Suing a Foreign Government Under the United States Antitrust Laws: The Need for Clarification of the Commercial Activity Exception to the Foreign Sovereign Immunities Act of 1976
CommercialActivity Exception to the Immunities Act
Sovereign Immunities Act of 1976
James Hugo Friend 0 1
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eed for Clarification of
Suing a Foreign Government Under the
United States Antitrust Laws: The
Need for Clarification of the
Commercial Activity Exception to the
Foreign Sovereign Immunities Act of 1976
Today, more than at any time in history, foreign states,I and their
agencies and instrumentalities,2 are engaged in activities traditionally
performed by private parties that directly affect trade and commerce.3
In so doing, a sovereign state theoretically can become involved in most
1 The term "foreign state" as used herein will mean "[a] foreign country or nation," BLACK'S
LAW DICTIONARY 1578 (4th rev. ed. 1968). For an analysis of the meaning of "foreign state"
under the Foreign Sovereign Immunities Act of 1976, see notes 19-23 and accompanying text
2 See notes 28-33 and accompanying text infra.
3 "The words 'trade' and 'commerce,' when used in juxtaposition impart to each other
enlarged signification, so as to include practically every business occupation carried on for
subsistence or profit, and into which the elements of bargain and sale, barter, exchange, or traffic, enter."
BLACK's LAW DICTIONARY, supra note 1, at 1665 (citation omitted). The term "trade and
commerce" will be used sometimes in this comment to describe the full range of activities in which a
foreign state could be engaged that have the potential to constitute antitrust violations. For a
discussion of the meaning of the phrase "trade and commerce," as used in the Sherman Act, see
U.S. ATT'y GEN'L, REPORT OF THE NATIONAL COMMITTEE TO STUDY THE ANTITRUST LAWS 62
(1955). With respect to the involvement of foreign states and their agencies in trade and
commerce, see generally Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 695
(1976); R. VERNON, SOVEREIGNTY AT BAY 33-37, 53-59 (1971); Carson & Losco, Who .4re the
CapitalistsNow in Europe,VISION, May 1976, at 71; ChangedPolicy Concerning the Grantingof
Sovereign Immunity to ForeignGovernments, 26 DEP'T STATE BULL. 984 (1952) (letter from Jack
B. Tate, Acting Legal Advisor of Dep't of State to Phillip B. Pearlman, Acting Att'y General (May
19, 1952)) [hereinafter cited as Tate Letter]; Fensterwald, Sovereign Immunity and Soviet State
Trading,63 HARV. L. REV. 614 (1950); GrowingShadow ofthe Public Sector, VISION, Feb. 1978, at
17; Kostecki, State Tradingin Industrializedand.Developing Countries,12 J. WORLD TRADE L. 187
(1978); Menzies, US. Companiesin Unequal Combat, FORTUNE, April 9, 1979, at 102.
of the restraints of trade proscribed by the antitrust laws of the United
Increased state involvement in trade and commerce has
manifested itself in a variety of ways, including the growth of producer
cartels with sovereign states as members,5 state monopolization of the sale
and production of certain products,6 the nationalization of industry in
peacetime and the concomitant growth of public corporations,7 and the
partial or complete ownership by sovereign states of private corporate
entities.' The widespread participation of governments in activities of
an arguably private nature, especially in view of the Foreign Sovereign
Immunities Act of 1976,9 raises a question of growing practical
importance: to what extent are the "commercial"'" activities of sovereign
governments, their agents, or their instrumentalities subject to the U.S.
To aid one's understanding of this subject, the following
discussion will consider the current quantity, form, and nature of "state
trading""t and the antitrust implications of state trading by foreign states
and their agencies. Also, the evolution of the law of sovereign
immunity in the United States will be described, as well as the primary tests
that courts and commentators have developed over the years to
distinguish the commercial and sovereign activity in which a government is
engaged. The lack of clarity and consistency in this area of the law will
be analyzed and it will be shown that the standards for the
determination of "commercial activity" under § 1605(a)(2) of the Foreign
Sovereign Immunities Act of 1976 are unnecessarily vague, ideological, and
THE FOREIGN SOVEREIGN IMMUNITIES ACT OF 1976
The passage of the Foreign Sovereign Immunities Act of 1976
manifested a concern of both the executive branch' 2 and the Congress' 3
about the use of the sovereign immunity defense by foreign
governments involved in commercial activities.' 4 Although it is an important
II For a definition and discussion of the term "state trading," see note 58 and accompanying
12 When President Ford signed the Foreign Sovereign Immunities Act on October 22, 1976, he
stated that the Act would "make it easier for our citizens and foreign governments to turn to the
courts to resolve ordinary legal disputes." 12 WEEKLY COMP. OF PRES. Doc. 1554 (1976). The
Act was introduced in accordance with the recommendations of an executive communication that
was transmitted to Congress by the Departments of State and Justice, and its passage was
recommended by both Departments. H.R. Rep. No. 1487, 94th Cong., 2d Sess. 6 (1976), reprintedin
 U.S. CODE CONG. & AD. NEws 6604 [hereinafter cited as HousE REPORT].
