Filed: May 13, 1996
Latest Update: Mar. 02, 2020
Summary: United States Court of Appeals, Fifth Circuit. No. 95-50161. MCI TELECOMMUNICATIONS CORPORATION, Plaintiff-Appellee, v. Subhi ALHADHOOD, Captain, et al., Defendants. The Ministry of Defense of the United Arab Emirates and State of the United Arab Emirates, Defendants-Appellants. May 13, 1996. Appeal from the United States District Court for the Western District of Texas. Before HIGGINBOTHAM, EMILIO M. GARZA and BENAVIDES, Circuit Judges. BENAVIDES, Circuit Judge: Defendants-Appellants appeal the
Summary: United States Court of Appeals, Fifth Circuit. No. 95-50161. MCI TELECOMMUNICATIONS CORPORATION, Plaintiff-Appellee, v. Subhi ALHADHOOD, Captain, et al., Defendants. The Ministry of Defense of the United Arab Emirates and State of the United Arab Emirates, Defendants-Appellants. May 13, 1996. Appeal from the United States District Court for the Western District of Texas. Before HIGGINBOTHAM, EMILIO M. GARZA and BENAVIDES, Circuit Judges. BENAVIDES, Circuit Judge: Defendants-Appellants appeal the ..
More
United States Court of Appeals,
Fifth Circuit.
No. 95-50161.
MCI TELECOMMUNICATIONS CORPORATION, Plaintiff-Appellee,
v.
Subhi ALHADHOOD, Captain, et al., Defendants.
The Ministry of Defense of the United Arab Emirates and State of
the United Arab Emirates, Defendants-Appellants.
May 13, 1996.
Appeal from the United States District Court for the Western
District of Texas.
Before HIGGINBOTHAM, EMILIO M. GARZA and BENAVIDES, Circuit Judges.
BENAVIDES, Circuit Judge:
Defendants-Appellants appeal the district court's order
denying their motion to vacate default judgment on the basis of
their sovereign immunity under the Foreign Sovereign Immunities Act
("FSIA"). The district court found that Defendants-Appellants made
promises to Plaintiff-Appellee MCI Telecommunications Corporation
("MCI") that qualified as commercial activity under the commercial
activity exception of the FSIA, 28 U.S.C. § 1605(a)(2) because
private parties would normally make such promises while
participating in the market. We reverse based on our finding that
the actions of Defendants-Appellants did not constitute commercial
activity under the FSIA.
I. BACKGROUND
On September 26, 1986, Defendant-Appellant United Arab
Emirates ("UAE") entered into an agreement/contract with the United
1
States Department of Defense for the training of UAE military
personnel ("Student Battalion") under the sponsorship of the U.S.
Army at Fort Bliss, Texas. Note 5 of the agreement addressed the
expenses covered by the Student Battalion:
Students will be responsible for payment of charges for
transportation, meals, laundry service, and any other services
or personal living expenses they incur. Purchaser agrees to
ensure prompt payment for such expenses.
In August 1987, MCI instituted an investigation of
unauthorized and unbillable calling activity reported by MCI's
Richardson, Texas office. Through its investigation, MCI
established that, beginning approximately October 1986, in excess
of $1 million in telephone calls using unauthorized codes and
dial-up numbers were placed by members of the Student Battalion to
the UAE and other overseas locations.
MCI contends that it first attempted to recover its damages
through diplomatic channels by meeting with UAE Ambassador Ahmed
Salim Al Mokarrab and UAE Military Attache Colonel Mubarak Rashid
Al Ghafli at the UAE Embassy in Washington, D.C. on January 6,
1988. MCI asserts that at that meeting Ambassador Mokarrab
explicitly told representatives of MCI that if the unauthorized
calls were attributable to the Student Battalion the UAE would
assume responsibility and pay MCI their damages. MCI contends that
the Ambassador requested that MCI take no further legal action, but
instead forward information to him on MCI's investigation.
