Solicitor General Recommends Denial of Cert in FSIA Case
May 21, 2024
Is a foreign government’s purchase of military equipment a “commercial activity” for purposes of the Foreign Sovereign Immunities Act’s (FSIA) commercial activity exception? In a brief filed on May 14, 2024, at the Supreme Court’s invitation, the Solicitor General (SG) answered “it depends.” This answer is surprising. It is in considerable tension—if not outright conflict—with the Supreme Court’s decision in Republic of Argentina v. Weltover (1992) and with the decisions of other circuits involving military purchases. The SG’s position would also create significant line-drawing problems for lower courts. There seems a good chance the Court will disregard the SG’s advice and decide to review this case.
Blenheim Capital Holdings Ltd. v. Lockheed Martin Corp. involves South Korea’s purchase of 40 F-35 fighter jets from Lockheed Martin and a satellite from Airbus. The plaintiff, Blenheim, is a broker who agreed to provide an “offset” transaction to lower the effective price to South Korea by purchasing three satellites from Airbus and transferring one of them to South Korea for a lower price. When Blenheim was subsequently cut out of the deal, it sued Lockheed, Airbus, and South Korea for various business torts and antitrust violations. The Fourth Circuit held that South Korea was immune from suit under the FSIA because its purchases were not commercial activity.
Military Purchases as Commercial Activity
The FSIA provides that foreign states are immune from suit in federal and state courts unless an exception to immunity applies. The commercial activity exception allows actions based upon foreign states’ commercial activities if the activities have sufficient connections to the United States. The Act defines a “commercial activity” as “either a regular course of commercial conduct or a particular commercial transaction or act.” It further provides that “[t]he 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.”
In Weltover, the Supreme Court interpreted “commercial activity.” It 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.” Weltover did not involve military sales but rather government bonds, which the Court held to be commercial. To illustrate the distinction between regulatory and commercial activity, Weltover explained that “a foreign government’s issuance of regulations limiting foreign currency exchange is a sovereign activity, because such authoritative control of commerce cannot be exercised by a private party; whereas a contract to buy army boots or even bullets is a ‘commercial’ activity, because private companies can similarly use sales contracts to acquire goods” (emphasis added).
What Weltover said about military purchases is consistent with the FSIA’s legislative history. To explain the Act’s distinction between nature and purpose, the House Report said:
As the definition indicates, the 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. The same would be true of a contract to make repairs on an embassy building. Such contracts should be considered to be commercial contracts, even if their ultimate object is to further a public function (emphasis added).
Relying on Weltover, and sometimes on the FSIA’s legislative history, the Fifth, Eighth, Ninth, and Eleventh Circuits have held that military purchases constitute commercial activity for which foreign states are not immune, as I have explained here and here.
The Fourth Circuit saw things differently. The panel reasoned that the plaintiff’s “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.” The court continued, “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.”
This seems plainly inconsistent with Weltover. As I have previously explained, Weltover defined “commercial activity” at a high level of generality (e.g., acquiring goods or issuing bonds) rather than a more specific level of generality (e.g., acquiring military goods or issuing government bonds). F-35 fighter jets are admittedly goods that private parties cannot buy (although the satellite is arguably different). But government bonds are similarly bonds that private parties cannot issue. Under Weltover, the identity of the thing being bought or sold simply does not matter. The level of generality about which the Fourth Circuit complained is the one the Supreme Court adopted.
The SG’s Brief
The SG’s invitation brief begins by explaining that there are two kinds of military sales under the Arms Export Control Act: (1) Foreign Military Sales (FMS), in which the goods are purchased directly from the United States government; and (2) Direct Commercial Sales (DCS), in which the goods are purchased directly from U.S. contractors. Some items can only be purchased under the FMS program, including fighter jets. In some FMS transactions, a private contractor agrees to provide the foreign state with an “offset” that may reduce the overall price. The offset is a separate contract, but its costs are built into the FMS transaction. At the time of South Korea’s transaction, the offset’s costs had to be approved as reasonable by the U.S. Department of Defense (DOD), although DOD has subsequently changed its policy and no longer reviews offset transactions.
FMS Transactions
The brief argues that FMS transactions are sovereign activity because the items are purchased directly from the United States government, because the President is required to find that the sale “will strengthen the security of the United States and promote world peace,” and because Congress can override some FMS transactions. The brief further relies on two international conventions, the United Nations Convention on Jurisdictional Immunities of States and Their Property and the European Convention on State Immunity, each of which exempts state-to-state transactions from its commercial activity exception.
This reasoning seems questionable. First, it is hard to see how the extent of U.S. regulation is relevant to the character of South Korea’s activity. To quote Weltover again, “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.” Although the United States regulates FMS transactions quite heavily, South Korea’s activity in this case is not that of a regulator but simply that of a purchaser.
