Throwback Thursday: International Association of Machinists v. OPEC

In 1978, the International Association of Machinists (IAM), a labor union, sued OPEC and its member countries for violating U.S. antitrust law by operating a cartel. The district court held that OPEC countries were immune from suit under the Foreign Sovereign Immunities Act (FSIA). On appeal the Ninth Circuit affirmed the district court’s dismissal on the alternative grounds that IAM’s claims were barred by the act of state doctrine.

The case is noteworthy as the first attempt to use U.S. antitrust law against OPEC (more on this later), but also as an illustration of how interpretations of the FSIA and the act of state doctrine have changed during the intervening four decades. Two unanimous Supreme Court decisions by Justice Antonin Scalia—Republic of Argentina v. Weltover (1992) and W.S. Kirkpatrick & Co. v. Environmental Tectonics Corp. (1990)—narrowed each of these doctrines in important ways. Yet, ironically, Scalia served as counsel for OPEC in the IAM case, advocating positions on the FSIA and act of state doctrine that he later rejected as a member of the Supreme Court.

Background

OPEC, the Organization of Petroleum Exporting Countries, was formed in 1960 to limit oil production, stabilize prices, and secure a steady income for the producing countries. In 1973-74, an embargo by Arab countries, including Arab members of OPEC, led to significant increases in the price of oil.

In 1978, the IAM sued OPEC and its then thirteen member countries, alleging price-fixing in violation of the Sherman Act. IAM’s members worked in petroleum-using industries and individually consumed gasoline and other petroleum products. The district court dismissed a claim for damages under the “indirect purchaser” rule because the plaintiff did not claim to have purchased products directly from the defendants. But the court held that this rule did not bar IAM’s claim for injunctive relief.

None of the defendants appeared to defend the claims, so the district court solicited input from the executive branch and other interested parties. Although the executive chose to remain silent, several organizations filed amicus briefs. One was the Indonesia-U.S. Business Committee of the Indonesian Chamber of Commerce and Industry, represented by Latham & Watkins and Antonin Scalia, then a law professor at the University of Chicago. Scalia went on to represent the defendants directly when IAM appealed to the Ninth Circuit. At the time, his biographer Joan Biskupic reports (p.73), Scalia had an active consulting practice. His financial disclosure form from 1982, the first he filed as a judge on the D.C. Circuit, shows that during the reporting period, he earned approximately $33,000 from the University of Chicago, $15,000 from the American Enterprise Institute, and $50,000 from legal consulting.

Foreign Sovereign Immunity

When the district court rendered its decision in 1979, the FSIA was a new statute. Congress had codified the restrictive theory of foreign sovereign immunity in 1976, making foreign states immune from suit in U.S. courts unless an exception to immunity applies. In this case, the relevant exception was the commercial activity exception, 28 U.S.C. § 1605(a)(2), which permits suits based on a commercial activity of a foreign state subject to a few other conditions.

Relying on the FSIA’s legislative history, the district court defined “commercial activity” as “one which normally could be engaged in by a private party.” But the court still found this standard “somewhat nebulous.” For guidance, the court turned to arguments presented by Professor Scalia:

As discussed by counsel for Amicus Curiae, Indonesia-U.S. Business Committee for the Indonesian Chamber of Commerce, the determining factor is how the court defines the act or activity. An act or activity can be defined broadly, such as “hiring of employees,” an activity carried on by private parties, and thus, “commercial,” or it can be defined narrowly, such as, “employment of diplomatic, civil service or military personnel,” a governmental activity. It was suggested that in determining whether to define a particular act narrowly or broadly, the court should be guided by the legislative intent of the FSIA, to keep our courts away from those areas that touch very closely upon the sensitive nerves of foreign countries.

The district court agreed that “commercial activity” should be defined narrowly. Defendants’ conduct should not be characterized as agreeing on prices or as limiting production, activities in which private parties can clearly engage. Rather, defendants’ conduct was properly viewed as “the establishment by a sovereign state of the terms and conditions for the removal of a prime natural resource to wit, crude oil from its territory.” Because defendants’ activities were not commercial and no other exception to immunity applied, they were immune from suit.