MCI contends that it took no further legal action in reliance
2
on the Ambassador's statements at the January 6, 1988 meeting.1
Throughout the early part of 1988, MCI forwarded detailed
information regarding the members of the Student Battalion
allegedly involved in the unauthorized telephone activity. MCI
claims that Ambassador Mokarrab repeatedly delayed any further
meetings until July 6, 1988, when Colonel Mubarak stated that he
would not assist MCI because MCI failed to prove that any
individual Student Battalion member made any of the unauthorized
calls. MCI also contends that at that same meeting Ambassador
Mokarrab stated that he had never promised MCI compensation. Then
in August 1988, the UAE officially informed MCI that it would not
compensate MCI for any of the telephone calls.
On May 11, 1989, MCI filed a complaint against the UAE, the
UAE Ministry of Defense ("Ministry") and the individual members of
the Student Battalion identified as having made the unauthorized
calls. Service was obtained upon the UAE and the Ministry only.2
One of the individual members of the Student Battalion filed an
answer, but neither the UAE or the Ministry filed an answer.
Because neither the UAE nor the Ministry answered or responded
within the required time, default judgments were entered against
the Ministry on November 8, 1989 and against the UAE on January 8,
1
Five years later, Ambassador Mokarrab executed an affidavit
denying that he made any promises to pay MCI for the unauthorized
telephone calls.
2
All the individual defendants were later dismissed.
3
1990.3
On May 21, 1993, the UAE and the Ministry moved to vacate the
default judgments on the ground that they are immune from suit
under the FSIA. The district court entered an order on February
10, 1995 denying the motion, finding that the UAE and the Ministry
were not able to assert sovereign immunity for the unauthorized
calls because the promises made by Ambassador Mokarrab and Colonel
Mubarak to MCI to pay for the calls qualified as "commercial
activity" under that exception to the FSIA. Both the UAE and the
Ministry now appeal.
II. JURISDICTION
This appeal arises from a denial of a motion to vacate
default judgments entered against Defendants-Appellants. Separate
default judgments were entered against the Ministry on November 8,
1989 and against the UAE on January 8, 1990. Defendants-Appellants
filed their motion to vacate on May 21, 1993, more than three years
after the last default judgment was entered. In their motion to
vacate the default judgments, Defendants-Appellants claimed
immunity from suit under the FSIA, and the district court denied
the motion based on its finding that their actions fell under the
"commercial activity exception to the FSIA. Immediate appeal,
under the collateral order doctrine, is permitted from an order
3
Prior to entering default judgments against the UAE and the
Ministry, the district court held a hearing at which MCI
presented evidence as to the amount of damages suffered and
expenses incurred by MCI. MCI also filed a memorandum of law in
support of its motion for default judgment on the issue of
immunity under the FSIA at the court's request.
4
denying sovereign immunity under the FSIA because it raises the
issue of the court's subject matter jurisdiction. Stena Rederi AB
v. Comision de Contratos, 923 F.2d 380, 385 (5th Cir.1991).
However, the question raised from the appeal in the instant case is
whether entry of default judgment prior to Defendants-Appellants
claim of sovereign immunity under the FSIA waives their right to
claim immunity or challenge the default judgment entered by the
district court on the same ground.
This Court has held in the context of the FSIA that
[w]hen a defendant foreign state has appeared and asserts
legal defenses, albeit after a default judgment has been
entered, it is important that those defenses be considered
carefully and, if possible, that the dispute be resolved on
the basis of all relevant legal argument.
Hester Intern'tl Corp. v. Federal Republic of Nigeria, 879 F.2d
170, 175 (5th Cir.1989) (quoting Practical Concepts, Inc. v.
Republic of Bolivia,
811 F.2d 1543, 1552 (D.C.Cir.1987)). A claim
of sovereign immunity under the FSIA is waived only when the
sovereign/state fails to assert immunity in a responsive pleading.