13 See generally HousE REPORT, note 12 supra;S. REP. No. 1310, 94th Cong., 2d Sess. (1976)
[hereinafter cited as SENATE REPORT]; Jurisdictionof U.S. Courtsin SuitsAgainst ForeignStates:
Hearingson HA. 11315 Before the Subcomm on 4dministrativeLaw andGovernmentalRelations
ofthe House Comm. on the Judiciary, 94th Cong., 2d Sess., (1976) [hereinafter cited as House
Hearings];Immunity ofForeignStates: Hearingson H.A 3493 Before the Subcomm. on Claimsand
GovernmentalRelations ofthe House Comm. on the Judiciary,93d Cong., 1st Sess. (1973).
14 See generally Brower, Bistline & Loomis, The ForeignSovereign Immunities Act of 1976 in
Practice,73 AM. J. INT'L L. 200 (1979); Delaume, PublicDebt andSovereignImmunity: The For
eign Sovereign Immunities Act of1976, 71 AM. J. INT'L L. 399 (1977); Delaume, Sovereign
Immunity in America: A BicentennialAccomplishment, 8 J. MAR. L. 349 (1977); Von Mehren, The
ForeignSovereign ImmunitiesAct of1976, 17 COLUM. J. TRANSNAT'L L. 33 (1978); Von Mehren,
The Foreign Sovereign ImmunitiesAct of1976, in PRIVATE INVESTORS ABROAD-PROBLEMS AND
SOLUTIONS IN INTERNATIONAL BUSINESS 63 (1977); Weber, The ForeignSovereign ImmunitiesAct
of 1976 Its Origin, Meaning and Effect, 3 YALE STUD. WORLD PUB. ORDER 1 (1976); Note,
InternationalLaw: Act of State Doctrine: ForeignSovereign Immunities.4etof1976, 18 B.C. IN
DUS. & COM. L. REv. 318 (1977); Note, The Foreign Sovereign Immunities Act of 1976: Judicial
Predominance,4 BROOKLYN J. INT'L L. 146 (1977); Note, The ForeignSovereign ImmunitiesAct of
1976 Giving the PlaintiffHis Day in Court, 46 FORDHAM L. REV. 543 (1977); Note, Sovereign
Immunity: Limits ofJudicialControl The ForeignSovereign Immunities Act of 1976, 18 HARV.
INT'L L.J. 429 (1977).
piece of legislation which has been widely litigated,' the Immunities
Act does not dramatically alter sovereign immunity determinations.
On the contrary, in many respects it merely has codified trends in the
case law which have been developing for decades. The Act also
provides for certain procedural innovations which streamline and simplify
litigation against allegedly sovereign parties. An understanding of the
Act is of course central to an analysis of the potential antitrust liability
of foreign states, their agents, and their instrumentalities.
The stated purpose of the Immunities Act was "to provide when
and how parties can maintain a lawsuit against a foreign state or its
entities in the courts of the United States and to provide when a foreign
state is entitled to sovereign immunity."' 6 The legislation was
considered urgently needed, because "foreign state enterprises are every day
participants in commercial activities,"' 7 and there existed "no
comprehensive provisions in our law available to inform parties when they can
have recourse to the courts to assert a legal claim against a foreign
The Immunities Act provides that a foreign state,' 9 and its
agencies or instrumentalities,2" shall be immune from the jurisdiction of
U.S. courts unless one of five exceptions are applicable. Section
1605(a)(2) of the Act, which provides the "commercial activity"
exception to blanket jurisdictional immunity, is the most important,
controversial, and unclear exception and, therefore, is a major focus of this
comment.2 1 This exception provides that a foreign state shall not be
immune from the jurisdiction of U.S. courts in any case
in which the action is based upon a commercial activity carried on in the
United States by the foreign state; or upon an act performed in the United
States in connection with a commercial activity of the foreign state
elsewhere; or 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. !
The Act thus expressly provides that sovereign immunity will not be
granted in cases involving the commercial or private acts of a "foreign
state" or "the agency or instrumentality of a foreign state," where the
cause of action is based upon a commercial activity "carried on" in the
United States, or an act performed in the United States, or an act
causing a "direct effect '23 in the United States.
Although jurisdictional questions are of great importance,
especially in the antitrust field,2 4 the question whether an activity is "carried
on" in and causes a "direct effect" in the United States will not be
discussed.25 For purposes herein, the discussion regarding the
Immunities Act will relate solely to the legislative and judicial meaning of the
phrases "foreign state," "agency or instrumentality of a foreign state,"
and, particularly, "commercial activity."
The Immunities Act defines "foreign state" as the sovereign state
itself, including political subdivisions, agencies or instrumentalities.26
"Political subdivisions" are defined as "all governmental units beneath
the central government, including local governments. ' 27 This phrase is
fairly straightforward, as evidenced by the fact that it has not yet been
the subject of litigation under the Act.