On appeal to the Ninth Circuit, IAM argued that the district court had ignored the FSIA’s command 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.” The control of natural resources was the purpose of the defendants’ actions, but the act complained of was a conspiracy to fix prices. The Court of Appeals found the answer to this question sufficiently difficult that it chose to resolve the case on a different ground. Noting the sovereignty concerns present in the case, the court concluded “that these concerns are appropriately addressed by application of the act of state doctrine.”

Act of State Doctrine

Although the act of state doctrine had not been considered by the district court, the OPEC nations raised it on appeal as an alternative basis for affirming the decision. Professor Scalia continued his involvement on appeal, but now as counsel for the defendants rather than simply for an amicus.

The act of state doctrine provides that U.S. courts will not question a foreign act of state fully performed within its own territory. When the IAM case came to the Ninth Circuit, the leading decision on the act of state doctrine was Banco Nacional de Cuba v. Sabbatino (1964) in which the Supreme Court held that U.S. courts were bound to recognize the validity of Cuba’s expropriation of U.S.-owned property even if the expropriation allegedly violated international law. As Sabbatino described it, the proper application of the act of state doctrine depended on balancing several factors including the degree of consensus about international law, the implications for U.S. foreign relations, and whether the foreign government was still in existence. “[S]ome aspects of international law touch much more sharply on national nerves than do others,” the Court observed.

The Ninth Circuit echoed Sabbatino’s theme of political sensitivity: “The act of state doctrine declares that a United States court will not adjudicate a politically sensitive dispute which would require the court to judge the legality of the sovereign act of a foreign state.” The court compared the act of state doctrine to the political question doctrine, noting that the act of state doctrine “requires that the courts defer to the legislative and executive branches when those branches are better equipped to resolve a politically sensitive question.” Sabbatino suggested a balancing approach, the court noted, because (quoting that decision) “some aspects of international law touch more sharply on national nerves than do others.”

The Ninth Circuit had no doubt that suing OPEC was politically sensitive. “There is no question that the availability of oil has become a significant factor in international relations,” the court wrote. “The remedy IAM seeks is an injunction against the OPEC nations. The possibility of insult to the OPEC states and of interference with the efforts of the political branches to seek favorable relations with them is apparent from the very nature of this action and the remedy sought.”

Justice Scalia and the Changing Doctrines of Foreign Relations

In 1982, one year after the Ninth Circuit upheld dismissal of IAM’s claims against OPEC, Professor Scalia was appointed to the D.C. Circuit. Four years later, he was elevated to the Supreme Court.

Justice Scalia’s chance to put his stamp on the act of state doctrine came in 1990, when he wrote the opinion for a unanimous Court in W.S. Kirkpatrick & Co. v. Environmental Tectonics Corp. (1990). In Kirkpatrick, a losing bidder for a construction contract in Nigeria brought a RICO action against the winning bidder, alleging that it won the contract by bribing Nigerian officials. The defendants argued that the act of state doctrine barred the suit because proving that Nigerian officials had been bribed would embarrass Nigeria and interfere with U.S. foreign relations. The United States, as amicus curiae, disagreed that this suit would interfere with U.S. foreign relations but agreed that the act of state doctrine could apply, even if the validity of a foreign act of state were not in question, if a suit touched sufficiently on “national nerves.”

Justice Scalia rejected those arguments. “The act of state doctrine does not establish an exception for cases and controversies that may embarrass foreign governments,” he wrote, “but merely requires that, in the process of deciding, the acts of foreign sovereigns taken within their own jurisdictions shall be deemed valid.” To decide this case, a U.S. court would not have to decide whether the Nigerian contract was invalid but only whether bribes were paid. True, the fact that bribes were paid might also show that the contract was invalid. But because that was not a question the court would have to decide, the doctrine did not apply.