See Rodriguez v. Transnave Inc.,
8 F.3d 284, 287 (5th Cir.1993);
Foremost-McKesson, Inc. v. Islamic Republic of Iran,
905 F.2d 438,
443 (D.C.Cir.1990). Thus, a waiver of sovereign immunity cannot be
implied from a foreign state's failure to appear. Such a waiver
would be inconsistent with section 1608(e) of the FSIA, which
requires the court to satisfy itself that jurisdiction exists prior
to entering a default judgment.4 "[E]ven if the foreign state does
4
Section 1608(e) provides in pertinent part:
No judgment by default shall be entered by a court of
5
not enter an appearance to assert an immunity defense, a district
court still must determine that immunity is unavailable under the
Act." Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480,
493-94 n. 20,
103 S. Ct. 1962, 1971 n. 20,
76 L. Ed. 2d 81 (1983).
Neither does the FSIA or its legislative history state when
sovereign immunity must be raised. The D.C. Circuit has concluded
that a foreign state's failure to appear, even after default
judgment has been entered, does not constitute a waiver. Practical
Concepts, 811 F.2d at 1547. In Practical Concepts, the Court
states that a defendant sovereign state that believes the district
court lacks jurisdiction may choose one of two paths: it may
appear, raise the jurisdictional objection, and ultimately pursue
it on direct appeal; or it may challenge the court's jurisdiction
in a collateral proceeding by refraining from appearing, thereby
exposing itself to the risk of a default judgment, and asserting
the jurisdictional objection when enforcement of the default
judgment is attempted.
Id. See also Insurance Corp. of Ireland,
Ltd. v. Compagnie des Bauxites de Guinee,
456 U.S. 694, 706,
102
S. Ct. 2099, 2106,
72 L. Ed. 2d 492 (1982) ("A defendant is always
free to ignore the judicial proceedings, risk a default judgment,
and then challenge that judgment on jurisdictional grounds in a
collateral proceeding."). By deferring its jurisdictional
the United States or of a State against a foreign
state, a political subdivision thereof, or an agency or
instrumentality of a foreign state, unless the claimant
establishes his claim or right to relief by evidence
satisfactory to the court.
28 U.S.C. § 1608(e).
6
challenge, the foreign state only loses its right to defend on the
merits. Id. In the instant case, Defendants-Appellants did not
file a responsive pleading prior to entry of default judgment;
they elected to wait and see if a default judgment would be entered
against them. Defendants-Appellants then asserted their claim of
sovereign immunity in a collateral proceeding through a motion to
vacate the default judgments. Although their appearance might
otherwise be characterized as "untimely," we cannot infer a waiver
of immunity from Defendants-Appellants' much delayed appearance in
this case.
III. COMMERCIAL ACTIVITY EXCEPTION TO THE FSIA
"We review the district court's conclusions about sovereign
immunity de novo." Walter Fuller Aircraft Sales, Inc. v. Republic
of the Philippines, 965 F.2d 1375, 1383 (5th Cir.1992) (citing
Stena, 923 F.2d at 386). The FSIA provides foreign states immunity
from suit in federal and state courts unless a specified exception
applies. 28 U.S.C. § 1604. One such exception, "commercial
activity," is defined under the Act as "either a regular course of
commercial conduct or a particular transaction or act." 28 U.S.C.
§ 1603(d). "The commercial character of an activity shall be
determined by reference to the nature of the course of conduct or
particular transaction or act, rather than by reference to its
purpose."
Id. See also Republic of Argentina v. Weltover, Inc.,
504 U.S. 607, 614,
112 S. Ct. 2160, 2166,
119 L. Ed. 2d 394 (1992).
We have stated "that an activity has a commercial nature for
purposes of FSIA immunity if it "is of a type that a private person
7
would customarily engage in for profit.' " Walter Fuller, 965 F.2d
at 1384 (5th Cir.1992) (quoting Callejo v. Bancomer, S.A.,
764 F.2d
1101, 1108 n. 6 (5th Cir.1985)).5
A. Promises to Pay
Defendants-Appellants contend that their alleged promises to
pay MCI for the unauthorized calls did not make them private
players within the market, as defined by the U.S. Supreme Court in
Weltover, because the non-commercial activity of stealing telephone
services did not create a "market" to which their alleged promises
could relate. On the other hand, MCI asserts that Defendants-
Appellants' promises to pay were made in the context of their
attempt to resolve a private dispute, which is exactly the type of
activity in which private parties engage. See United States v.
Moats, 961 F.2d 1198, 1205 (5th Cir.1992) ("[t]he negotiation of
contracts, including entry into a settlement agreement, clearly is
the type of act performed by private persons"). Thus, MCI argues,
the Defendants-Appellants' express promises to pay constituted
"commercial activity" within the meaning of § 1605(a)(2).