The phrase "agency or instrumentality of a foreign state," while
not unclear, is more prone to be litigated. The Immunities Act
provides that "agency or instrumentality of a foreign state" means any
entity which is:
22 28 U.S.C. § 1605(a)(2) (1976).
23 For a discussion of the term "direct effect," see Carey v. National Oil Co., 453 F. Supp.
1097 (S.D.N.Y. 1978). In this case, a Libyan state oil company allegedly cancelled contracts for
the delivery of crude oil to a refinery company in the Bahamas which was a subsidiary of a New
York corporation. In a suit for breach of contract by the New York corporation against the
Libyan state oil company, the court held that because the oil was sold through the Bahamas instead of
directly to the United States, the breach did not have a "direct effect" in the United States. Id at
1101-02. Accordingly, the court dismissed the suit for lack ofjurisdiction under section 1605(a)(2)
of the Immunities Act. Id at 1102.
24 For commentary regarding the controversy surrounding the appropriate extraterritorial
application of the U.S. antitrust laws, see ANTITRUST GUIDE, supranote 4, at 6-8; K. BREWSTER,
ANTITRUST AND AMERICAN BUSINESS ABROAD (1958); W. FUGATE, FOREIGN COMMERCE AND
THE ANTITRUST LAWS, §§ 2.1-.23 (2d ed. 1973); J. RAHL, COMMON MARKET AND AMERICAN
ANTITRUST: OVERLAP AND CONFLICT 54-89 (1970); Baker, Antitrustand WorldTrade: Tempest in
an InternationalTeapot?, 8 CORNELL INT'L L.J. 16 (1974); Rahl, American Antitrust andForeign
Operations: What is Covered?, 8 CORNELL INT'L L.J. 1 (1974).
25 It should be noted that the House Report regarding the Immunities Act specifically
indicates that: "Neither the term 'direct effect' nor the concept of 'substantial contacts' embodied in
section 1603(e) is intended to alter the application of the Sherman Antitrust Act, 15 U.S.C. 1, et
6 28 U.S.C. § 1603(a)H(O19U7S6E). REPORT, supra note 12, at 19.
se., to any defendant."
27 HOUSE REPORT, supra note 12, at 15.
(1) a separate legal person, corporate or otherwise, and
(2) an organ of a foreign state or political subdivision thereof, or a
majority of whose shares or other ownership interest is owned by a
foreign state or political subdivision thereof, and
(3) neither a citizen of a State of the United States as defined in section
1332(c) a2n8d (d) of this title, nor created under the laws of any third
The legislative history of the Immunities Act clarifies the definition.
"Separate legal person is intended to include a corporation, association,
foundation, or other entity which under the law of the foreign state
where it was created can sue or be sued in its own name, contract in its
own name or hold property in its own name." 29 Furthermore, an entity
will be deemed to be an agency or instrumentality of a foreign state
only if a majority of the ownership shares are held by a foreign state or
its political subdivision.30 Lastly, entities such as corporations which
are either organized and incorporated under the laws of one of the
United States,3' or created under the laws of third countries, are
excluded from the definition of "agency or instrumentality of a foreign
state" because it is presumed that if a foreign state establishes or
acquires a company or other legal entity in a foreign nation, the entity is
"presumptively engaging" in activities that are either commercial or
private in nature.32 In clarification, it was explained that an "agency or
instrumentality of a foreign state" could include a state trading
corporation, a mining enterprise, a transport organization such as a shipping
line or airline, a steel company, a central bank, an export association, a
governmental procurement agency, or a department or ministry which
acts and is suable in its own name. Thus far courts have found little
difficulty in determining which entities fall within the meaning of
agency or instrumentality of a foreign state.3 3
28 28 U.S.C. § 1603(b) (1976).
29 HOUSE REPORT, supra note 12, at 15.
31 See Amtorg Trading Corp. v. United States, 71 F.2d 524 (C.C.P.A. 1934).
32 HOUSE REPORT, supra note 12, at 15.
33 Several recently decided cases have interpreted the phrase "agency or instrumentality of a
foreign state." Herzberger v. Compania de Acero del Pacifico, S.A., No. 78 Civ. 2451 (S.D.N.Y.
Aug. 17, 1978), involved a suit against a Chilean corporation, Compania de Acero del Pacifico
(CAP), engaged in the mining of iron ore and the production of steel products. CAP was 95%
owned by the Chilean Corporaci6n de Fomento de la Produci6n (CORFU), a Chilean
governmental agency created by Chilean law, designed to foster economic development by assistance to
and direct control of various domestic industries. The court held that CAP fell squarely within the
definition of agency or instrumentality of a foreign state because it had a separate corporate
personality and the majority of its shares were owned by a foreign state or a political subdivision of a
In Carey v. NationalOil Co., 453 F. Supp. at 1100-01, National Oil Company (NOC), which
was 100% owned by the Libyan government, was held to be a "foreign state" under §§ 1603(a) and
It is the controversial "commercial activity" exception 34 to
jurisdictional immunity under the Immunities Act which is the most
important, yet the most unclear of the five exceptions. Neither the language
of the Immunities Act nor its legislative history provide much guidance
as to what is meant by "commercial activity" or as to when a "foreign
state" should be subject to the jurisdiction of U.S. courts by virtue of its
having engaged in commercial activity.