Kirkpatrick substantially narrowed the act of state doctrine by limiting it to questions about the validity of foreign acts of state. Justice Scalia, a vehement opponent of balancing tests, noted Sabbatino’s “balancing approach” but limited its weighing of other factors to deciding whether the act of state doctrine should not apply even though the validity of a foreign act of state was technically at issue—a question that was significantly less likely to arise after the doctrine’s narrowing. The act of state doctrine, he emphasized, “is not some vague doctrine of abstention.”

Two years later, in Republic of Argentina v. Weltover (1992), Justice Scalia got a chance to interpret the FSIA, again for a unanimous Court. Argentina had defaulted on bonds issued as part of a plan to stabilize its currency, and bondholders sued relying on the FSIA’s commercial activity exception.

Justice Scalia 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.” He could have relied on the FSIA’s legislative history to reach this conclusion, as the district court in IAM had done. But Scalia—a skeptic of legislative history—relied instead on the Supreme Court’s characterization of “commercial activity” in Alfred Dunhill of London, Inc. v. Republic of Cuba (1975), a case decided the year before Congress passed the FSIA and one that Scalia had argued before the Supreme Court on behalf of the United States.

This definition of “commercial,” however, did not determine how broadly or narrowly the activity itself should be defined. Justice Scalia chose to view the activity in its most general terms. “[A] contract to buy army boots or even bullets is a ‘commercial’ activity,” for example, “because private companies can similarly use sales contracts to acquire goods.” The same was true of Argentina’s bonds, which were “in almost all respects garden-variety debt instruments” like those that private parties issue. Weltover called for a broad definition of the activities in question: not as buying goods for the army or issuing bonds to stabilize a currency (things that only governments can do), but rather as buying goods or issuing bonds (things that private parties clearly can do).

Suing OPEC Today

In the four decades since IAM v. OPEC, other attempts have been made to sue OPEC, all of them unsuccessful. But in light of Justice Scalia’s opinions in Kirkpatrick and Weltover, it is worth asking how the FSIA and act of state issues might be resolved today. The point is not to accuse Justice Scalia of inconsistency—lawyers do not have to agree with the positions they take on behalf of their clients—but rather to show how the law in these areas has changed.

With respect to the FSIA, recall that the district court in IAM defined the activity in question narrowly, not as limiting production but rather as “the establishment by a sovereign state of the terms and conditions for the removal of a prime natural resource.” But narrowing the definition of an activity by considering its sovereign context, as Professor Scalia suggested and the court did, is precisely what Weltover forbids. If buying boots for the army is a commercial activity because private parties can also buy goods, then limiting the production of a natural resource is similarly a commercial activity because private parties can also limit production.

With respect to the act of state doctrine, recall that the Ninth Circuit based its decision on “[t]he possibility of insult to the OPEC states and of interference with the efforts of the political branches to seek favorable relations with them.” But Kirkpatrick holds that the act of state doctrine does not bar cases “that may embarrass foreign governments,” but simply requires a court to treat the foreign act as valid. IAM’s suit asked a U.S. court to decide that the OPEC countries had violated U.S. antitrust law rather than to decide that their acts limiting production of oil were invalid. As the Second Circuit recently observed in rejecting the act of state doctrine as a defense to antitrust claims involving the actions of the Haitian government, whether a foreign act of state is valid and whether it violates U.S. law are separate questions.

Conclusion

With oil prices once again at high levels, there is renewed interest in using U.S. antitrust law against OPEC. In March, a bipartisan group of Senators (Grassley, Klobuchar, Lee, and Leahy) introduced a bill to make oil cartels like OPEC illegal. The “No Oil Producing and Exporting Cartels Act” (or NOPEC Act) would amend the Sherman Act to make it illegal for any foreign state to act with others to limit the production of petroleum or fix its prices. The bill would prohibit courts from declining to hear such cases “based on the act of state, foreign sovereign compulsion, or political question doctrine.” And the bill would amend the FSIA to create an exception to state immunity for such suits.

Whether NOPEC will become law remains to be seen. But four decades after the first attempt to sue OPEC under U.S. antitrust law, it is interesting to reflect on how the relevant law has already changed and on one person’s role in changing that law.