For those whose careers in international arbitration have origins connected to the Iran-US Claims Tribunal (Tribunal) — and I am one of many — yesterday’s decision by the federal court of appeals in Washington, allowing a US company to recover damages for expropriation from the Islamic Republic of Iran under the 1955 US-Iran Treaty of Amity, as interpreted under Iranian law, resonates like a fondly-remembered ballad from the American Songbook. (McKesson Corp. v. Islamic Republic of Iran, 2012 WL 615831 (D.C. Cir. Feb. 28, 2012)). I leave it to others to consider the potential for future US litigation against Iran under this venerable treaty, and for the bearing of a heavier jurisdictional burden by the Foreign Sovereign Immunities Act (FSIA), should Iran in the future take measures against US investors and investments. And I invite readers to read more elsewhere about the Court’s necessary and important preliminary holding that the “Act of State” doctrine did not shield Iran from US jurisdiction where its conduct, distinctly non-sovereign in the Court’s view, consisted of the takeover of the board of directors of a private company and the subsequent making of corporate governance decisions about dividends to the US shareholder.
Instead I will focus this post on the Court’s holding that the FSIA provides no basis for an implied cause of action based on violations of customary international law.
To summarize the case’s background very briefly: McKesson since 1960 had been in a joint venture with private parties in Iran in the dairy business. After the Islamic Revolution of 1979, the Islamic Republic took over the joint venture’s Board of Directors and effectively froze out McKesson. But in its claim in the Iran-US Claims Tribunal, the Tribunal held that the expropriation of McKesson’s property rights in the joint venture did not culminate until after the outside date (provided in the formative Algiers Accords) for actions taken by the Islamic Republic to be within the subject matter jurisdiction of the Tribunal. Thus McKesson achieved only a limited recovery in the Tribunal and, after the Tribunal’s final award, revived in federal court case against Iran. After more than 25 years of litigation since this revival of suit in 1986, and after four prior trips to the DC Circuit, McKesson obtained a final judgment from the district court for expropriation damages in excess of $43 million.
The important element of the DC Circuit’s decision that I highlight here is its ruling that no implied federal judicial cause of action for expropriation arises from customary international law or the FSIA. The consequences of that ruling, which reverses the order of the district court, are considerable. Had the Court accepted the position of the district court that a right to sue for expropriation compensation is implicit in the certain exceptions to sovereign immunity under the FSIA, an area of international investment law essentially regulated by treaties and through arbitrations would have found a new domain in the federal court system. This would have expanded the potential for investment claim litigation against foreign states with which the US does not have investment treaties. Further, US investors with investment claims against State parties to investment treaties with the US that provide for arbitration might have brought lawsuits instead, thus raising the question of the exclusivity or arbitration under the treaties.
But it was not to be. The DC Circuit disagreed with the district court’s view that the FSIA was, like the Alien Tort Statute (ATS), not exclusively a jurisdiction-conferring statute but also one that provides a substantive cause of action for redress of a limited number of violations of customary international law.
In this regard the appellate court cited Supreme Court and federal circuit cases (its own and the 9th Circuit) for the position that the FSIA is “purely jurisdictional,” and found no evidence that Congress in enacting the commercial activity exception to sovereign immunity intended that the FSIA would also serve as a source of substantive rights. The ATS, the Court observed, was enacted against a very different practical backdrop — i.e. Congress’s desire to facilitate certain substantive causes of action such as tort claims by ambassadors — whereas the FSIA was enacted one year after the Supreme Court had (in Cort v. Ash) “signaled its reluctance to imply causes of action when faced with statutory silence.”
The Court also observed that given the substantial judicial discretion involved in fashioning common law causes of action from customary international law norms, it was strongly disinclined to allow the use of such discretion in regard to claims against foreign States — a matter in the Court’s view that is better left to Congress in view of the potential impact on foreign relations.
So expropriation and other international-law based property claims against foreign sovereigns will, for US investors, remain almost entirely in the domain of treaty-based arbitration. It is this road-not-taken, rather than the Court’s recognizing of a cause of action for the Plaintiff based on an old treaty interpreted under Iranian law, that should be of greatest interest to US foreign investors and their counsel.