The Immunities Act defines commercial activity as "either a
regular course of commercial conduct or a particular commercial
transaction or act." 35 The legislative history expands somewhat on the
meaning of these phrases, but ultimately it provides the reader with
little guidance as to what is meant by these terms.
As an example of "a particular commercial transaction or act" the
legislative history pointed out "a single contract, if of the same
character as a contract which might be made by a private person. ' 36 It also
noted that "a regular course of commercial conduct" would include the
carrying on of such activities as those of a mineral extraction company,
an airline, or a state trading company. Other examples of commercial
activity included a foreign government's sale of a service or a product,
its leasing of property, its borrowing of money, its employment or
engagement of laborers, clerical staff or public relations or marketing
agents, or its investment in a security of an American corporation.37
The legislative history also noted that "certainly, if an activity is
customarily carried on for profit, its commercial nature can be readily
These definitions, clarifications, and examples point the courts in a
general direction; they fail, however, to provide the courts with any
useful means of differentiating or categorizing various types of state
activity. Initially, the reader may feel that these examples are helpful
and capable of logical application. Upon closer analysis, however, one
finds that it is not at all clear what these examples were intended to
represent. Are they examples of commercial activity because they
employ a private or public corporate structure, or because they could be
performed by a private party, or because they are customarily carried
on for profit? Unfortunately, one is not told in any kind of specific or
(b)(2) of the Immunities Act, because NOC was a corporation, a majority of whose shares were
owned by a foreign state or political subdivision of a foreign state.
34 28 U.S.C. § 1605(a)(2) (1976).
35 28 U.S.C. § 1603(d) (1976).
36 HousE REPORT, supra note 12, at 16.
Northwestern Journal of
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readily applicable way what it is about the cited examples that makes
them commercial activity. As a result, the examples are of limited
Consider the statement, mentioned above, that a contract, if of the
same character that might be made by a private person, would be
regarded as "a particular commercial transaction or act." We are told,
for example, that a contract by a foreign government to purchase
provisions or equipment for its armed forces or to construct a government
building would constitute commercial activity.3 9 This is presumably
one contract that could be made by a private person. It is difficult to
imagine today many contracts, if indeed there are any, that could not
be made by a private person. A government could contract for nearly
all services which are traditionally regarded as sovereign functions.
For example, it is not inconceivable that a government could provide
for its defense, including the procurement of troops, by contracting out
the responsibility. Even certain legislative functions, such as the
appropriation of funds, could theoretically be performed by contract.
Does the legislative history actually indicate that such activity, if
done by private contract, is commercial? One might reason that
because nearly all government activities could be performed by private
contract, the presence of a contract is per se evidence of commercial
activity. The legislative history, however, certainly does not go that far,
and one may doubt whether it was the intent of Congress to do so. The
government-private person distinction, therefore, provides little
assistance in analyzing the meaning of commercial activity.4 0
The statement that activities "customarily carried on for profit"
have a commercial nature is also ambiguous and often difficult to
apply. No definition of profit is offered, and in today's world the meaning
is not self-evident. For example, the term has little practical
significance in the socialist bloc, where there are no profits or corporate
structure as in the West.
The legislative history of the Immunities Act indicates that the
language in the bill was purposely left imprecise. It was stated that:
"The courts would have a great deal of latitude in determining what is
a 'commercial activity' for purposes of this bill. It has seemed unwise
to attempt an excessively precise definition of this term, even if that
were practicable."'" Also noted was the opinion of the State
40 For a critique of the "governmental-non-governmental distinction" in tort law, see notes
182-84 and accompanying text infra.
41 HOUSE REPORT, supra note 12, at 16.
mert that it was best to defer to the courts in the determination of
whether an activity is commercial or governmental. In fact, Monroe
Leigh, legal advisor to the Department of State, stated that the officials
at the Department realized that they
probably could not draft legislation which would satisfactorily delineate
that line of demarcation between commercial and governmental. . . .We
have decided to put our faith in the U.S. courts to work out progressively,
on a case-by-case basis, and using such guidance as has already
developed in the very large body of case law which exists, on the distinction
between commercial and governmental.42
Mr. Leigh did point out, however, that the drafters sought to
provide the courts with a starting point in their analysis, namely, that the
commercial character of an activity should be determined, "not based
on the purpose for which an activity occurred, but rather on its
nature."'43 The courts would inquire, he noted, "whether the activity in
question is one which private parties ordinarily perform or whether it is
peculiarly within the realm of governments."' The resultant language
in the Immunities Act states that 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. '45 This means that it is irrelevant that the goods or services
procured through a contract are to be used for a public purpose. The
commercial nature of the activity is the critical factor.46
THE USE OF GOVERNMENT INTEREST FACTORS IN ANTITRUST CASES
INVOLVING THE SOVEREIGN IMMUNITY DEFENSE
It should be noted that the mere stating of a preference for one test
over another, with little indication as to how the test should be applied,
does not provide courts with sufficient guidance for their sovereign
immunity decisions. Moreover, it is neither easy, nor wise, to divorce
completely the underlying purpose of a government activity from its
commercial nature. Nature and purpose are not mutually exclusive.
