allows the Commodity Futures Exchange Commission to Bring a Lawsuit Involving Non-U.S. Investors and Non-U.S. Electronic Trading Platforms

Posted in Adjudication, International Practice

United States Commodity Futures Exch. Comm’n v. Vision Fin. Partners, LLC, No. 16-60297 (S.D. Fla. 2016), addresses the international practice question of whether federal courts have subject matter jurisdiction to hear lawsuits brought by the Commodity Futures Exchange Commission (the Commission) on behalf of non-U.S. investors trading through non-U.S. electronic platforms.

In this case, the Commission sued Vision Financial Partners and its principal for violating the Commodity Exchange Act. Defendants allegedly misappropriated funds deposited by non-U.S. investors who invested in “binary options” through trading platforms located in Israel, Cyprus, and the United Kingdom.

In moving to dismiss based on Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), Defendants argued that the Commission lacked authority to bring the suit, mainly because “the Commodity Exchange Act does not apply to the binary options purchased by foreign investors and exchanged on foreign trading platforms.” Defendants’ argument was based on Morrison v. National Australia Bank Ltd., No. 08-1191 (June 24, 2010), in which non-U.S. plaintiffs relied on the Securities Exchange Act of 1934 to sue a non-U.S. issuer based on securities transactions outside of the United States. In Morrison, the Supreme Court held that a private plaintiff can bring a securities lawsuit only if “the purchase or sale [of the subject security] is made in the United States, or involves a security listed on a domestic exchange.” (For a fuller discussion of Morrison v. National Australia Bank Ltd., see the discussion of subject matter jurisdiction in our e-book, International Practice: Topics and Trends.) Courts have applied Morrison to suits brought by private parties under the Commodity Exchange Act. However, in this case, the Court did not apply Morrison, because the Court believed that “the extra-territorial reach of a private right of action under the Commodity Exchange Act is a ‘different, and somewhat more complicated question’ than that of a suit brought by the Commission.” The Commodity Exchange Act affirmatively indicates that “it applies to extraterritorial transactions, at least concerning suits brought by the Commission itself.”

The district court denied the motion to dismiss, holding that “the Commission may sue Defendants for violation of the Commodity Exchange Act, even if the violations concerned transactions between non-U.S. residents and non-U.S. electronic platforms.” The Court found that since Defendants committed their misconduct in Florida, the Commodity Exchange Act permitted the Commission to bring this lawsuit. The Court stated:

7 U.S.C. § 6(b)(2) permits the Commission to “adopt rules and regulations proscribing fraud,” and other rules, even if they concern instruments or transactions “made on or to be made subject to the rules of a board of trade, exchange or market located outside the United States,” so long as that fraud or other regulated behavior is committed by “any person located in the United States.” And, of course, 7 U.S.C. § 13a-1 permits the Commission to sue over “any practice constituting a violation of any provision of [the Commodity Exchange Act] or any rule, regulation, or order thereunder.

In short, the Court was not willing to extend the narrowing teaching of Morrison to this lawsuit brought by the Commission.

 

Special thanks to Yujia Feng* for her assistance in creating this blog post and in re-establishing this blog.

*Not admitted to the practice of law

 

 

Norex Decision, Long in Federal Court, Now Dismissed By State Court Using Borrowing Statute To Shorten Applicable Limitations Period

Posted in Adjudication, International Practice

We have posted on the meanderings of the Norex case in federal court (e.g., here).  After dismissal from federal court, Norex sued in state court.  Norex Petroleum Ltd. v. Leonard Blavatnik, et al., Index No. 650591/11 (Sup. Ct. N.Y. County 2012).

In a decision that addresses several international litigation issues, the trial court dismissed at least one major action between the parties.  The Court relied on the statute of limitations as imposed by virtue of New York’s Borrowing Statute.  A brief reminder of the power of that statute is warranted.  See the general discussion of borrowing statutes in our e-book, International Practice:  Topics and Trends.

In the Norex case, Norex, though a Cyprus entity, has in principal place of business in Calgary, Alberta, Canada.  The gravamen of the complaint related to alleged misappropriation of Norex’s majority interest in oil fields in Russia that are owned by Yugraneft, a non-party to the suit.  The defendant in the case, BP, allegedly took control (through a joint venture) of the oil assets that Norex claims were taken from it.

