Terenkian v. Republic of Iraq

When asserting jurisdiction over a foreign country under the commercial activity exception of the Foreign Sovereign Immunities Act, 28 U.S.C. §1602, et seq., a plaintiff must assert more than the mere execution of a contract within the boarders of the United States and/or prove the action constituted a "legally significant act" which had a "direct effect on the United States."

Manuel Terenkian (“Terenkian”), the president and sole shareholder of two oil brokerage companies in Cyprus, brought suit against the Republic of Iraq (“Iraq”) for terminating two oil contracts. Terenkian filed suit in district court under “commercial exception” to the Foreign Sovereign Immunities Act (“FSIA”), 28 U.S.C. § 1605 et seq, an act which represents the “sole basis” for establishing jurisdiction over a foreign state in the United States. Specifically, Terenkian asserted that the first and third clause of 28 U.S.C. § 1605(a)(2), which make exceptions to sovereign immunity for commercial activities “carried on in the United States,” and those activities which have a “direct effect in the United States.” The district court found that the breach of contract had a “direct effect” on the United States and thus the “commercial activity” exception applied, granting jurisdiction over Iraq. On appeal, the Ninth Circuit considered whether Terenkian carried the necessary burden of proof in establishing that FSIA exceptions applied. First, the Ninth Circuit found that the “execution of a contract in the United States alone, without more, is not sufficient to satisfy the first clause of § 1605(a)(2). Second, the Ninth Circuit addressed any potential direct effect on the United States. The Ninth Circuit found: (1) that a “potential financial loss by an entity in the United States is not, in itself, sufficient to constitute a direct effect;” and (2) the potential failure of oil to reach the United States did not constitute a legally significant act as “many additional steps remained, including such fundamental requirements as finding potential U.S. purchasers and negotiating mutually acceptable agreements.” Thus, the federal courts did not have subject matter jurisdiction over Iraq. REVERSED, VACATED, and REMANDED.