Terenkian v. Republic of Iraq

Under the Foreign Sovereign Immunities Act, for a “commercial activity” immunity exception to thrive, it must be based on a legally significant commercial act that occurred in the United States or an act that had a direct and legally significant effect in the U.S.

The Republic of Iraq appealed the district court’s denial of their motion to dismiss for lack of subject matter jurisdiction. Oil brokerage companies, Pentonville Developers, Ltd. and Marblearch Trading, Ltd., and the companies’ president, Manuel Terenkian, (collectively, “Plaintiffs”) sued Iraq for terminating two contracts for the sale and purchase of oil. The district court held that the suit was within the “commercial exception” under the Foreign Sovereign Immunities Act (“FSIA”). Pursuant to FSIA, United States federal courts only have jurisdiction over foreign states if the plaintiff establishes that the foreign state is not entitled to immunity via one of the exceptions. The Court identified “three independent clauses” in § 1605(a)(2) to evaluate a claimed exception with a “nexus” requirement, a “material connection” requirement, and a “legally significant acts” test for each clause consecutively. The Court determined that the “commercial activity” exception did not disentitle Iraq to sovereign immunity, clarifying that the lawsuit was not based on “commercial activity” in the U.S., “nor upon an act in connection with such commercial activity having a direct effect in the [U.S.].” The Court went further to say that “[r]egularly conducted commercial activity” in the U.S., having “no connection with, or relationship to, the conduct” giving rise to plaintiff’s cause of action is insufficient to abrogate sovereign immunity. The non-deposit of payment (mere potential financial loss by a U.S. entity), the failure of performance occurring outside the U.S., and lack of “immediate connection between Iraq’s cancellation of the contracts and the failure of oil to reach customers in the [U.S.],” did not constitute legally significant “direct effects” for Plaintiffs’ claim. The Court concluded that Iraq proved that the exceptions to sovereign immunity are inapplicable. Accordingly, the federal courts lacked subject matter jurisdiction. REVERSED, VACATED, and REMANDED.