Alleged Fraud by Petrobas Inducing American Funds to Invest in Failed Project Satisfies “Commercial Activity” Exception to FSIA

The World in U.S. Courts: Summer 2017 - Foreign Sovereign Immunity Act (FSIA)/Political Question Doctrine | March.30.2017

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EIG Energy Fund XIV v. Petroleo Brasileiro, US District Court for the District of Columbia, March 30, 2017

This case arose in the wake of the bribery scandal that has engulfed Petrobras, the Brazilian state-owned petroleum company. The plaintiffs are eight related US-based and Cayman Islands-based investment funds, plus their investment adviser, that provided more than USD 2 million in financing to an entity organized to pay for the construction of a large fleet of drillships that Petrobras planned to use in developing large, newly discovered oil reserves located off the coast of Brazil. The entity collapsed after the bribery scheme was uncovered, and the plaintiffs lost their investments.

As relevant here, the parties agreed that Petrobras is a “qualifying foreign entity” for purposes of the FSIA, but disagreed about whether jurisdiction could nonetheless be asserted under the FSIA’s “commercial activity” exception. The plaintiffs argued that the facts satisfied the exception’s alternative requirement that there was “an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere [that] causes a direct effect on the United States.” The Court explained that for an injury to be “direct” it had to “follow as an immediate consequence” of the defendant’s act. Petrobras argued that the alleged injury was indirect and thus outside the scope of the exception, because the plaintiffs provided funding through multiple entities in Luxembourg, Brazil, and elsewhere. The Court disagreed, noting that six of the eight plaintiff funds were organized in the US and that they were injured “at the time Petrobras successfully induced them to invest,” i.e., immediately in connection with an act alleged to be part of the fraud. The Court thus found Petrobras to be amenable to suit in the US.

[Editor’s note: The EIG Energy Fund XIV case is also discussed in the Personal Jurisdiction/Forum Non Conveniens section of this report.]

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