The Law of Unintended Consequences: Avoiding Inadvertent Effects of a Broad Supreme Court Ruling on the FSIA’s Expropriation Exception
David Y. Livshiz, Scott A. Eisman, and Christian Vandergeest, Freshfields Bruckhaus Deringer US LLP
On December 7, the Supreme Court will hear argument in Germany v. Philipp and Hungary v. Simon. Both cases are brought by plaintiffs seeking to recover property expropriated during the Holocaust, and concern only the “expropriation exception” to the Foreign Sovereign Immunities Act, which governs whether foreign sovereigns are immune from suit in the United States.
But both defendants (Germany and Hungary)—and the United States as amicus curiae—argue that comity should be available as a defense to sovereigns in all cases brought under the FSIA. Although the cases do not concern the enforcement of arbitral awards against sovereigns, which is subject to a different FSIA exception, accepting that argument wholesale could frustrate arbitral-award holders seeking to timely enforce arbitral awards against foreign sovereigns under the New York Convention.
The Expropriation Cases
The issue in Philipp and Simon is narrow. The practical question is whether and under what circumstances U.S. courts should adjudicate expropriation claims against foreign sovereigns. The sovereign defendants in these cases advance two arguments. First, they contend that the expropriation exception should not apply because international law does not bar sovereigns from taking property from their own citizens within their own borders. Second, they argue that international-comity considerations allow U.S. courts to abstain from hearing such cases where issues of considerable historical and political significance to the foreign sovereign are at stake, and where the foreign nation has a domestic framework for addressing the claims.
The defendants argue that the FSIA was never meant to displace comity defenses and that sovereign litigants can both challenge the jurisdiction of the court under the FSIA and argue that, even if jurisdiction exists, a U.S. court should abstain from exercising that jurisdiction in a given case. The D.C. Circuit rejected the comity defense below, holding in both cases that comity-based abstention is not available in FSIA cases because the FSIA’s immunity was meant to be the exclusive form of comity available to foreign sovereigns. The Supreme Court will now consider whether to reverse the D.C. Circuit on this issue.
Fig. 1 - This dome reliquary from the end of the 12th century is part of
the Welfenschatz collection at issue in the Germany v. Philipp case.
Comity Could Be A Wrecking Ball
The Court should be careful to limit its holding to the expropriation exception to sovereign immunity. For starters, it is hard to square a broadly permitted comity defense with a number of FSIA exceptions to sovereign immunity, such as the waiver and arbitration exceptions. After all, the very notion of a waiver exception presupposes that a sovereign has agreed to be sued in the United States, and allowing the sovereign to assert a comity defense would only undermine the expectation of parties, including U.S. companies, that rely on a sovereign’s commitment to litigate disputes in the United States.
So too in the arbitration context, where 28 U.S.C. § 1605(a)(6) allows parties to enforce in the United States arbitral awards rendered against a sovereign. The exception is crucially important to U.S. businesses that work abroad and depend on arbitral clauses to protect their rights, especially when faced with unpredictable or unreliable foreign court systems. A comity defense to enforcement of arbitral awards against sovereigns could undermine this critical pillar of international commerce. It could also put the United States in breach of its obligations under the New York Convention—which governs the recognition and enforcement of international arbitral awards—given that the Convention contains no comity defense to enforcement. Indeed, the New York Convention implicitly rejects the notion of comity the defendants are asserting before the Supreme Court: it lets arbitral-award holders bring enforcement proceedings in any country that is a party to the Convention, subject to a few very narrow, enumerated defenses to enforcement (comity is not among them). A holding that a comity defense is always available to sovereigns in claims brought under the FSIA could undermine this carefully structured system of arbitral-award enforcement.
Ways To Resolve The Expropriation Cases Without Unleashing A Wrecking Ball
If the Court wishes to address comity, it can limit its holding to the expropriation exception before it, which requires the challenged expropriation to be done in violation of international law. Because international law often contemplates the exhaustion of local remedies, the Supreme Court could read the comity defense into the expropriation exception only, leaving the other exceptions to sovereign immunity unburdened by any comity concerns.
Such a holding would not only resolve the dispute before the Court, but it would preserve the strong federal policy in favor of arbitration to resolve investment disputes, which the Court has long endorsed.
David Y. Livshiz is a counsel, Scott A. Eisman is a special counsel, and Christian Vandergeest is an associate in the Dispute Resolution Group at Freshfields Bruckhaus Deringer US LLP