Foreign Sovereign Immunity and Choice of Law—State, not Federal

In Cassirer v. Thyssen-Bornemisza Collection Foundation, the Supreme Court unanimously held that, in adjudicating state-law claims against a foreign state or instrumentality under one of the exceptions to the Foreign Sovereign Immunity Act (FSIA), 28 U.S.C. § 1602, et seq., a federal court must apply the choice-of-law rules of the forum state rather than federal choice-of-law rules. In so holding, the Supreme Court reversed the Ninth Circuit’s decision and resolved the split between that Circuit and the Second, Fifth, Sixth, and D.C. Circuits.

Factual Background and Proceedings Below

Cassirer is a fascinating case, involving Nazi-looted art and implicating the laws of three foreign countries (Germany, Switzerland, and Spain) and two U.S. States (California and New York). Litigation began in 2006 and has already produced nineteen decisions by lower federal courts and three by the Supreme Court. This 2022 decision is the latest, but by no means the last.

The central issue in Cassirer is the ownership of an Impressionist painting depicting a Paris streetscape (Camille Pissarro’s, Rue St. Honoré, après midi, effet de pluie), which is currently possessed by the defendant, an entity that qualifies as an instrumentality of the Kingdom of Spain. The plaintiffs are the descendants of a German Jew who was forced to “sell” the painting to the Nazis in 1939 Germany. After a series of transfers in different countries, the painting was purchased by the defendant and is now exhibited at a museum in Madrid.

Following opposing arguments by the parties on both the applicable choice of law and the applicable substantive law, a California Federal District Court held that (1) under either California’s choice-of-law rules or federal choice-of-law rules which, according to Ninth Circuit precedent, are based on the Restatement (Second), Spanish substantive law governed the dispute, and (2) under that law, the defendant acquired ownership of the painting by acquisitive prescription.

On appeal, the Ninth Circuit held that federal rather than state choice-of-law rules controlled the action, and that Spanish property law governed the merits. However, the court also found that unresolved issues of material fact precluded summary judgment in favor of the defendant. The Supreme Court granted writ to address only one question—the applicable choice-of-law rules in FSIA cases.

The Supreme Court Decision

In answering this question in favor of state choice-of-law rules, Justice Kagan, who authored the Court’s opinion, relied exclusively on § 1606 of the FSIA. That section provides that, as to any claim against a foreign state or instrumentality that is not entitled to immunity under the FSIA, “the foreign state shall be liable in the same manner and to the same extent as a private individual under like circumstances.” (emphasis added). The Court concluded that § 1606 “dictates the selection of a choice-of-law rule [that] mirror[s] the rule that would apply in a similar suit between private parties” because “[o]nly the same choice-of-law rule can guarantee use of the same substantive law—and thus guarantee the same liability.” The Court compared this case with a similar case involving a state-law claim against a private museum filed in California federal court. Under Klaxon Co. v. Stentor Elec. Mfg. Co. Inc., that court would be required to apply California’s choice-of-law rules. The Court held that, in this case, the same rules should be followed because “[t]hat is the only way to ensure—as Section 1606 demands—that [the Spanish instrumentality] will be liable in the same way as a private party.”

De Lege Lata

Statutory Interpretation

In terms of statutory interpretation, it is difficult to argue against the Court’s holding or reasoning. The defendant tried valiantly by arguing, inter alia, that the § 1606 requirement of treating the foreign state “in the same manner and to the same extent” as a private individual becomes operative only after the selection of the applicable substantive law and prohibits the application of that law in a preferential or discriminatory was. But that was an uphill argument. Crucially, it did not account for the fact that, when Congress adopted the FSIA in 1976, Erie R. Co. v. Tompkins and Klaxon were long entrenched in the law and too important to be overlooked or ignored. Erie and its progeny established a strong presumption against creating federal common law, while Klaxon mandated the application of state choice-of-law rules in diversity cases and other cases involving non-federal claims.

