Cert Petition Highlights Circuit Split on Sovereign Immunity for Military Purchases
March 23, 2023
The Foreign Sovereign Immunities Act (FSIA) immunizes foreign states from suit in federal and state court. But it makes an exception for actions based on a foreign state’s commercial activities. The Supreme Court’s leading decision interpreting this exception is Republic of Argentina v. Weltover (1992), where the Court unanimously held “that when a foreign government acts, not as regulator of a market, but in the manner of a private player within it, the foreign sovereign’s actions are ‘commercial’ within the meaning of the FSIA.” Thus, the Court wrote, “a contract to buy army boots or even bullets is a ‘commercial’ activity, because private companies can similarly use sales contracts to acquire goods.”
Both before and after Weltover, lower courts have routinely held that foreign states are not immune from suits based on military purchases, even if the goods were not ones that private parties could have bought. As previously reported on TLB, the Fourth Circuit recently departed from this line of cases in Blenheim Capital Holdings Ltd. v. Lockheed Martin Corp., holding that South Korea’s contracts to buy F-35 fighter jets and a military satellite did not constitute “commercial activity.” The decision creates a clear circuit split. Not surprisingly, the plaintiffs have filed a petition for certiorari seeking the Supreme Court’s review.
The Fourth Circuit’s Decision
The plaintiffs, two affiliated companies collectively referred to as “Blenheim,” are in the business of arranging “offset” transactions that reduce the ultimate costs of military equipment purchases to foreign governments. In this case, Blenheim arranged to transfer a satellite to South Korea in connection with that country’s purchase of 40 F-35 fighter aircraft. Blenheim alleges that Lockheed, Airbus, and South Korea later conspired to cut it out of the deal. Blenheim sued for various business torts.
While acknowledging the Supreme Court’s reference to military purchases in Weltover, the Fourth Circuit concluded “that not every purchase of goods by a sovereign is ‘commercial activity.’” Specifically, “when the sovereign engages in a transaction peculiar to sovereigns—one in which private parties cannot engage—it is engaged in sovereign activity that is not excepted from the immunity conferred by the FSIA, even if it involves the purchase of goods.”
In this case, the court noted, “the sale of F-35s was restricted as a Foreign Military Sale and therefore could only be made with the approval and supervision of the U.S. government, and then only to a friendly country.” It distinguished two district court decisions on which Blenheim relied because the sales in those cases were not as “highly regulated.”
Blenheim pointed out that the contract for the satellite that it was to buy clearly was one that a private party could engage in. Indeed, the contract provided for Blenheim to purchase three satellites, one of which would be transferred to South Korea and two of which Blenheim would operate itself. But the Fourth Circuit reasoned that this contract could not be divorced from South Korea’s purchase of the F-35’s. “Activities such as creating and maintaining armed forces and obtaining for them arms and other tools of war,” the court stated, “are peculiarly sovereign activities.”
The Circuit Split
The Fourth Circuit’s decision in Blenheim squarely conflicts with decisions from the Fifth, Eighth, Ninth, and Eleventh Circuits.
Even before Weltover, the Eighth Circuit held that purchasing replacement parts for F-4 fighter jets under the U.S. Foreign Military Sales program was a commercial activity. Citing even earlier decisions, the court stated that “a contract by a foreign government to buy equipment for its armed services constitutes a commercial activity to which sovereign immunity does not apply.”
In 2004, the Ninth Circuit held that the purchase of an Air Combat Maneuvering Range by Iran’s Ministry of Defense constituted a commercial activity. Relying on the FSIA’s legislative history as well as its own earlier decisions, the court held that “a contract to purchase military supplies, although clearly undertaken for public use, is commercial in nature.”
The following year, the Eleventh Circuit held that Honduras was not immune from suit for breach of a contract relating to “an inventory of weapons, munitions, and explosives.” Citing Weltover, the court observed: “The mere fact that the military was involved in the storage and purchase of arms does not alone convert the activity into an exercise of sovereign power.”
And in 2009, the Fifth Circuit held that Saudi Arabia’s purchase of replacement parts for F-5 fighter jets acquired under the U.S. Foreign Military Sales program, was a commercial activity. “Regardless of the end use of the F-5 components in aircraft that were used for national defense,” the court held, the “contract was for goods and services and is properly construed as commercial activity.”
In contrast to the Fourth Circuit in Blenheim, none of these decisions asked whether a private person could have purchased the equipment at issue. Indeed, two of them involved items that could be acquired only through the U.S. Foreign Military Sales program, just as in Blenheim.
Consistent with Weltover, the other circuits reasoned that the transactions concerned were commercial simply because they involved the purchase of goods, and private parties can also purchase goods. The Fourth Circuit, by contrast, staked out the novel position “that not every purchase of goods by a sovereign is ‘commercial activity.’”
The Fourth Circuit also emphasized that “creating and maintaining armed forces … are peculiarly sovereign activities.” The other circuits, by contrast, have expressly noted that the involvement of the military does not strip the purchases of their commercial character.
The Fourth Circuit did not discuss any of these cases, much less distinguish them.
Reasons for Granting Cert
The Fourth Circuit’s decision creates a clear split with four other circuits on how the FSIA’s commercial activity exception applies to military purchases. That alone is ordinarily enough to warrant Supreme Court review.
The decision in Blenheim also seems inconsistent with Weltover itself. The Fourth Circuit complained that the plaintiffs’ “definition of commercial activity is made at too general a level, such that it would essentially encompass every purchase or sale of goods involving a foreign sovereign.” But as I have previously explained, that “high level of generality” is precisely what Weltover commands. And Weltover’s reference to “army boots or even bullets” seems to indicate that the identity of the goods does not matter.
The FSIA’s legislative history leads to the same conclusion. The House Report states:
[T]he fact that goods or services to be procured through a contract are to be used for a public purpose is irrelevant; it is the essentially commercial nature of an activity or transaction that is critical. Thus, a contract by a foreign government to buy provisions or equipment for its armed forces or to construct a government building constitutes a commercial activity.
Carving out exceptions to the principle that military purchases are commercial activity also seems practically unworkable. The Fourth Circuit emphasized that the sale of F-35’s is “highly regulated.” How much regulation is sufficient to convert a commercial activity into a sovereign one? Where should a court draw the line between bullets and fighter jets? If the test is to be simply whether a private party could have purchased the same item, many foreign military purchases will no longer be considered commercial.
The implications for the defense industry are significant. According to the cert petition, U.S. defense contractors sell approximately $170 billion annually in defense material to approved foreign governments. Although Lockheed is a defendant in this case and would certainly like to see it dismissed, the Fourth Circuit’s decision will make it more difficult for companies like Lockheed to obtain redress from foreign governments that breach military sales contracts in the future.
Conclusion
Blenheim Capital Holdings Ltd. v. Lockheed Martin Corp. presents about as clear a case for granting certiorari as I can imagine. There is a clear circuit split, inconsistency with Supreme Court precedent, a holding that seems wrong on policy grounds, and potentially large financial implications.