Foreign Sovereign Immunities Act

Floor Speech

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Mr. GRASSLEY. Madam President, I rise to speak about the changing nature of globalization. Everyone is aware globalization has changed how economies work. Some people have embraced globalization while others are fighting to slow its effects. In America, most people are familiar with the modern, multinational corporation. These corporations are privately owned by shareholders and operate in countries around the world. However, there is a new trend that is becoming increasingly evident in commerce today. We are now seeing entities that are owned by governments competing with private companies in the automotive, food, and airline industries that represent more traditional commerce.

Over the last several decades, governments, through entities called state-owned enterprises, have become highly involved in international commerce. We have seen state-owned companies and enterprises buy the assets of private companies, such as Smithfield Foods, and start up completely new companies, such as the new airlines in the Middle East. There is nothing inherently wrong with state-owned enterprises paying a premium on market value to purchase a company. However, the actions of the company and its legal obligations after the transaction is complete are what I intend to focus on today.

In a 2014 report, the United Nations estimated there are over 550 state-owned transnational companies with cumulative assets of over $2 trillion. Many would argue the estimate of $2 trillion in assets under management is a conservative number. There are many differences between state-owned companies and companies that are publicly traded.

First, state-owned companies are not subject to the same transparency requirements as publicly traded companies. Publicly traded companies must adhere to GAAP accounting standards and file quarterly and annual reports, such as 10-Qs and 10-Ks, with the Securities and Exchange Commission.

Second, state-owned enterprises have the implicit backing of the various governments, giving them access to credit oftentimes at cheaper rates than individual private companies could hope to find. The most valuable companies in America, based on market capitalization, are worth between $500 and $600 billion on any given day. While Fortune 100 companies are large, their resources then pale in comparison to government wealth.

Finally, state-owned enterprises report their strategies, profits, and losses to governments. They are not accountable to shareholders in the way publicly traded companies are. Therefore, it is prudent we take time to consider how foreign, state-owned enterprises are participating in this American economy.

In agriculture, state-owned enterprises have started to buy publicly traded American companies. Smithfield Foods was sold to China's Shuanghui in 2013 for $4.7 billion in cash. ChemChina is currently trying to buy the Swiss-based seed and chemical company Syngenta for $43 billion. About one-third of Syngenta's $12 billion in revenue comes from North America, which is what makes this transaction very concerning for me. While some could argue these investments are similar to foreign direct investment, what these foreign, state-owned enterprises are really buying are our resources and expertise in food production, including the intellectual property that fuels development and growth of the agricultural sector. Even if these transactions function seamlessly for the first 10 or 15 years, there are strategic questions we need to consider before approving the sale of any more of our agricultural assets to another government. For that reason, Senator Stabenow and I asked the Committee on Foreign Investment in the United States, commonly referred to as CFIUS, to thoroughly review the proposed Sengenta acquisition with the help of the Department of Agriculture. CFIUS is responsible for reviewing the national security implications of transactions that result in foreign control of U.S. businesses and critical infrastructure. There is a shared sentiment among lawmakers, military officials, and everyday Americans that protecting the safety and resiliency of our food system is core to American national security. The food security of our country is not something we can take for granted, and as I have said before, at any given time we are only nine meals away from revolution.

As I mentioned, I also have concerns about the legal obligations and accountability of foreign, state-owned companies, particularly as they relate to those companies' interactions with American companies and consumers.

Now, I have heard several recent reports noting cases where companies owned by foreign governments have claimed that they are immune to lawsuits by American companies or American consumers in our very own courts.

They have made this claim even when a foreign, state-owned company or one of its corporate affiliates has been engaged in normal commerce with American consumers or other American companies.

In making this argument, these foreign, state-owned companies would try both to take advantage of our market and to avoid the rules and potential liability that every other market actor must face. Of course, that doesn't seem right to me, and it is not the way our laws are set up to work.

It is an age-old rule of international law that one sovereign nation should not subject another country acting in its sovereign capacity to the authority of domestic courts.

Our courts recognized this principle long before Congress wrote it into statute.

The theory developed at a time when personal sovereigns ruled foreign powers rather than democracies. The sovereign was the same as the State. Chief Justice John Marshall acknowledged it in an 1812 Supreme Court opinion when he explained that our courts had no jurisdiction to hear America's claim against France to recover a ship seized by order of Napoleon.

But there have long been important exceptions to the doctrine of foreign sovereign immunity. One of those is the so-called ``commercial activity'' exception. Just 12 years after his opinion about Napoleon's ship, Chief Justice Marshall explained that ``[w]hen a government becomes a partner in any trading company, it divests itself . . . of its sovereign character, and takes that of a private citizen.''

For that reason, over the last several decades, both the State Department and the Supreme Court have recognized that the original purposes of foreign sovereign immunity--respect for the person and governmental acts of a foreign sovereign--are not served when the doctrine is invoked to protect a sovereign's private acts.

This development resulted from the need to ensure stability and predictability in international commerce after state monopolization in industries like transportation and communication.

It is based on the notion that when a sovereign nation enters the competitive marketplace, it no longer acts as a sovereign at all, and it must follow the very same rules as every other market participant.

