The Separate Entity Rule in International Perspective: Should State Ownership of Corporate Shares Confer Sovereign Status for Immunity Purposes

Article by William C. Hoffman

The Foreign Sovereign Immunities Act is today the exclusive basis of jurisdiction over foreign states in the courts of the United States. Under prior law, foreign states enjoyed absolute immunity in American courts. Generally, the courts lacked jurisdiction over foreign states and their property; therefore, cases against state-owned commercial entities were dismissed. Long after most other countries had rejected absolute immunity, the United States continued to adhere to it. Americans engaged in international commerce were often without a remedy when the defending party turned out to be a foreign state enterprise.

In 1976, Congress enacted the FSIA in order to achieve two basic objectives. First, the Act was intended to provide fairness to American plaintiffs, who previously had no established procedural remedies against foreign states. Second, the Act was intended to align the United States with international practice. To these ends, the Act codifies the internationally predominant “restrictive theory” of sovereign immunity, and draws exceptions to immunity for claims based on nonsovereign activity. For example, the “commercial activities exception” permits suit if (1) the claim is based on a commercial activity, (2) the requisite territorial nexus is present, and (3) the court has personal jurisdiction over the defendant.

In short, the FSIA attempts to balance competing policies. The Act provides procedural safeguards for foreign states engaged in sovereign activities while creating a remedy for plaintiffs. Much needless unfairness, however, has resulted from the fact that the Act confers its protections not only on foreign states but on foreign state-owned commercial entities as well.

Section 1603 of the FSIA confers “foreign state” status on several categories of entities. While nothing in the FSIA defines the term “foreign state,” section 1603(a) includes within that term the “political subdivisions, agencies, and instrumentalities of a foreign state.” Section 1603(b) goes on to define “agency” and “instrumentality” as follows:

(b) An “agency or instrumentality of a foreign state” means any entity—

(1) which is a separate legal person, corporate or otherwise, and

(2) which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof, and

(3) which is neither a citizen of a State of the United States . . . nor created under the laws of any third country.

Most significantly, section 1603(b) does not require that an entity seeking the protections of the FSIA show that it is engaged in sovereign activity. Rather, section 1603(b)(2) creates a presumption that any foreign state-owned entity is engaged in sovereign activity. This presumption, which has virtually no support in international or pre-FSIA American law, actually enlarges the availability of the immunity defense. As presently written, section 1603(b) can confer sovereign status on any corporation owned in whole or in part by one or more foreign states, regardless of the nature of its activities.

In the end, sovereign status can have the effect of immunizing entities that, but for state-ownership, are ordinary commercial corporations. In case after case, corporate defendants invoke the FSIA, shifting the burden to the plaintiff to show nonimmunity. Thus, section 1603(b) forces a plaintiff into the FSIA's “labyrinth” of jurisdictional provisions, exceptions, and nexus requirements. And unless an exception is shown to apply, the court lacks jurisdiction and must dismiss the case, effectively immunizing a commercial entity from suit.

Section 1603(b) abolished its predecessor, the “separate entity rule.” This rule, which today is the internationally recognized rule, provides that foreign state-owned entities with separate legal personalities generally are not entitled to assert sovereign immunity. In direct contrast to section 1603(b), the separate entity rule presumes that state-owned corporations are not immune. In the United States, the rule's ease of application and presumption of nonimmunity worked well in most commercial contexts. Nevertheless, commentators criticized the separate entity rule, and Congress, in enacting the FSIA, adopted its opposite presumption in section 1603(b).

This Article compares the performance of the separate entity rule with that of section 1603(b). The comparison is of interest for FSIA reform because it reveals that section 1603 should be amended. A thorough survey of the caselaw demonstrates that the separate entity rule would better further the objectives of the FSIA than does section 1603(b). This Article concludes that the courts could apply the FSIA more fairly, more consistently with international practice, and in harmony with the policy of the restrictive theory if section 1603(b) were amended to codify the separate entity rule.

The practical and theoretical difficulties raised by section 1603(b) have not been analyzed previously in any detail. Thus, this Article is a first attempt to assess the performance of a significant and highly neglected provision of the FSIA. Part I traces the development of the separate entity rule, analyzes the sources of dissatisfaction with the rule under pre-FSIA law, and describes the rule's recent international applications. Part II surveys the caselaw under section 1603(b), describing the theoretical illogic as well as the practical consequences of conferring sovereign legal status on state-owned commercial entities. Finally, Part III compares the two rules, evaluates their performance, and explores briefly an internationally observable trend away from the use of the concept of legal status altogether in conferring sovereign immunity under the restrictive theory.


About the Author

William C. Hoffman. Counsel for Kölnische Rückversicherungs-Gesellschaft Aktiengesellschaft, Cologne, Germany. J.D. 1986, University of California at Davis.

Citation

65 Tul. L. Rev. 535 (1991)