Second, the existence in the two conventions of carve outs for state-to-state transactions highlights the lack of any similar carve out in the FSIA’s commercial activity exception. Congress did not see fit to exempt state-to-state transactions when it wrote the FSIA. Nor is there any reference to such transactions in the legislative history quoted above. Certainly, Congress knew how to create exceptions to the FSIA’s exceptions. It did this in the non-commercial tort exception (§ 1605(a)(5)) for discretionary functions and for certain torts such as malicious prosecution and slander. The lack of any exception in the commercial activity exception (§ 1605(a)(2)) undercuts the SG’s argument here.
It is also not clear how these two conventions are relevant. The United States is a party to neither, and the U.N. Convention has not entered into force for any states. The brief says “they are relevant only to the extent they reflect customary international law” but never says that they reflect customary international law in this respect. It would, in fact, be quite dangerous for the SG to rely on these conventions as evidence of customary international law because the FSIA has other exceptions—such as the expropriation exception and two terrorism exceptions—that are found in neither convention.
Offset Transactions
The SG’s brief acknowledges that offsets are separate contracts from FMS transactions. The brief does not argue that every offset for an FMS transaction falls outside the commercial activity exception. But it does argue that in this case the offset involving a satellite does because (1) offset costs are built directly into the FMS contract, (2) this offset was separately approved by DOD, and (3) it “was closely tied to the underlying FMS transaction because the military satellite was equipped with classified technology for integration with the F-35 fighter planes” (quotation marks omitted).
This argument raises more questions than it answers. The first factor cited—incorporation of costs—appears to be true of every offset transaction and so does not distinguish those that fall outside the commercial activity exception from those that fall within it. The second factor—government approval—raises further questions. In this case, it appears that DOD approved only the cost of the offset (and DOD has since changed its policy so that it no longer reviews offsets at all). Why is this minimal approval enough? And what are the implications for DCS transactions, which “the Department of State must authorize … through a license or other form of approval if it involves defense articles or services”? Does this requirement of approval take DCS transactions outside the scope of the commercial activity exception, too? The third factor—connection to the FMS transaction—raises similar questions. How “closely tied” must the offset be? Does this “closely tied” factor also apply in the case of DCS transactions, for example, the sale of spare parts for fighter planes?
The Circuit Split
The SG’s brief argues that there is no conflict among the circuits because none of the other decisions on military purchases involved FMS transactions or offsets. While it is true that none of these cases was based directly on an FSM transaction, two of them—McDonnell Douglas Corp. v. Islamic Republic of Iran (1985) and UNC Lear Services, Inc. v. Kingdom of Saudi Arabia (2009)—involved contracts to supply parts for equipment sold in FMS transactions raising precisely the question of how “closely tied” a non-FMS transaction must be that the offset presents in this case.
More generally, other circuits have accepted Weltover’s reasoning that the identity of the goods is irrelevant to whether a foreign state’s purchase of military equipment is commercial. The SG suggests that the Fifth Circuit did make such a distinction in UNC Lear Services when it held that hiring personnel to operate an air defense system was a sovereign activity. But in that case the Fifth Circuit relied on language in the House Report stating that “the employment of diplomatic, civil service, or military personnel” is not commercial. As noted above, the same House Report does not recognize any similar exceptions with respect to the purchase of military equipment.
A Poor Vehicle?
Finally, the SG’s brief suggests that this case would be “a poor vehicle” for considering the scope of the FSIA’s commercial activity exception because the district court alternatively held that Blenheim’s claims are not “based upon” a commercial activity, a question the Fourth Circuit found unnecessary to address. “[T]he presence of this additional jurisdictional issue,” the SG writes, “might complicate this Court’s consideration of whether South Korea engaged in commercial activity.”
It is hard to see how this is so. Whether the transactions in this case involve commercial activity is a separate question from what the suit is based upon, sufficiently separate that the Fourth Circuit was able to answer the first question without addressing the second. Nor does the fact that there might be an alternative ground for dismissal make this case a poor vehicle. To take the first example that springs to mind, in Turkiye Halk Bankasi A.S. v. United States, the possibility that Halkbank might be entitled to common-law immunity from criminal proceedings did not prevent the Supreme Court from hearing the case and deciding that Halkbank was not entitled to immunity under the FSIA.
Conclusion
The SG’s brief tries to carve out a subset of military purchases that should not be considered “commercial” under the FSIA based on a set of fine distinctions. I am not convinced that the SG’s reasoning makes sense even for FMS transactions. Why does U.S. regulation of FMS transactions make the activity of the purchasing state sovereign? Moreover, it is not clear how far beyond FMS transactions her reasoning goes. Does it apply to all offset transactions? What about DCS transactions? What is clear is that lower courts will have a devil of a time applying such distinctions if the Fourth Circuit’s decision is allowed to stand.
When Congress wrote the commercial activity exception, it intended to cover military purchases and included no carve out for state-to-state transactions. Writing for a unanimous Supreme Court in Weltover, Justice Scalia could not have been more clear: “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.” None of the distinctions urged by the SG show that South Korea was acting as a regulator in this case. It was doing nothing more than buying military equipment.