Many dealings in which governments are involved are complicated
mixtures of commercial enterprise and sovereign activities. The
participation by a nation in a producer cartel is one example. Cartel
members engage in management functions similar or equivalent to private
corporations. At the same time, if the cartel's product is a vital natural
42 HouseHearings,supra note 13, at 53.
45 28 U.S.C. § 1603(d) (1976).
46 HoUSE REPORT, supra note 12, at 16.
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resource, the government activity may also serve a legitimate and
important public purpose. In such cases, courts should not simply
compare the government activity to a common commercial transaction.
Instead, a more sophisticated, sensitive, and truly international analysis
is necessary. Such an analysis should take into consideration the
sovereign interests of a foreign government by looking to a variety of factors
that could bear upon and amplify the nature of the transaction in
question. These factors, which will be referred to in the following
discussion as the "government interest factors," include the following:
(1) the legal form used by the foreign government to engage in the
(2) comity between the United States and the foreign government;
(3) the representations made by the foreign government, the United
States Government and other relevant persons regarding the vital
national interests of the foreign government involved in the
(4) the temporal and political context of the transaction;
(5) the likelihood of enforceability, or retaliation, by the foreign
(6) the status of the transaction under the law of the foreign
Recent world developments, including the heightened activity of
OPEC and the creation of the uranium cartel, suggest that dramatic
new means of managing the economic and political affairs of state are
being employed by foreign governments. The sensibilities of foreign
governments and the changing conceptions of the proper role of the
sovereign in the economic and political affairs of state require a less
ideological and ethnocentric approach to the determination of the
commercial character of an activity. If the commercial nature of a
government activity is determined with reference to the government interest
factors and in conjunction with an analysis of the indicia of
commerciality present in the transaction, the resultant decisions will be
fairer and more easily applicable by future courts.
Since the legislative history indicates that Congress was purposely
imprecise in its treatment of the definition of "commercial" activity, the
responsibility falls to the courts to clarify the problem areas. In the
three years since the passage of the Immunities Act, however, the
courts which have confronted the issue have failed to develop a
workable test.4 7 In the section which follows, the quantity, form, and nature
47 See, e.g., Outboard Marine Corp. v. Pezetel, 461 F. Supp. 384 (D. Del. 1978) (antitrust case
against Polish state trading agency that exports golf carts); Herzberger v. Companla de Acero del
Pacifico, S.A., No. 78 Civ. 2451 (S.D.N.Y. Aug. 17, 1978) (suit against Chilean mining
corporation, a majority of whose shares were owned by a Chilean governmental agency); Yessenin-Volpin
of state trading in the world today, as well as its antitrust implications,
will be considered.
FOREIGN STATE INVOLVEMENT IN TRADE AND COMMERCE:
QUANTITY, FORM, AND NATURE
One of the most significant developments of the past century has
been the increasing participation of sovereign governments in domestic
and foreign trade and commerce. Today, virtually all foreign states are
engaged in some form of state trading48 or commercial activity.49
One commentator has reported recently that "[s]tate-controlled
companies, whether or not the government owns a majority of the
shares, have become a powerful presence on the international business
scene."50 State-controlled companies in the non-Communist world
produce 85% of the oil, 40% of the copper, and 33% of the iron ore and
bauxite and manufacture 54% of the steel, 35% of the polyethylene, and
20% of the autos. 1 A recent report indicated that the state is involved
in 40 of the top 100 European industrial enterprises. 2 An important
share of the foreign trade in many developing Middle Eastern, Asian,
South American, and Black African nations is conducted by the
government or its agents. 53 Numerous developed nations, including
Australia, Canada, New Zealand, and South Africa, operate food
marketing boards.' In the Council for Mutual Economic Assistance
(COMECON) nations55 of the socialist bloc, which account for
approximately one-tenth of international trade,56 the state transacts all
business with the outside world, and regulates all internal economic affairs
by means of a national economic plan.5 7
Nevertheless, an acceptable definition of state trading is not easy
to formulate.5 8 For purposes of this comment, it will be convenient to
consider collectively all of the trade and commerce in which a foreign
government could be engaged. Therefore, state trading will be defined
herein as conduct by a state, or its agencies, of trade or commerce
which serves a national interest. It is intended that this definition will
include the three common forms of state trading, Le., majority state
ownership of private corporations, state ownership of public
corporations, and state trading by government ministries or agencies. Each
form is unique, having its own advantages and disadvantages,
depending on the objectives of the foreign state. Furthermore, with respect to
the first of the government interest factors mentioned above, "the legal
form used by the foreign government to engage in the transaction," one
should keep in mind the level of interest that a government manifests in
a particular transaction when it utilizes each of the three forms.
