Foreign Sovereign Immunities Act.  District court finds no subject matter jurisdiction over Republic of Iran because there was no activity that caused a "direct effect" in the United States by which the foreign nation had waived its sovereign immunity.

Plaintiff Bell Helicopter Textron, Inc. sued Defendant, the Islamic Republic of Iran, for trademark violations under the Lanham Act related to Plaintiff’s “distinctive” helicopter trade dress. Defendant allegedly manufactured helicopters that looked substantially similar to helicopters manufactured by Plaintiff. Defendant failed to appear and, after an evidentiary hearing pursuant to the Foreign Sovereign Immunities Act (“FSIA”), 28 U.S.C. § 1608(e), the court entered a default judgment against Iran in the amount of over $22 million. The court found that Defendant had waived its sovereign immunity under the FSIA since it “engaged in commercial activity outside the United States” that “caused a direct effect in the United States.” Iran moved to vacate the default judgment, claiming the court lacked subject-matter jurisdiction.

The court (through a different judge) determined that subject-matter jurisdiction had not been adequately addressed in the evidentiary hearing, as the issue was not “fully and fairly litigated.” Although the prior judge had made a summary finding that Defendant was engaged in a commercial activity that caused a direct effect in the United States, the finding was not subject to any adversarial process. The court decided it needed to conduct a de novo review to determine if it had subject-matter jurisdiction.

For Defendant to have waived sovereign immunity under the FSIA’s commercial activity exception, the effect in the United States had to be “direct,” i.e., an immediate consequence of Defendant’s activity without any events or actors intervening. The court noted that a financial loss alone was insufficient to show a “direct effect.” Defendant had to have caused a “substantial” and “direct and foreseeable” effect in the United States.

Plaintiff claimed that direct effects occurred because: (1) infringement of U.S. intellectual property caused direct effects per se; (2) “basic economic logic” supported the conclusion; (3) the financial loss was significant enough; and (4) the counterfeiting caused confusion among customers within the United States.

The court dismissed all four arguments. Intellectual property infringement did not cause effects in the United States because the helicopters were not marketed in the United States and could not even be sold in the United States because they did not meet strict certification requirements. “Economic logic” only led to a conclusion, tentatively, of financial loss, which the court had already noted was insufficient to be a direct effect on its own. Similarly, financial loss was insufficient on its own because, even if the loss was substantial, there must have been other effects in addition to the financial harm. Finally, Plaintiff did not demonstrate sufficient consumer confusion in the United States, a finding which was amplified by the fact that the infringing helicopters could not even be sold in the country.

The court also examined the record from the default judgment evidentiary hearing to look for evidence of direct effects, and found none. There was no evidence of any acts, “much less legally significant acts” occurring in the United States. The court further noted that all of the effects Plaintiff claimed it experienced were dependent on the actions of third parties and a chain of intervening events. For example, Plaintiff argued that customers could confuse Defendant’s spare parts with Plaintiff’s spare parts, which are of higher quality, leading to safety problems and negative customer opinions. The court noted that any effect felt in the United States would be dependent on intervening acts by others – operators who bought and used the parts interchangeably, sources who sold them, and customers who failed to maintain their helicopters. The court found that the “presence of independent actors” “reinforces the conclusion that any effect is indirect, not direct.”

Accordingly, the court granted Defendant’s motion to vacate and dismiss the default judgment because it was void for lack of subject-matter jurisdiction.