In moving to dismiss on statute of limitations grounds, Defendants relied on CPLR Section 202, which provides as follows:

CPLR § 202 Cause of action accruing without the state

An action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favor of a resident of the state the time limited by the laws of the state shall apply.

Because Norex was not a New York resident, the Court needed to determine where the cause of action accrued.  Finding that the cause of action accrued in Canada, “where the[] damages were felt”, the Court applied the Alberta two-year statute of limitations in tort cases.  On this analysis the action in state court was time-barred.

The tricky part of the analysis, however, was whether the statute of limitations had been tolled.  The federal action brought by Norex was, it claimed, timely filed even under a two-year statute.  And Norex relied on CPLR 205(a), which provides in pertinent part:

New action by plaintiff. If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff, or, if the plaintiff dies, and the cause of action survives, his or her executor or administrator, may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months after the termination provided that the new action would have been timely commenced at the time of commencement of the prior action and that service upon defendant is effected within such six-month period.

The state action was commenced within six months of the dismissal of the Norex federal action.  However, the Court found that there was no similar tolling provision in the Canadian statutory scheme.  The Court ruled that the fact that the Alberta law was “substantive” and not “procedural” didn’t matter; the Borrowing Statute required reliance on that non-New York law in any case.

Finally, the Court considered (arguendo) and rejected Norex’s reliance on 28 U.S.C. Sec 1367(d), a federal statute that provides:

d) The period of limitations for any claim asserted under subsection (a), and for any other claim in the same action that is voluntarily dismissed at the same time as or after the dismissal of the claim under subsection (a), shall be tolled while the claim is pending and for a period of 30 days after it is dismissed unless State law provides for a longer tolling period.

The Court determined that this federal statute was binding on it.  The Court however also found that New York’s six-month tolling provision, being longer than the federal 30-day, meant that the federal statute didn’t apply.  And “State law”, the Court found based on a definition in Section 1367(e), meant only states of the U.S., not a non-U.S. jurisdiction.

 

 

Court Denies Non-U.S. Company’s Attempt To Avoid Default, Citing Agency Relationship Between Parent and Sub Justifying Earlier Exercise of Jurisdiction Over Non-U.S. Parent

Posted in Adjudication, International Practice

The drywall litigation, arising from the installation into U.S. homes of allegedly defective drywall from China, has included a great many noteworthy international practice issues.  Many companies have settled.  Others have continued to litigate.  In Lennar Homes, LLC, et al. v. Knauf Gips, et al.,, Case no. 09-07901 CA 42 (Cir. Ct. 11th Jud. Dist. 2012), the Court addressed the situation of a defaulting defendant trying to undue the consequences of default. 

The company involved is Taishan Gypsum Co.  Taishan argued that it lacked the minimum contacts necessary to be hailed into a U.S. court.  The plaintiffs argued that Taishan had the requisite contacts through an agency relationship with an allegedly controlled and dominated wholly owned subsidiary.

We have discussed on this blog the many different ways for securing jurisdiction over a non-U.S. parent or subsidiary.  In this decision, the Court determines that the relationship between parent and subsidiary was so close and dominating that the U.S. entity was in fact the agent of the absent non-U.S. parent.  Such an agency relationship would be sufficient for jurisdiction under any or almost any U.S. law. 

In this case, the analysis was made under Florida state law, which requires a “high level of control” to trigger the agency determination.  Here, the Court further found that the subsidiary’s “separate corporate status was a formality” and that the subsidiary “was merely a vehicle through which [the parent] exported its products to the United States”.  The Court credited evidence that the only reason the subsidiary was established was to enable customers to take advantage of VAT tax offsets, and the Court found that the Company ignored the formalities and acted without any apparent need to request or provide corporate authorizations.

After finding the parent subject to U.S. law, it reviewed the parent’s arguments for why the default judgment should be lifted.  The Court rejected all of these arguments and maintained the default.