State Ownership of Private Corporations
Ownership of a private corporation is becoming a frequent vehicle
for foreign governments desirous of engaging in state trading.
Typically, governments will either offer shares for sale to the public in a
state-owned entity or simply purchase shares of a corporation through
Private corporations normally have commercial attributes such as
limited liability, the ability to sue and be sued, a separate legal
personality, the motivation to realize a profit, and the ability to contract in
their own name with other persons for goods and services. These
attributes are important when considering whether a transaction
involving a private corporation is a commercial activity under the Immunities
In Europe, some of the largest, most powerful, and well-known
private industrial firms are at least 50% state-owned and are engaged in
commercial activities which include ship-building, the refining of steel
57 See generally Berman, The LegalFrameworkofTrade Between PlannedandMarket
Economies. The Soviet-American Example, 24 LAW & CONTEMP. PROB. 482 (1952); Berman & Bustin,
The Soviet System ofForeign Trade, 7 LAW & POL'Y INT'L Bus. 987 (1975); Fensterwald, supra
note 3; Spulber, The Soviet-Bloc ForeignTrade System, 24 LAW & CONTEMP. PROB. 420 (1959).
58 Professor Kostecki notes that "[ilt is virtually impossible to give a clear-cut and meaningful
definition of state trading which could please everybody." Kostecki, supranote 3, at 188.
Professor Allen states that "state trading is by no means crystal-clear in conception, and its ambiguity in
operation is even more pronounced." Allen, State Tradingand Economic Warfare, 24 LAW &
CONTEMP. PROB. 256, 257 (1959).
and petroleum, the mining of coal, and the sale and production of
motor vehicles, chemical products, paper and wood products, and
tobacco.5 9 These private corporations are predominantly commercial
entities. The nature of a private corporation has induced many
governments to utilize the private corporate form. An autonomous,
corporate-minded management with a strong profit incentive is just one of
the advantages. Government ownership, however, even if it represents
a controlling or majority interest, does not confer any kind of sovereign
immunity on the private corporation.6" Typically, private corporations
are subject to the corporate laws of the jurisdiction in which they are
incorporated or are doing business, and receive no special treatment by
virtue of their government affiliation.6 '
Due to the commercial nature of their activities and autonomous
private corporate form, private corporations would seem to have little
claim to immunity from the jurisdiction of U.S. courts. This is
notwithstanding the fact that a majority of their shares may be owned by a
foreign government and they qualify as an "agency or instrumentality
of a foreign state" under the Immunities Act. Furthermore, if a
sovereign state has a vital interest that it wishes to protect, it seems that this
interest can be advanced more effectively by utilizing a legal form
whereby the government can exercise greater control. Therefore, a
court employing the government interest factors would likely
deter59 It should be noted that determining state ownership of private enterprise is not easy,
because "many firms either do not know or do not care who owns their shares." Carson & Losco,
supranote 3, at 72. The following well-known examples, cited in Carson & Losco, supranote 3, at
73-74, and in Menzies, supra note 3, at 104, include Renault, the automobile manufacturer, which
is 75% owned by the French government. In Great Britain, the government owns a majority of the
shares of Rolls-Royce and British Leyland and a 48% interest in British Petroleum, Ltd. The West
German government holds a majority position in several industrial giants, including Salzgitter, a
steel refining and shipbuilding concern, Saarbergwerke, a coal mining and petroleum refining
company, and VIAG, an aluminum refining firm. Volkswagenwerk, the huge German auto
company, is 40% state-owned. The Italian government owns a majority of an auto manufacturer, Alfa
Romeo, and a steel refiner, Italsider. In Spain, the government owns a majority of the shares of
Tabacalera, which produces tobacco, and ENSIDESA, which produces steel. In Sweden, the
Statsforetag Group, a conglomerate which, among other things, produces paper and wood
products and mines iron ore, is 100% government-owned.
Government ownership of private industrial companies is prevalent outside Europe as well.
For example, the Chilean government owns a majority of CODELCO-CHILE, a copper and
metal mining company. The Steel Authority of India has majority government participation. The
Zambia Industrial and Mining Corporation, which mines and refines copper and other metals, is
also controlled by the government. The South African government owns the majority of equity in
South Africa Iron and Steel.
60 See United States v. Deutsches Kalisyndikat Gesellsehaft, 31 F.2d 199 (S.D.N.Y. 1929).
61 For information regarding the Amtorg Trading Corporation, a New York corporation
utilized by the Soviet Union to engage in state trading in the United States, see note 91 and
accompanying text infra.