We find that alleged promises made through diplomatic
channels do not constitute commercial activity. As we stated in
Walter Fuller, "courts typically hold that contracts for the
procurement of goods and services are commercial rather than
5
This approach has been approved by the U.S. Supreme Court
in Weltover, 504 U.S. at 614, 112 S.Ct. at 2166 ("the issue is
whether the particular actions that the foreign state performs
(whatever the motive behind them) are the type of actions by
which a private party engages in "trade and traffic or commerce'
").
8
governmental in nature." 965 F.2d at 1384 (internal citations
omitted). Negotiations over the payment of illegal telephone
calls, however, are not commercial in nature. Private parties may
engage in talks, negotiations, and may even make promises to
resolve disputes, but not all such activity will be deemed
"commercial." See Rush-Presbyterian-St. Luke's Medical Center v.
Hellenic Republic,
877 F.2d 574, 578-79 (7th Cir.), cert. denied,
493 U.S. 937,
110 S. Ct. 333,
107 L. Ed. 2d 322 (1989). MCI
approached Defendants-Appellants not to form a contract for goods
or services, but to try and recover its losses from the
unauthorized use of its services by third parties. Thus, we find
no nexus between MCI and Defendants-Appellants sufficient to find
a contract or agreement that would be "commercial" in nature so to
constitute commercial activity. In addition, any attempt to
resolve the dispute related to services provided to third parties,
and not Defendants-Appellants in this instance, and are clothed
with a diplomatic nature, not a commercial one.6
B. Contract for Personal Living Expenses
Addressed as an alternative argument for affirming the
district court's judgment, MCI contends that Note 5 of the military
training agreement between the UAE and the United States expressly
makes the UAE a guarantor of the payment of personal expenses
6
In this regard we note that MCI admits that instead of
filing criminal charges against the Student Battalion members who
made the unauthorized calls, it sought to recover its losses
through "diplomatic channels" at the UAE Embassy. The
negotiations were not related to any contract for services
between the UAE and MCI, as no such contract was ever in
existence.
9
incurred by the Student Battalion. MCI argues that by agreeing to
act as a guarantor for debts incurred by the Student Battalion,
which includes telephone calls, the UAE is, like a private party,
engaging in commercial activity. Relying on Weltover, MCI asserts
that the agreement constitutes commercial activity not for its
"purpose," but by its "nature"; although the agreement has a
governmental purpose, the guarantee contained in Note 5 constitutes
commercial activity. See Weltover, 504 U.S. at 614, 112 S.Ct. at
2166. MCI also argues that the guaranty in Note 5 is unambiguously
written without any limitation for the benefit of all creditors
providing services of a personal nature to the Student Battalion.
Thus, under Texas law, MCI claims itself as a third-party
beneficiary under the agreement.7 We find no merit in MCI's
arguments.
The cases relied on by MCI are inapplicable in that they
involve contracts or agreements between a sovereign state and the
complaining party for either the sale of goods or services.8 The
contract in this case involves a military training agreement
between two sovereign parties, the United States and the UAE. No
goods or services were purchased or required to be purchased from
MCI under the terms of the contract. Therefore, we find nothing in
the nature of this agreement, even considering the provisions of
7
See United States v. Allstate Ins. Co., 910 F.2d 1281, 1284
(5th Cir.1990) (citing Hermann Hosp. v. Liberty Life Assurance
Co. of Boston,
696 S.W.2d 37 (Tex.App.—Hous.1985, error refused
n.r.e.)).
8
See Hellenic Republic, supra; Gemini Shipping v. Foreign
Trade Org.,
647 F.2d 317 (2d Cir.1981).
10
Note 5, that would constitute commercial activity.
C. Unauthorized Telephone Calls
As a second alternative argument, MCI contends that because
the procuring of telephone services is a basic activity undertaken
by private persons on a daily basis, the placing of long distance
telephone calls by members of the Student Battalion constitutes
"commercial activity" within the meaning of the FSIA. MCI argues
that each use of MCI's authorization codes created federal tariff
obligations on the caller to pay MCI for the long distance
telephone services procured, and such activity is commercial, even
in the context of an implied rather than express contract. MCI
asserts that this argument is even stronger in the instant case
because the implied agreement to pay MCI for its provision of
tariffed telephone services is not permeated by any overriding
governmental function or purpose.
