Arch Trading Corp. v. The Republic of Ecuador, 839 F.3d 193 (2d Cir. 2016) [click for opinion]

Plaintiffs, five entities incorporated in the British Virgin Islands, brought suit in the United States District Court for the Southern District of New York (the "Southern District"), claiming that an agency of the Republic of Ecuador ("Ecuador") unlawfully seized more than 100 companies that Plaintiffs owned in that country. Plaintiffs sued Ecuador and two of Ecuador's instrumentalities, seeking more than $1 billion in damages for the alleged taking.

Ecuador invoked the Foreign Sovereign Immunities Act (the "FSIA")—which establishes the general rule of immunity for foreign states—to oppose jurisdiction. The Southern District found that it lacked jurisdiction under the FSIA, denied the request for jurisdictional discovery or a hearing, and dismissed the case with prejudice. Plaintiffs appealed to the Second Circuit, which affirmed. The central issue on appeal was whether the alleged actions of Ecuador, and its instrumentalities, satisfied the "takings" or "expropriation" exception under 28 U.S.C. § 1605(a)(3) of the FSIA. That provision provides that a foreign state, including any agencies and instrumentalities, is not immune from jurisdiction in any case:

in which rights in property taken in violation of international law are in issue and [1] that property or any property exchanged for such property is present in the United States in connection with a commercial activity carried on in the United States by the foreign state; or [2] that property or any property exchanged for such property is owned or operated by an agency or instrumentality of the foreign state and that agency or instrumentality is engaged in a commercial activity in the United States[.] In invoking the FSIA, a defendant must first present a prima facie case that it is a foreign sovereign or related instrumentality. The plaintiff then has the burden of presenting evidence that, under an exception set forth in the FSIA, immunity should not be granted. The Second Circuit's focus here was on whether the instrumentalities of Ecuador had engaged in a commercial activity in the United States.

The Second Circuit first noted that, under Supreme Court precedent, government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such. This presumption of legal separateness is strong, and based on sound justifications. Freely ignoring the separate status of governmental instrumentalities would result in substantial uncertainty for sovereigns and creditors alike. And recognizing legal distinctions between entities as embraced by another nation's laws gives due respect for the actions taken by foreign sovereigns and for the principles of comity between nations.

Engaging in a detailed analysis of competing declarations, the Second Circuit agreed with the Southern District in concluding that Plaintiffs' allegations were "non-specific," especially in light of the presumption of legal separateness, and failed to demonstrate Ecuador's sovereign control over day-to-day operations of its instrumentalities in the United States. The Second Circuit further noted that Plaintiffs failed to address the commercial activity of Ecuador itself in the United States or Ecuador's relationship with any of the legally separate entities at issue.

After affirming the Southern District's ruling on the merits, the Second Circuit likewise affirmed the Southern District's denial of jurisdictional discovery and an evidentiary hearing. Because sovereign immunity protects a sovereign from the expense, intrusiveness, and hassle of litigation, a court must be circumspect in allowing discovery before a plaintiff has established that the court has jurisdiction over a foreign sovereign defendant under the FSIA. Thus a district court may deny jurisdiction discovery demands made on a foreign sovereign if the party seeking discovery cannot articulate a reasonable basis for the court to first assume jurisdiction.