Northwestern Journal of
International Law & Business
mine that the private corporate form suggests a limited government
State Ownershi ofPublic Corporations
Another legal form commonly utilized by governments to
effectuate their state trading is the "public corporation." A public
corporation, although in some respects autonomous, is really an arm of the
state that creates it-by nationalization or otherwise. In fact, one
author has recently noted that "the public corporation is today a
worldwide phenomenon. There are very few states in which the public
corporation does not play a significant, indeed an indispensable role in
their economic life." 62
Although they exist in very different legal systems, economies, and
cultures, one commentator has noted that public corporations have the
following common features:
(1) they are separately established by statute;
(2) each has a separate legal personality;
(3) their administration is in the hands of a governing board appointed
by the government;
(4) their employees are not civil servants;
(5) the basis of their finances is not parliamentary appropriation but
permanent revenue earning assets. Some of them with ministerial
approval can raise loans. They have to balance revenue and
expenditure and any profits generally have to be ploughed back into the
development of the enterprise. They are commercially audited;
(6) they are responsible to the government through the appropriate
minister and subject to his general direction; and
(7) in their day-to-day operations they are like any other private entities.
They are fully liable in law, and do not enjoy any of the legal
privileges and immunities of government.63
The above characteristics indicate the ambiguous, even
contradictory, nature of public corporations. Although they possess
characteristics of both government departments and private corporations, legally
and analytically, they cannot be regarded as eitherf For example,
while public corporations operate on behalf of the government, they
are separate legal entities, possess their own funds, and have many of
the legal and commercial attributes of private corporations. 65
Furthermore, while public corporations are largely autonomous in their
man62 Zakariya, supra note 6, at 487.
63 Id at 489-90.
64 See id at 490.
65 Friedmann, .4Comparative .4naysis, in THE PUBLIC CORPORATION, supra note 6, at 541.
agement, they are subject to some direction by the government, 66 often
by way of a semi-independent governing board appointed by the
executive.6 7 These hybrid organizations reside somewhere between the
pure public authority and the private commercial entity, "clothed with
the power of government but possessed of the flexibility and initiative
of a private enterprise. 6 8
Numerous vital industries in nations throughout the world have
been nationalized and their ownership interest transferred from private
to public corporate ownership. 69 In certain Western European
countries today the aerospace,70 aluminum, 7' computer,72 automobile, 73 and
steel74 industries have been nationalized and are presently run as
public corporations.7 5 Outside the U.S., the petroleum industry is largely
run by state petroleum companies.76 Moreover, powerful state holding
companies exist in Spain, Great Britain, Italy, and Sweden.7 7
In the United States, the federal government operates over a
hundred public corporation-type enterprises78 which engage in activities
including the production and distribution of radioisotopes, the
production of electric power, insuring, lending and borrowing, the
holding of timber lands, the ownership of grain, the operation of
warehouses, the operation of railroads, and the operation of the post office.79
At the state level, individual U.S. states have public corporations which
operate public utilities, transportation and communications.8 0
It is difficult to say exactly why a government would use the public
corporation to conduct a particular state trading activity. Part of the
reason must be that the activity is regarded as too important a business
to be left entirely to private interests. 8 1 Likewise, the activity may be
too important to be left solely to a government department. Through
Northwestern Journal of
International Law & Business
the public corporation form, a government can reap the benefits of
semi-private management 82 and yet retain a greater degree of direct
government control as compared to a private corporation. 83 In Great
Britain, for example, a minister who is authorized to appoint the
members of the boards of public corporations can, after consultation, give
directives of a general nature to the corporations.8 " Such prerogatives
would not be available in a private corporate form.
Whatever the specific reason why a state chooses the public
corporation form, it can be said that the creation of a public corporation to
manage a particular activity reflects a judgment by a government that
the activity is of great importance to the state.8 5
From a juridical point of view, the government interest manifested
by the creation of a public corporation, instead of the acquisition of
shares of a private corporation, should be recognized. The Immunities
Act, however, does not prescribe or even suggest a different legal
treatment for a foreign state depending upon the form of state involvement
in trade or commerce. In fact, under the Act, private and public
corporations alike-assuming a majority of their shares are owned by a
foreign state or a political subdivision of a foreign state-as well as
government ministries or agencies, are similarly treated.8 6
When determining the nature of an activity in which a state is
engaged, the courts, although they have thus far declined to do so, should
take into account the governmental interest of the foreign state in
engaging in a particular activity. In other words, if a state has chosen to
manage a vital natural resource by way of a public corporation, this
would indicate a higher degree of interest in the activity than if the
government left the activity to be operated privately, even if the
government retained stock in the corporation. Accordingly, this
government interest factor, in conjunction with a consideration of the other
government interest factors mentioned above, and a traditional
analysis of the indicia of commerciality present in the transaction, suggest
that immunity should be granted because the nature of the transaction
82 Id at 490-91.
85 Equally suggestive of the high degree of interest that the government must have in an activ-.
ity that it places under the aegis of a public corporation is the high risk of loss or nominal return
typical of public corporations. Today, due in part to mismanagement and financial difficulties,
nationalized industries throughout Europe are suffering heavy losses. See Goldsborough,
Giscard'sNew French Revolution: Capitalism,FORTUNE, Apr. 9, 1979, at 66; GrowingShadow ofthe
PublicSector, supra note 3, at 17.
