Venezuela’s Repatriation of Assets From its US Subsidiary to Avoid Potential Enforcement of Arbitration Award in the US Does not Satisfy the FSIA’s “Commercial Activity” Exception

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

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Crystallex International Corp. v. Petróleos de Venezuela, S.A., US District Court for the District of Delaware, May 1, 2017

Crystallex, a Canadian company, won a USD 1 billion+ arbitration award against Venezuela’s state-owned oil company, PDVSA, for illegally expropriating certain of its mining rights and investments. In this action in federal court in Delaware, Crystallex sued PDVSA and its US subsidiaries for allegedly orchestrating a scheme to transfer Venezuelan assets from the US to Venezuela to frustrate efforts to collect on the award. The present opinion considers whether the suit should be dismissed on FSIA grounds.

The parties agreed that PDVSA is a sovereign within the meaning of the FSIA, and the principal issue to be addressed was whether the statute’s “commercial activities” exception applied. The Court observed that the exception could apply in any one of three circumstances: “[i] upon a commercial activity carried on in the United States by the foreign state; or [ii] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [iii] upon 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.” As a preliminary matter, the Court stated that a “commercial activity” is one of a type undertaken by a “private player” in a market, irrespective of the sovereign’s motives. The activity in question was PDVSA’s direction that its US subsidiary take on debt and cause a USD 2.8 billion dividend to be paid to PDVSA in Venezuela.

The Court found this conduct to be “commercial activity.” With respect to the first alternative test—a commercial act “carried on” in the US—the Court observed that the geographic location of conduct on which a claim is based must be determined with respect to the “gravamen,” “core,” and “foundation” of the claim as a whole. While activities relating to PDVSA’s subsidiaries occurred in the US, the Court found that PDVSA’s allegedly fraudulent intent constituted this “core,” and that could only have manifested itself in Venezuela. The Court noted that in prior cases the first test has also been satisfied where a sovereign has carried on commercial activity with a “substantial connection” to the US. While acknowledging a disagreement among other courts on the question, the Court concluded that this requirement could only be met if the commercial activity by PDVSA had itself occurred in the US, which the Court found had not been adequately alleged.

Having concluded that PDVSA conducted no activity in the US, the Court found that the second alternative test by its own terms did not apply.

Finally, the Court considered the third alternative test, which applies to commercial activity outside the US that “causes a direct effect” in the US. Crystallex argued that the “direct effect” in this case was that the transfer directed by PDVSA rendered its US subsidiary insolvent, thus hindering Crystallex’s efforts to collect on its arbitration award. But the Court observed that the transfer occurred before the judgment in arbitration was entered, and it characterized Crystallex’s claim to be that Venezuela had hindered collection of a “potential future judgment” in the US. The subsequent effect that the action had in the US once the arbitral award had been entered was different, and not the “direct” effect of PDVSA’s commercial activity outside the US.

Finding no basis for application of the FSIA’s “commercial activities” exception, the Court dismissed Crystallex’s claim.

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