So in 1976 we codified those principles in statutory law by enacting the Foreign Sovereign Immunities Act, referred to as FSIA. Under the FSIA, foreign sovereign immunity extends not only to foreign sovereigns but also to political subdivisions and even corporate entities owned by foreign sovereigns.

But, importantly, the FSIA also codifies exceptions to the foreign sovereign immunity principle, including--very importantly--the commercial activity exception.

As I said, I have seen reports noting cases where companies owned by foreign governments have claimed that they are immune to suits by American companies or American consumers in our very own courts when they are suspected of doing something wrong. Sometimes, their arguments have succeeded, which raises concerns that the exception may not be working as designed.

Let me give one example. America bought much of the drywall used to rebuild New Orleans after Hurricane Katrina from Chinese manufacturers. Thousands of homes built with that drywall turned out to be uninhabitable because residents said the drywall made them sick.

So these Americans tried to sue the Chinese manufacturers, including a manufacturer's parent company, China National Building Materials Group, or CNBM.

The problem for the consumers is that the Chinese Government is heavily invested in these manufacturers, among many other commercial enterprises.

Under the general principle of foreign sovereign immunity, a foreign government selling Americans a product is not acting as a sovereign but as a market competitor. One would assume that the ``commercial activity'' exception to foreign sovereign immunity applies, but the state-owned manufacturer argued otherwise.

Here is how it works under statute. Foreign companies are sued in our courts all the time. Commonly, these lawsuits, like the drywall case, involve claims of American consumers or companies that the foreign company engaged in some behavior that harmed them.

When a foreign company is sued in one of our courts, it has a chance to show at the beginning of the case that a foreign government owns a majority of its shares. If the foreign company makes that showing, it then enjoys a presumption of immunity under the FSIA, meaning that the plaintiffs' lawsuit will be dismissed.

But before that happens, the plaintiffs have one more chance to save their case from early dismissal. This is where the ``commercial activity'' exception comes into play. The plaintiffs can defeat the presumption of immunity by showing that the foreign state-owned company was acting as a market participant--that is, engaging in commercial activity that takes place in or affects the United States--when it caused the harm the plaintiffs complained about.

This principle--the ``commercial activity'' exception--saves a case from early dismissal and gives plaintiffs a chance to move forward and try to prove their claims against a foreign, state-owned corporation behaving like a market actor.

But as it turns out, that can be a complicated showing for plaintiffs to make at such an early stage in the case. Here is why. Companies owned by foreign states are often governed through very complicated corporate structure.

Take, for example, the large Chinese insurance company backed by the Chinese state bank in its recent attempt to purchase an American hotel chain. In describing the attempted takeover, the Wall Street Journal described the Chinese company's ownership structure as ``opaque.''

Yet in implementing the FSIA, courts require plaintiffs to meet the commercial activity exception at every level of corporate organization or they must show that various levels of organization acted only as corporate pass-throughs and, therefore, can be ignored.

Here is why I think that may be a problem. Corporate parents can exercise an extraordinary level of control over subsidiaries without concluding that the subsidiary is a mere pass-through.

Requiring plaintiffs to show commercial activity at every level of corporate organization--at such an early stage in the lawsuit--runs the risk of ignoring high-level involvement in the conduct that allegedly hurt the plaintiffs. If plaintiffs don't satisfy this showing against a parent company at an early stage in their case, they may lose the chance to establish their claims.

Now, what this means, as a practical matter, is that this mechanism puts foreign companies that happen to be owned by sovereign states at a distinct advantage over private foreign companies. A private foreign company has no mechanism for early dismissal of a lawsuit on these grounds. A private foreign company would be required to respond to the plaintiffs' allegations, and it would have to produce evidence during the course of the lawsuit relating both to its control over other parts of the conglomerate and also to its involvement in the activities alleged.

As a result of this early dismissal mechanism, the plaintiffs' case in New Orleans could only proceed against one subsidiary, and that happens to be CNBM. The case against CNBM itself was dismissed.

Now, it may be that these plaintiffs still wouldn't have been able to establish liability on the part of CNBM in the end, but they didn't even have that opportunity.

This is something that I want to consider carefully. If a foreign, state-owned company is able to shield parts of its organization behind the FSIA to avoid having to answer a lawsuit entirely in a way that the FSIA doesn't contemplate, when a privately owned foreign company wouldn't enjoy the same luxury, then a fix may be in order.

The point of the commercial activity exception to foreign sovereign immunity is to treat foreign governments like any other market actor when they enter into commerce. Nothing about the principles of foreign sovereign immunity or the FSIA is designed to afford extra early defenses to foreign companies' commercial actions just because the companies happened to be owned by foreign states.

But, currently, foreign, state-owned companies will argue that many of their affiliates don't have to answer the claims of American companies and American consumers, even when it is clear that at some level the company engaged in market activity that may have harmed Americans. Sometimes, like in the New Orleans case, the companies are succeeding.

So I think that may be a problem. That is why I took the time to speak now on the floor of the Senate, and I intend to look at it very carefully and possibly seek legislative remedy.

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