To be sure, Congress had the power and opportunity to exempt FSIA cases from the scope of both Klaxon and Erie by federalizing not only the applicable choice-of-law but also the applicable substantive law. Congress did neither. Instead, it codified the principle of foreign sovereign immunity and its exceptions, granted federal courts original but nonexclusive jurisdiction, and did not alter the status quo with regard to the applicable liability law (except for shielding foreign states from punitive damages). As an accompanying House Report reiterated, the FSIA was “not intended to affect the substantive law of liability” nor did it affect the means through which to identify that law—namely, the then-applicable state choice-of-law rules. Section 1606 left little room for contrary arguments.

Judicial Policy

The Court also stated that, even if § 1606 were not as clear in contemplating the use of state choice-of-law rules, there would be “scant justification” for judicially adopting a federal choice-of-law rule for FSIA cases. The Court reiterated the strong presumption against creating federal common law except when “necessary to protect uniquely federal interests.” The Court acknowledged that foreign relations are “an interest of that kind,” but also pointed out that the only claims that the FSIA allows to be adjudicated on the merits are those in which the foreign state has lost its immunity (under one of the FSIA exceptions to immunity) and has descended to the level of private individuals “subject to standard-fare legal claims involving property, contract, or the like.” Under these circumstances, the Court reasoned, the application of state choice-of-law rules does not pose any “threat to foreign relations” and, thus, there is no reason “for federal law to supplant the otherwise applicable choice-of-law rule.” The Court characterized as “unusual” a case in which the application of state choice-of-law rules may raise foreign relations concerns and cited the federal government’s suggestion in its amicus brief that those concerns can be addressed through other means, such as international comity or the Act of State doctrine.

De Lege Ferenda: Congressional Policy

In summary, there is little doubt that, as written, § 1606 does not allow the judicial creation of a federal choice-of-law rule. In that sense, it is difficult to disagree with the Court’s decision to stick with the status quo, or with the more comprehensive amicus brief submitted by fourteen law professors (including two of this Blog’s editors—Dodge and Gardner), with unquestionable expertise on this subject.

However, this hardly means that the status quo is ideal. Even if one believes that Klaxon was grounded on impeccable logic and represented the best national policy choice for its time, there is room to reexamine its outer reaches today. For example, one of Klaxon’s premises was that intra-state forum shopping between state and federal courts is more problematic than interstate forum shopping. Is that premise equally true in FSIA cases, all of which are by definition international and almost none of which end up in state court? If the answer is no, then the next question is whether a federal choice-of-law rule for FSIA cases would be preferable to the present regime of potentially fifty different state rules. There is plenty of room for disagreement on this question, and even more room for disagreement on the substance of such a rule. What is clear, however, is that: (a) as written, § 1606 does not authorize the judicial creation of such a rule, and (b) if such a rule is desirable, it must come from Congress.

What Next?

As noted at the beginning, this decision is by no means the end of this litigation. The only issue that has been settled is that state rather than federal choice-of-law rules control this case. The district court held that, under those rules, Spanish substantive law governed the merits and, under that law, the defendant acquired ownership of the painting. However, the Ninth Circuit did not consider the application of California’s choice-of-law rules (and neither did Supreme Court). On remand, the Ninth Circuit has several options. One option is to review the district court’s application of California’s choice-of-law rules to determine whether Spanish law indeed applies under those rules and whether the defendant acquired ownership under that law. If the answer to both questions is yes, the Ninth Circuit will affirm the decision of the district court. Otherwise, it will remand the case to the district court. Another option is to certify to the California Supreme Court the question of which jurisdiction’s substantive law would govern this case under California’s choice-of-law rules. This is arguably the better option because it would produce a more authoritative decision on this important question on which the law is not entirely settled. Regardless of which option is followed, the readers of this Blog can expect to see another commentary as soon as we have a definitive choice-of-law decision.