We find no merit in MCI's contentions. At first glance, this
argument appears as an attempt to apply the "tortious activities"
exception to the FSIA, since it involves the actions of the UAE's
"employees" (i.e., the Student Battalion).9 Clearly, the making of
9
The "tortious activities" exception provides in pertinent
part:
(a) A foreign state shall not be immune form the
jurisdiction of courts of the United States or of the
States in any case—
(5) ... in which money damages are sought against a
foreign state for personal injury or death, or damage
to or loss of property, occurring in the United States
and caused by the tortious act or omission of that
foreign state or of any official or employee of that
foreign state while acting within the scope of his
11
unauthorized long distance telephone is not within the Student
Battalion's scope of employment. See Moran v. Kingdom of Saudi
Arabia, 27 F.3d 169, 173 (5th Cir.1994). Even if we were to
attempt to apply the commercial activity exception, the nature of
the calls, which are stolen, could not be found to be "commercial."
IV. CONCLUSION
Finding Defendants-Appellants actions did not constitute
"commercial activity" so that Defendants-Appellants are entitled to
immunity from suit under the FSIA, we VACATE the default judgment
of the district court and DISMISS the case for lack of subject
matter jurisdiction.
EMILIO M. GARZA, Circuit Judge, dissenting:
The majority in Part III.A. holds that UAE's actions—"its
promises to pay"—did not constitute "commercial activity" under the
commercial activity exception of the FSIA, 28 U.S.C. § 1605(a)(2).
Because I believe that UAE and MCI's alleged contract negotiations
constituted "commercial activity" under the FSIA, I dissent.1
My disagreement with the majority opinion begins with its
failure to address the burden of proof. Under the FSIA, "[o]nce
the defendant alleges that it is a "foreign state', the plaintiff
must produce some facts to show that the commercial activity
exception to immunity applies, but the defendant retains the
office or employment....
28 U.S.C. § 1605(a)(5).
1
I concur in Part II and Parts III.B. and C. of the majority
opinion.
12
ultimate burden of proof on immunity." Arriba Ltd. v. Petroleos
Mexicanos, 962 F.2d 528, 533 (5th Cir.), cert. denied,
506 U.S.
956,
113 S. Ct. 413,
121 L. Ed. 2d 337 (1992). In this case, UAE has
the burden of proving that it is immune from suit under the FSIA.
However, instead of analyzing whether UAE has met this burden, the
majority opinion focuses solely on discrediting MCI's arguments.
"The commercial character of an activity shall be determined
by reference to the nature of the course of conduct or particular
transaction or act, rather than by reference to its purpose."
Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 614,
112
S. Ct. 2160, 2166,
119 L. Ed. 2d 394 (1992). The Court in Weltover
emphasized that the "commercial activity" exception to the FSIA
embodies the restrictive rather than the absolute view of foreign
sovereign immunity.
Id. at 613, 112 S.Ct. at 2165. Pursuant to
this restrictive theory, the Court held that "when a foreign
government acts, not as regulator of a market, but in the manner of
a private player within it, the foreign sovereign's actions are
"commercial' within the meaning of the FSIA." Id. at
614, 112
S. Ct. at 2166. The determinative factor is not whether the foreign
government is acting to fulfill uniquely sovereign objectives.
"Rather, the issue is whether the particular actions that the
foreign state performs (whatever the motive behind them) are the
type of actions by which a private party engages in "trade and
traffic or commerce.' "
Id. (quoting Black's Law Dictionary 270
(6th ed. 1990)).
Applying this rule, the Weltover Court held that Argentina had
13
"participated in the bond market in the manner of a private actor,"
and therefore engaged in a "commercial activity," when it issued
bonds to restructure debt. Id. at 615-19, 112 S.Ct. at 2167-68.
