D.C. Circuit Holds that District Court Must Decide Jurisdictional Facts under FSIA for Itself

 

“File:Vladimir Putin 20 December 2002-1.jpg”

by Presidential Press and Information Office

is licensed under CC BY 4.0.

In a recent decision, Hulley Enterprises Ltd. v. Russian Federation, the D.C. Circuit held that a district court must decide for itself any “jurisdictional facts” necessary to establish subject matter jurisdiction in suits against foreign states under the Foreign Sovereign Immunities Act (FSIA).

The plaintiffs sought to enforce an arbitral award against Russia. The FSIA’s arbitration exception, 28 U.S.C. § 1605(a)(6), provides that a foreign state shall not be immune from suit in an action to confirm an arbitral award made pursuant to an agreement to arbitrate if the award or agreement may be governed by a treaty calling for the recognition of arbitral awards. In concluding that there was an agreement to arbitrate in this case, the district court relied on the arbitral tribunal’s decision to that effect. Writing for the D.C. Circuit, Judge Neomi Rao held that this was error. “Whether an arbitration agreement exists,” she wrote, “is a jurisdictional fact under the FSIA that must be independently evaluated by the district court.”

The Yukos Award

In 2003 and 2004, Russia expropriated the most valuable assets of OAO Yukos Oil Co. Shareholders in Yukos—three companies organized under the laws of Cyprus and the Isle of Man—challenged the expropriation in arbitration under the Energy Charter Treaty (ECT). Russia signed the ECT in 1994 but never ratified it. The treaty requires a country to comply with its terms from the moment of signature “to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.”

Russia challenged the arbitral tribunal’s jurisdiction, arguing that it was not required to provisionally apply the ECT’s arbitration provision because doing so would be inconsistent with Russian law. Russia also argued that these shareholders were not “investors” under the treaty because the companies were controlled by Russian citizens not investors from another state. The arbitral tribunal rejected both jurisdictional arguments and ultimately entered an award for more than $50 billion.

Because the arbitral tribunal was seated in the Netherlands, Russia asked a Dutch court to set aside the award, repeating the jurisdictional arguments it had made before the tribunal. Ultimately the case went to the Dutch Supreme Court, which rejected Russia’s arguments and held that the tribunal had jurisdiction under the ECT.

In the meantime, the shareholders brought suit in the District of Columbia to confirm and enforce the arbitral award. Russia argued that it was immune from suit under the FSIA and that the arbitration exception did not apply because there was no valid arbitration agreement between it and the shareholders, repeating the same jurisdictional arguments that the tribunal and the Dutch Supreme Court had rejected. The district court held that the FSIA’s arbitration exception did apply, relying in part on the arbitral tribunal’s determination that there was an agreement to arbitrate, which the court characterized as “binding.”

The D.C. Circuit’s Decision

Under the FSIA, foreign states are immune from suit in federal and state courts unless an exception to immunity applies. The FSIA’s arbitration exception, added in 1988, provides in relevant part that a foreign state shall not be immune in any case where

the action is brought … to confirm an award made pursuant to … an agreement to arbitrate, if … the agreement or award is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.

“Before concluding the arbitration exception to sovereign immunity applies,” Judge Rao explained, “a federal court must independently confirm three jurisdictional facts: (1) the existence of an arbitration agreement; (2) an arbitration award; and (3) a treaty that may govern the award.” Russia did not dispute the existence of an award or the potential applicability of a treaty governing the award (the New York Convention). But Russia argued that there was no arbitration agreement because provisional application of the ECT was contrary to Russian law and because the shareholders were not investors within the meaning of the treaty. It worth noting that there was no contractual relationship between the parties in this case. The existence or non-existence of an arbitration agreement depended entirely on the applicability of the ECT.

Existence and Validity Versus Scope

The D.C. Circuit began by “evaluat[ing] whether Russia’s arguments challenge the existence or validity of an arbitration agreement or instead merely challenge the scope of an arbitration agreement” (emphases in original). Challenges to the existence or validity of an agreement are jurisdictional because they go to the applicability of the FSIA’s arbitration exception. Challenges to the scope of an agreement, by contrast, are not jurisdictional. The U.S. Supreme Court has held that, when the parties delegate such questions to an arbitral tribunal, U.S. courts are bound by its determinations.

