Foreign Sovereign Immunities Act - Commercial Activity Exception

Commercial Activity Exception

The most important exception to sovereign immunity is the commercial activity exception, 28 U.S.C. § 1605(a)(2). That section provides three bases on which a plaintiff can sue a foreign state:

1. When the plaintiff's claim is based upon a commercial activity carried on in the U.S. by the foreign state.
2. When the plaintiff's claim is based upon an act by the foreign state which is performed in the U.S. in connection with commercial activity outside the U.S.
3. When the plaintiff's claim is based upon an act by the foreign state which is performed outside the U.S. in connection with commercial activity outside the U.S. and which causes a direct effect in the U.S.

In determining whether the Foreign State's activities are commercial, the FSIA requires that courts look to the nature of the act itself, rather than the purpose for which the foreign sovereign engaged in the act. 28 U.S.C. 1603(d). For example, the operation of a fee-based transportation system would likely be a commercial act, while imposing fines for parking tickets would be a public act, even if the former was undertaken to provide a public service, and the latter was initiated to raise revenue.

Republic of Argentina v. Weltover, 504 U.S. 607 (1992), concerned a breach of contract claim asserted by bondholder (two Panamanian corporations and a Swiss bank) against the government (Argentina) that issued the bonds arising from Argentina's default on the bond payments. Under the terms of the bonds, the bond-holders were given the option of having the bonds paid in London, Frankfurt, Zurich, or New York. Because the case concerned a default in Argentina on bonds issued in Argentina (i.e. an act performed outside the U.S in connection with activity outside the U.S.), in order to establish jurisdiction, the plaintiff's could only rely on the third basis to sue Argentina under the commercial activity exception. Argentina made two primary arguments as to why the FSIA commercial activity exception should not apply: (1) the issuance of sovereign debt to investors was not a "commercial" activity and (2) the alleged default could not be considered to have had a "direct effect" in the United States. In a unanimous opinion, written by Justice Antonin Scalia, the Supreme Court held that Argentina was not entitled to sovereign immunity. Reasoning that "when 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,'" the Court concluded that Argentina's issuance of the bonds was of a commercial character. As for the "direct effect" in the U.S., the Court rejected the suggestion that under the FSIA the effect in the U.S. necessarily needed to be "substantial" or "foreseeable" and instead concluded that in order to be "direct," the effect need only "follow as an immediate consequence" of the defendant's activity. Because New York was the place where payment was supposed to be made, the Court concluded that the effect was direct, notwithstanding the fact that none of the plaintiffs were situated in New York.