Focusing on the nature of the Argentine government's behavior, not
its purpose, the Court rejected the argument that the context in
which the Argentine government created the bonds—to fulfill its
obligations under a foreign exchange program designed to address a
domestic credit crisis and to control the nation's critical
shortage of foreign exchange—made these bonds "sovereign" instead
of "commercial" in nature.
Id. at 615, 112 S.Ct. at 2167. The
Court stated that "it is irrelevant why Argentina participated in
the bond market in the manner of a private actor; it matters only
that it did so." Id.2
Because the focus is on the nature of the foreign sovereign's
behavior, most contracts entered into by a foreign sovereign will
fall within the commercial activity exception.3 We have previously
noted the commercial nature of the making or breaching of a
2
Applying Weltover, the Court in Saudi Arabia v. Nelson, 507
U.S. 349,
113 S. Ct. 1471,
123 L. Ed. 2d 47 (1993) stressed that a
state engages in commercial activity only when it exercises
powers that can also be exercised by private citizens, as
distinct from those powers that are peculiar to sovereigns.
Id.
at 360, 113 S.Ct. at 1479. Applying this logic, the Court held
that Saudi Arabia's alleged wrongful arrest, imprisonment and
torture of the plaintiff constituted an abuse of the state's
police power, the exercise of which is "peculiarly sovereign in
nature."
Id.
3
The legislative history of the FSIA specifically states
that "a single contract, if of the same character as a contract
which might be made by a private person," is an example of the
type of behavior that the "commercial activity" exception was
designed to encompass. H.R.Rep. No. 1487, 94th Cong., 2d Sess.
16 (1976), U.S.C.C.A.N.1976, at 6615.
14
contract. See Walter Fuller Aircraft Sales, Inc. v. Republic of
Philippines, 965 F.2d 1375, 1386 (5th Cir.1992) (holding that the
breach of a contract for the sale of aircraft is a commercial
activity); United States v. Moats,
961 F.2d 1198, 1205 (5th
Cir.1992) ("The negotiation of contracts, including entry into a
settlement agreement, clearly is the type of act performed by
private persons."); Stena Rederi AB v. Comision de Contratos del
Comite, 923 F.2d 380, 389 n. 11 (5th Cir.1991) ("A single contract
or course of dealing executed within this nation's boundaries
typically will constitute commercial activity carried on in the
United States.").
Other circuits have also noted that a foreign government's
formation or breach of a contract will typically constitute
commercial activity. In Rush-Presbyterian-St. Luke's Med. Ctr. v.
Hellenic Rep., 877 F.2d 574 (7th Cir.), cert. denied,
493 U.S. 937,
110 S. Ct. 333,
107 L. Ed. 2d 322 (1989), the Seventh Circuit stated
that although "contracts for purchase or sale of goods or services
are presumptively "commercial activities,' ... certain contracts,
although generally of a type in which a private person could enter,
are by their nature governmental, since only a sovereign entity
deals in the particular kind of goods or
services." 877 F.2d at
578. Examples of noncommercial contracts that the court cited
included a contract to allow a private party a license to exploit
the state's natural resources and employment contracts between a
state and its civil servants or military personnel.
Id. at 578-79.
In Janini v. Kuwait University,
43 F.3d 1534, 1537 (D.C.Cir.1995),
15
the D.C. Circuit held that the Kuwait University's unilateral
termination of employment contracts was a commercial activity,
despite the fact that it was accomplished by a formal decree of
abrogation as the result of the Iraqi invasion of Kuwait.
In this case, there is nothing sovereign about UAE's
behavior—the alleged making and breaching of a contract with MCI.
This is simply a contract for services which UAE felt it was
morally obligated to enter into. The fact that the telephone calls
were unauthorized, or that UAE had a military training agreement
with the United States is irrelevant to the nature of UAE's
actions. UAE's actions were not authorized by a power peculiar to
a foreign state; the making and breaching of this contract was not
the result of UAE's exercise of its police powers or power over the
state's resources, or even its power over the military. Instead,
any private person could have engaged in these actions.
For the foregoing reasons, I respectfully dissent from the
majority opinion, and I would hold that UAE's alleged making and
breaching of a contract with MCI constituted "commercial activity"
under 28 U.S.C. § 1605(a)(2).
16
