CVSG in Wye Oak v. Republic of Iraq: Is it Time to Resolve the FSIA “Direct Effect” Circuit Split?

Photo by Sora Shimazaki

On April 28, 2025, the Supreme Court called for the views of the Solicitor General (colloquially a “CVSG”) in Wye Oak Tech., Inc. v. Republic of Iraq. This is the latest chapter in a decades-long attempt by Wye Oak (discussed in a separate blog post) to recover damages for the breach of a contract it entered into with the Republic of Iraq in 2003. In its petition for certiorari, Wye Oak presented two questions about ambiguities in the Foreign Sovereign Immunities Act’s (“FSIA”) commercial activity exception, 28 U.S.C. § 1605(a)(2):

1. Whether, in a breach of contract case under the FSIA’s third clause, it is sufficient to prove a “direct effect” in the United States applying traditional causation principles, as four circuits have held, or whether courts must make an additional finding that the contract at issue established or necessarily contemplated the United States as a place of performance, as six circuits have held.
2. Whether the “act performed in the United States” giving rise to jurisdiction in an action under the FSIA’s second clause must be an “act” by the foreign sovereign, as the D.C. Circuit has held, or whether the FSIA’s text contains no such limitation, as the Fourth Circuit has held.

The Solicitor General, Dean John Sauer, should recommend that the Court grant cert. This case would be an excellent vehicle to clear up a particularly complicated circuit split and would give the Solicitor General an opportunity to weigh in on when U.S. courts have jurisdiction over foreign sovereigns in a contractual dispute.

The Circuit Split over the Third Clause

Foreign sovereigns are presumptively immune from suit in U.S. courts unless one of the exceptions in the FSIA applies. Here, the relevant exception—the third clause of the commercial activity exception—reads:

A foreign state shall not be immune from the jurisdiction or of the States in any case . . . in which the action is 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.

As Wye Oak correctly notes, the circuits are split over what is sufficient to establish a “direct effect” in a breach of contract claim.

The Second, Third, Seventh, Ninth, Eleventh, and D.C. Circuits all employ at least one of two bright line rules, referred to as a “place of performance” requirement and a “legally significant acts” requirement. Wye Oak argues these rules are synonymous and under either, a breach of contract only has a direct effect in the United States if a party is contractually obligated to perform an act in the United States. On the other side of the split, the Fifth, Sixth, Eighth, and Tenth Circuits supposedly apply “traditional causation principles” rather than a bright line rule to determine whether an effect is direct. Iraq, however, argues that there is no material difference between these two approaches and in every circuit a contractual obligation (or its absence) is determinative of whether there is a direct effect in a breach of contract claim.

Iraq’s claim that there is no circuit split is wrong. The Fifth, Sixth, and Tenth Circuits have all explicitly rejected the “legally significant acts” requirement used by other circuits. In Voest-Alpine USA Corp. v. Bank of China (1998) and earlier in Walter Fuller Aircraft v. Republic of Philippines (1992), the Fifth Circuit found that a breach of contract caused a direct effect in the United States even though there was no clear contractual obligation to perform an act in the United States. These cases would have likely come out differently in the Second, Third, Seventh, or D.C. Circuits. Iraq is correct that a contractual obligation to perform an act in the U.S. is sufficient for a court to find a direct effect in the United States in every circuit. Similarly, any court would find that an absence of a contractual obligation weighs against a finding of a “direct effect.” But there is a clear split on how much weight to give the absence of a contractual obligation—in some circuits this is determinative, whereas in the Fifth, Sixth, and Tenth Circuits it is just one consideration among many.

Even though Wye Oak is correct about the existence of a circuit split, Wye Oak mischaracterizes it to some extent, conflating the “legally significant acts” requirement with the “place of performance” requirement. Two factors go into determining whether there is a direct effect: (1) how significant the effect is (this corresponds with the “legally significant acts” requirement), and (2) how direct the effect is (this corresponds with the “place of performance” requirement). The “legally significant acts” requirement holds that something legally significant (i.e. forming the basis of the suit) must happen in the United States for there to be a direct effect. In a breach of contract claim, this means the effect in the United States must be substantially related to the contract. On the other hand, the “place of performance” requirement holds that a contract must clearly obligate performance in the United States for its breach to have an effect in the United States. If, for example, a contract does not clearly designate the United States as the place of payment but a party unilaterally directs payment to her New York bank account, then under the “place of performance” requirement, the contract’s breach does not have a direct effect in the United States. That is, the explicit terms of the contract—not a party’s unilateral choice about where to perform the contract—establish where the “direct effect” of the contract’s breach is felt.

By eliding the distinction between the “legally significant acts” requirement and the “place of performance” requirement, Wye Oak actually underplays the severity of the circuit split. For example, the Third Circuit in Aldossari v. Ripp (2022) only adopted the “place of performance” requirement while explicitly refusing to adopt a “legally significant acts” requirement. And although the Second, Seventh, Ninth, Eleventh, and D.C. Circuits adopted both the “legally significant acts” and “place of performance” requirements, the Second Circuit in Guirlando v. Ziraat Bankasi A.S. (2010) established a more expansive “legally significant acts” requirement that does not require the effect in the United States be “legally significant” as long as the conduct that gave rise to the dispute (even if outside the United States) is legally significant. Finally, the Ninth Circuit, in Adler v. Federal Republic of Nigeria (1997), found a direct effect even though the plaintiff, not the contract, designated the United States as the place of payment—something the Second Circuit declined to do in MMA Consultants Inc. v. Republic of Peru (2017). Given the distinction between the “legally significant acts” and “place of performance” requirements and the subtle variations within each requirement, the Supreme Court has more flexibility in how it resolves this split than the binary choice presented by Wye Oak.

The Question About the Second Clause

Wye Oak’s second question arises only because of a procedural peculiarity of this case (further discussed here), which resulted in courts of appeals for both the Fourth Circuit and the D.C. Circuit arriving at different decisions on the same issue.

The second clause of the commercial activity exception requires the action to be based upon “an act performed in the United States in connection with a commercial activity of the foreign state elsewhere.” Wye Oak argues the Fourth Circuit was right to find that the “act performed in the United States” does not need to be an act performed by the foreign sovereign and that Wye Oak’s own activity in the United States could instead be the basis for jurisdiction.

Wye Oak’s argument, however, does not hold water. As Iraq points out in its response, in the intervening years since the Fourth Circuit’s decision, the Supreme Court decided OBB Personenverkehr AG v. Sachs (2015). There, the Court held that “the act” in the commercial activity exception is the conduct that forms the “gravamen” of the lawsuit—which in Wye Oak’s case is the decision by Iraq to breach the contract. As a result, it seems unlikely that the Fourth Circuit would make the same decision if presented with Wye Oak’s case again, and so there is not (for the moment anyway) a clear circuit split that needs resolution.

Conclusion

Although there is no need for the Supreme Court to answer Wye Oak’s second question presented regarding the second clause of the commercial activity exception, this case still presents a strong vehicle for the Court to decide whether to reject the “legally significant acts” or the “place of performance” requirements and clarify the legal standard for finding a “direct effect” in the third clause—a standard that has confounded the courts since the Supreme Court last spoke on this issue in Republic of Argentina v. Weltover (1992).