Russia’s argument that the ECT did not apply provisionally because it was contrary to Russian law fell into the first category, Judge Rao explained:

In this context, an arbitration agreement between Russia and the Shareholders would exist only if Russia had made a standing offer to arbitrate through provisional application of the Treaty. Russia denies it extended any such offer, because it was not required to apply the Treaty’s arbitration clause provisionally. Russia’s argument therefore goes to the existence of an arbitration agreement and is jurisdictional.

“Because the existence of an arbitration agreement is a jurisdictional fact under the FSIA,” she continued, “the district court was required to decide Russia’s claim de novo, without deferring to the Tribunal’s conclusions about Russian law.”

The same was not true, however, of Russia’s second argument that the shareholders were not “investors” within the meaning of the ECT. This argument concerned not the existence of an arbitration agreement but its scope, the D.C. Circuit held, which means that the district court could rely on the arbitral tribunal’s determination of the question.

The Dutch Court’s Decision

The district court found it unnecessary to decide whether the Dutch Supreme Court’s rejection of Russia’s jurisdictional argument should be given preclusive effect, but the D.C. Circuit provided some guidance in case the question arose again on remand.

Other courts have held that issue preclusion can apply to domestic courts’ decisions of jurisdictional questions under the FSIA, although the D.C. Circuit has not addressed this. It would be a separate and additional question, Judge Rao indicated, whether issue preclusion extends to the decisions of foreign courts. Here, she suggested, the district court should look to the Supreme Court’s 1895 decision in Hilton v. Guyot. “If issue preclusion applies to jurisdictional facts under the FSIA,” she concluded, “the district court must apply the Hilton factors to determine whether principles of comity counsel in favor of recognizing the Dutch judgments.” Finally, because these are novel questions that potentially implicate U.S. foreign relations, Judge Rao said that “the district court should invite the United States to express the government’s position on this issue.”

The D.C. Circuit’s opinion could have been clearer on why federal common law governs this question of issue preclusion. As a general matter, under the Erie doctrine, the recognition and enforcement of foreign judgments in the United States is governed by state law, not federal law. But the U.S. Supreme Court has held that courts must apply federal law on issue preclusion in federal question cases. The applicability of the FSIA’s arbitration exception is a federal question—as is the ultimate question of whether the award should be confirmed—so Judge Rao was right to conclude that Hilton applies.

The distinction between federal question and diversity cases was recognized in the cases on which she relies. Tahan v. Hodgson (D.C. Cir. 1981) is not terribly clear about this, but it at least acknowledges the Erie doctrine in a footnote. Phillips USA v. Allflex USA (10th Circ. 1996), was a diversity case and clearly says that state law on the recognition of foreign judgments should govern. The court looked to Hilton only because it thought that Kansas law would follow that decision. (Kansas has not adopted either of the relevant Uniform Acts.) Hurst v. Socialist People’s Libyan Arab Jamahiriya (D.D.C. 2007), by contrast, involved a federal question, and the district explained that it was looking to Hilton specifically for that reason.

In sum, it is well established that federal courts sitting in diversity are bound by state law rules on the recognition and enforcement of foreign judgments. It is only in federal question cases—such as this one—that federal common law rules apply.

Conclusion

If I were the district judge on remand, I would avoid having to decide all the complex issues surrounding the preclusive effect of the Dutch court decisions by simply holding that Russia was bound to apply the ECT provisionally. Although I have not looked at the arguments myself, I note that Russia’s arguments failed to convince both the arbitral tribunal and the Dutch courts. If I were counsel for the plaintiffs, I would be tempted to abandon reliance on the preclusive effect of the Dutch court decisions and put all my chips on rebutting Russia’s arguments on the merits.

But I suspect that this is not what will happen. Counsel for the plaintiffs will likely brief the issue preclusion issue, the district court will likely ask the executive branch to submit its views, and the court will likely feel obligated to address these questions, if only to ensure that all the questions are put to rest in one last interlocutory appeal.