Eleventh Circuit Finds Moot a Post-Judgment Challenge to a Confirmed Arbitral Award, Even When the Challenge Is Made in a Primary Jurisdiction Under the New York Convention

Posted in Adjudication, Arbitration, International Practice

Ingaseosas International Co. v. Aconcagua Investing Ltd., No. 11-10914 (11th Cir. 2012) (unpublished),  involves an interesting application of the primary vs secondary jurisdiction doctrine under the New York Convention as well as the mootness doctrine. 

IIC participated in an arbitration in Miami, Florida, under New York law.  IIC lost, the award requiring it to pay $11 million to AIL.  When IIC didn’t pay, AIL brought an enforcement proceeding in the British Virgin Islands.  As the Eleventh Circuit noted, under the New York Convention, AIL could have filed an enforcement action in any of the over 140 contracting states within the New York other than an state where the award was rendered or where the award is “considered as domestic”.  (For a fuller discussion of where arbitral awards can be enforced/opposed, see the discussion of international arbitrations and the New York Convention in our e-book, International Practice:  Topics and Trends.)  In response to the AIL proceeding in the BVI court, IIC filed a motion to vacate in the district court in Florida.

In the BVI court, the court was willing to stay the matter until the determination of the motion to vacate in federal district court if IIC provided security of $7 million.  IIC declined to do so, the BVI court ultimately entered a judgment enforcing the award, and IIC in fact paid the judgment while still pursuing it’s motion to vacate in the federal district court.

The Eleventh Circuit held that IIC could not “idly stand by and allow an arbitration award to be confirmed and then seek to vacate same”.  In support, the Court of Appeals relied on The Hartbridge, 57 F.2d 672 (2d Cir. 1932), a decision by three of the legal giants of that generation (Learned Hand, Augustus Hand, and Thomas Walter Swann), which held:

As we understand the statute a motion to confirm puts the other party to his objections. He cannot idly stand by, allow the award to be confirmed and judgment thereon entered, and then move to vacate the award just as though no judgment existed. . . . After judgment we think the award can be vacated only if the judgment can be, and to vacate the judgment an adequate excuse must be shown for not having presented objections to the award when the motion to confirm was heard.

The Court of Appeals did not analyze whether this law should apply under the organization of rules adopted by the New York Convention, which was not adopted until 1958. Under the New York Convention, as the Court of Appeals acknowledged,  jurisdictions are divided into primary and secondary, with the court where the award was rendered being among the primary jurisdictions, and the court (in this case in BVI) where enforcement is sought being among the secondary jurisdictions.  The New York Convention “envisions multiple proceedings that address the same substantive challenge to an arbitral award” — but a primary jurisdiction situs is generally thought of to have more say in the vacatur/enforcement process.  The Eleventh Circuit did not hold that the federal district court lacked jurisdiction but rather held the case moot “for prudential reasons”.  The Court of Appeals was moved by IIC’s repeated failure to protect its rights by not posting a bond — but the New York Convention does not require the posting of a bond or automatically stay a secondary jurisdiction from enforcing an award upon such a posting.

New York’s Highest Court Interprets Both State and Federal Antitrust Law and Limits Extraterritorial Application

Posted in Adjudication, International Practice

Global Reinsurance Corp. v. Equitas Ltd., No. 53 (NY Ct. App. 2012), addresses the sufficiency and, more pertinent for our purposes, the extra-territorial reach of antitrust claims under New York’s antitrust statute, the Donnelly Act (NY Gen Bus. Law sec. 340, et seq.).  In doing so, the High Court interpreted as well federal antitrust jurisprudence on extra-territoriality, a subject we have posted on as a matter of signficance to the international practitioner (e.g., here). 

Equitas arose from the Reconstruction and Renewal plan by the Names (the insurance underwriters) at Lloyd’s of London in 1996.  Its job was to reinsure otherwise uninsurable non-life obligations that Lloyd’s syndicates had taken as retrocessionary reinsurers.  The antitrust claims against Equitas alleged that Equitas’s goal was not to pay just reinsurance claims but to stall, take a “hard-nosed” approach, etc. 

The Court of Appeals of New York found the operative pleading against Equitas deficient for failute to allege “any anticompetitive effect attributable to the posited conspiracy beyond the Lloyd’s marketplace”. But the Court went further and held that, even if the pleading could be amended to allege market power, “there would remain as an immovable obstacle to the action’s maintenance, the circumstance that the Donnelly Act cannot be understood to extend to the foreign conspiracy plaintiff purports to describe”.

