E-Alert Case Updates

Iraq Not Immune from Suit based on Commercial Activities Exception to the Foreign Sovereign Immunities Act

Wye Oak Technology, Inc., v. Republic of Iraq
Case No.: 10-1874 (U.S. Court of Appeals for the Fourth Circuit, December 29, 2011)
by Eric M. Leppo, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In this recently issued opinion from the U.S. Court of Appeals for the Fourth Circuit, the Appellate Court affirmed the U.S. District Court for the Eastern District of Virginia’s decision that Iraq was subject to suit for breach of contract in the U.S. for a contract entered into by the Iraq Ministry of Defense. Specifically, the case was deemed to fall within the commercial activities exception to the Foreign Sovereign Immunities Act, 28 U.S.C. §§ 1602-11 ("FSIA").

In August 2004, Wye Oak Technology entered into a contract with the Iraq Ministry of Defense (“IMOD”) for the refurbishment and disposal of Iraqi military equipment. Wye Oak was to serve as a broker, making efforts to establish markets and prospects for the sale of Iraq’s military equipment. Wye Oak was to be paid a ten percent (10%) commission on any sale or refurbishment of the subject equipment. Payment was to be made by IMOD immediately upon the submission of an invoice from Wye Oak.

In July 2009, Wye Oak filed suit against Iraq in the United States District Court for the Eastern District of Virginia. Wye Oak alleged breach of contract and that IMOD had failed to pay Wye Oak for its work despite submission of invoices in excess of twenty-four million dollars ($24,000,000.00). Iraq moved to dismiss the case based on lack of subject matter jurisdiction, arguing that it was immune from suit pursuant to the FSIA and fell within none of its exceptions. Wye Oak responded that Iraq was subject to jurisdiction under the FSIA’s commercial activities exception. The District Court agreed that Iraq was subject to suit in the U.S., and the matter was appealed to the Fourth Circuit.

“The FSIA provides that ‘a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States except as provided in sections 1605 to 1607 of this chapter.’ 28 U.S.C. § 1604. Thus, a foreign state is immune from suit in U.S. courts unless an exception applies.” Wye Oak at *5.

The relevant exception here is the commercial activities exception set out at 28 U.S.C. § 1605. The statutory provision provides that there is not immunity when the action is based upon [1] a commercial activity carried on in the United States by the foreign state; [2] an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [3] an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.

Iraq asserted that it was a separate legal entity from IMOD and therefore Wye Oak’s claims against IMOD could not be used to bring suit against Iraq directly. Iraq contended that Iraqi law should be applied to determine whether Iraq and its Ministry of Defense were separate legal entities. The Fourth Circuit noted that allowing Iraqi law as opposed to the statutory provisions of the FSIA would essentially allow any foreign jurisdiction to insulate itself from liability in any U.S. court.

The Court then determined that IMOD was not a separate legal entity from Iraq for purposes of the FSIA. The FSIA applies not just to the foreign state but includes its "political subdivisions." Such subdivisions must be differentiated from agencies or instrumentalities of the foreign state as those are defined by statute as separate legal entities. 28 U.S.C. § 1603(a). The Court held that because the core functions of IMOD—waging war and defending the state—are inherently governmental, it is properly considered a political subdivision of Iraq and not a separate legal person.

Once determining that IMOD was not a separate legal entity from Iraq, the Court applied the commercial activities exception. The Court concluded that Wye Oak presented sufficient facts to support a reasonable inference that Iraq engaged in the preparation for sale and sale of scrap metal in Iraq—a commercial activity. Wye Oak at *18. Therefore, Iraq’s Motion to Dismiss was denied and Iraq was deemed to be subject to the jurisdiction of U.S. Courts.