More Threats to Sovereign Immunity? New Bill Would Strip State-Owned Companies of Immunity

Today, President Obama is likely to veto the Justice Against Sponsors of Terrorism Act (JASTA), a bill that would amend the Foreign Sovereign Immunities Act to strip the immunity of Saudi Arabia from suit for alleged acts of international terrorism. I have previously expressed concern about JASTA in Senate testimony. Congress reportedly has enough votes to override a Presidential veto. But Congress may not stop there.

Days after Congress passed JASTA, Senator Grassley introduced legislation that would further amend the FSIA to strip foreign state-owned companies of immunity for the commercial actions of their subsidiaries in the United States. The bill—entitled the “State-Owned Entity Transparency and Accountability Reform Act”—is aimed at Chinese state-owned companies that have been able to avoid liability for sales of defective drywall by their U.S. subsidiaries. But the legislation is not limited to lifting the immunity of Chinese state-owned companies and it could subject hundreds or more state-owned companies in other countries to suit in the United States. Although the bill is unlikely to pass anytime soon, such legislation may encourage other countries to pass similar legislation to limit the immunity of the United States in their courts and/or to make it easier to sue U.S. companies, whether state-owned or not.

The text of Senator Grassley’s bill is here. It would amend the definitions in the FSIA to provide that the “commercial activity” of an agency or instrumentality of a foreign state shall be “attributable to” a corporate affiliate of the agency or instrumentality that owns a majority of the shares of the agency or instrumentality and that is itself a state-owned agency or instrumentality. This would mean that the foreign state-owned parent of a company that engages in commercial activity in the United States would also be subject to suit in U.S. courts even if the parent does not itself engage in commercial activities in the United States. Under the “commercial activities” exception of the FSIA, an agency or instrumentality of a foreign state that engages in commercial activity in the United States does not enjoy immunity, but its corporate parent does have immunity if it does not itself engage in U.S. commercial activities.

The bill is intended to reverse a decision earlier this year by a federal judge in Louisiana who has been overseeing multidistrict litigation against foreign drywall manufacturers. The court held that the Chinese state-owned parent of a company that sold allegedly defective drywall was immune from suit because it did not itself sell drywall in the United States.

In his Senate floor statement introducing the legislation, Senator Grassley states that the amendment “would mean only that a foreign state-owned company would have to respond to the claims brought by American companies and consumers, just like any other foreign company that isn't owned by a government.”

I expressed concern earlier this year that Congress might amend the FSIA to reverse a single district court decision with an amendment with far-reaching consequences that could upset the delicate balance in the FSIA between sovereign immunity and the need to ensure accountability by foreign states for certain acts.

I have also previously written at Lawfare about “earmarks for lawyers”—legislation that is intended by trial lawyers to reverse judicial decisions against them. As I said then, “Members of Congress and their staffs should ensure that these bills and others urged by plaintiffs’ lawyers to reverse their losses in federal courts are subject to very rigorous review.” U.S. companies have objected strongly to “special” legislation in other countries, such as Ecuador and Nicaragua, that has made it easier to sue U.S. companies in their courts. It makes it harder for the U.S. Government and U.S. companies to complain about special-purpose laws in other countries that limit the immunity of the United States or limit the defenses of U.S. companies when the U.S. Congress engages in similar actions.