To arrive at that conclusion, the Court of Appeals was prepared to extend the reach of the Donnelly Act to nearly the same lengths as federal antitrust statutes can reach.  In describing the reach of federal antitrust extra-territoriality, the Court cited the Foreign Trade Antitrust Improvements Act to observe that “conduct involving [non-import] trade or commerce . . . with foreign nations” is actionable in the U.S. only where the conduct has a “direct, substantial, and reasonably forseeable effect” on domestic commerce.  Describing the pleading before it, the Court of Appeals states:

The complaint alleges, essentially, that a German reinsurer through its New York branch purchased retrocessional coverage in a London marketplace and consequently sustained economic injury when retrocessional claims management services were by agreement within that London marketplace consolidated so as to eliminate competition over their delivery. Injury so inflicted, attributable primarily to foreign, government approved transactions having no particular New York orientation and occasioning injury here only by reason of the circumstance that plaintiff’s purchasing branch happens to be situated here, is not redressable under New York State’s antitrust statute. That this is so, is demonstrable when the Donnelly Act is considered in the context of federal antitrust law.

The Court was not willing to extend the reach of the Donnelly Act because the business of insurance was involved.  Indeed, it was not willing to extent the Donnelly Act as far as the federal antitrust laws, stating instead that:

For a Donnelly Act claim to reach a purely extra-territorial conspiracy, there would, we think, have to be a very close nexus between the conspiracy and injury to competition in this State.

Ninth Circuit Reverses FSIA Exception; No Commercial Activity in the U.S. in Iraq’s Oil for Food Program

Posted in Adjudication, International Practice

Terenkian v. Republic of Iraq, No. 10-56708 (9th Cir. 2012), addresses the important international practice question of whether activity by a non-U.S. sovereign satisfies the “commercial activity” exclusion to the application of the Foreign Sovereign Immunities Act, thus permitting the federal courts to exercise subject matter jurisdiction over a matter.  

The case concerned alleged breaches of contracts between Cyprus-based oil brokerage companies and the Iraqi State Oil Marketing Organization (SOMO), which had been selling oil through the Oil for Food Program.  Although the original contract provided for arbitration in accordance with ICC rules and designated the place of arbitration as Baghdad, the plaintiff argued that this was impossible because Terenkian faced death threats in Iraq, and also argued that the district court could not compel arbitration because Iraq was not a signatory to the New York Convention.

The plaintiff argued that Iraq was the actual defendant in the suit and that it was not entitled to sovereign immunity.  It initially argued that the alleged breach of contract had direct effect in the United States because some of the oil from the contract, which was no longer available, was intended for distribution in the United States. Later, in the opposition of Iraq’s motion to dismiss, the plaintiffs argued that Iraq was not entitled to sovereign immunity under the FSIA because of the exemption for commercial activity carried on in the United States.  The plaintiffs argued that the contracts at issue were executed in New York.  Additionally, the plaintiffs argued the act of depositing money in the United Nations escrow account outside the U.S. instead of in a New York bank caused a direct effect in the United States because the payment was not deposited in the US (which the original contract had required).

Iraq (the new government) moved to dismiss for lack of subject matter jurisdiction, arguing that it was not a party to the contracts (rather SOMO was) and that the alleged breaches did not have direct effect on the U.S. because the place of performance was Iraq and that there was no evidence that any oil would go to U.S. customers.

The district court denied the motion to dismiss, holding that the commercial activity exception applied; the commercial activity outside the U.S. had a direct effect in the U.S., based on the contract requiring payment be made in New York. It did not address the plaintiff’s alternative arguments.

The Ninth Circuit reversed.  It held that Iraq’s participation in the Oil for Food Program was not a commercial activity that could be engaged in by a private player, as defined in governing precedent. Additionally, there was no evidence that Iraqi officials signed the contract in the United States, and even if they had, that would not constitute significant activity or substantial contact in the U.S. The Court of Appeals also held that the alleged breach did not have direct effects in the United States, as Iraq had no obligation to perform in the United States. It also found that neither a potential financial loss nor the distant potential of oil sale loss was sufficient to constitute a direct effect.

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