86 28 U.S.C. §§ 1603(a)-(b) (1976).
is not truly commercial.8 7
State TradingAdministered by Government
A third form which may be used by governments to engage in
trade or commerce is direct state trading by a government ministry or
agency. While some definitions classify such entities as having separate
legal personalities, 88 for purposes herein it will be assumed that they do
not have a separate corporate identity. They have few of the
characteristics of corporations, private or public, and they enjoy few of their
advantages. Their operations are conducted by government ministers
and other "civil servants" directly in the employ of the government.
All of their funding is provided by the government and they are
responsible only to the government. Although they deal with private
parties, no private persons control their day-to-day operations. In short,
government ministries or agencies, as defined herein, are the sovereign
Direct state trading by government ministries or agencies is
infrequent today, even in many of the socialist nations.8 9 In fact, Soviet
trade delegations have not carried on trade directly with foreigners
since 1935.90 Moreover, many Western nations, like the United States,
have attempted to avoid a sovereign immunity confrontation with a
government ministry or agency engaged in state trading. For example,
in 1924, some nations, including the United States, insisted that the
Soviet Union state trading entity incorporate under the laws of the
local jurisdiction. 9 1
87 Under such an analysis, if the foreign state was a member of the socialist bloc, where the
private corporate form is virtually non-existent, the court could take this structural element into
consideration and, at its discretion, give the presence of a public corporate form less weight.
88 Kostecki, supranote 3, at 189.
89 Quigley, Soviet Foreign TradeAgenciesrAbroad .4 Note, 37 LAW & CONTEMP. PROB. 465,
469-73 (1972). One commentator has noted:
[I]n modem times. . . as the state was called upon to fulfill ever-increasing functions of a
predominantly social and economic nature, it became evident that the conventional
government departments were not adequately equipped to handle such new functions which, more
often than not, were of a very specialized and highly technical nature. Besides, the inherent
defects of departmental administration - the bureaucracy - had been under constant attack
for some time. This district of "government by civil service," was also a significant factor in
the emergence of a policy of public administration through separate agencies which would
operate largely according to business principles and be separately accountable.
Zakariya, supra note 6, at 487. See also Friedmann, 4 ComparativeAnalysis, in THE PUBLIC
CORPORATION, supra note 6, at 547-52.
90 Quigley, supra note 89, at 469.
91 As a result, in the United States the Soviet trading arm, the Amtorg Trading Corporation,
took the form of a New York corporation, the shares of which were owned by Soviet Foreign
A sovereign immunity conflict also can be avoided by an advance
waiver of immunity. Nations such as the Soviet Union enter into trade
treaties by which they waive sovereign immunity and subject their
trade delegations to the jurisdiction of local courts for commercial
obligations undertaken abroad.9 2 If a dispute were to arise, however, it
could be resolved under the Immunities Act. The Act provides that a
government ministry or agency is a "foreign state."9 3 Jurisdiction most
likely would be based upon § 1605(a)(2) of the Immunities Act, the
"commercial activity" provision.9 4
A determination, however, of whether the activities of state
ministries or agencies is commercial is a difficult one.95 All government
departments are closely integrated with the sovereign and there is a
greater presumption that their activities are of a more political and
governmental nature. At present, it is fair to say that the courts have not
clearly resolved the question of whether the mere existence of a
defendant, which is a government ministry or agency, is determinative of
whether an activity is a commercial activity.96
It seems sensible for courts to treat state trading administered by
government departments as having more of a public nature than that
conducted by public or private corporations. The government interest
of this form is evident. Government agencies or ministries offer
maxiTrade Ministry officials. Subject to all New York laws, Amtorg could not hope to gain immunity.
See Hazard, State Tradingin History andTheory, 24 LAW & CONTEMP. PROB. 243, 248-49 (1959).
92 "Thus," notes one commentator, "the practical significance of the Soviet claim of immunity
for the trade delegation is not great, both because of the customary treaty waiver and because of
the infrequency with which trade delegations contract in their own name." Quigley, supra note
89, at 470.
93 The Immunities Act, at 28 U.S.C. § 1605(a)(1) (1976), provides:
(a) A foreign state shall not be immune from the jurisdiction of courts of the United States
or of the States in any
case(1) in which the foreign state has waived its immunity either explicitly or by
See also notes 5-6 and accompanying text supra;Yessenin-Volpin v. Novosti Press Agency, 443 F.
Supp. 849, 852 (1978).
94 Under that section, if the activity of the governmental department falls within one of three
clauses, the party is denied immunity and the action proceeds. 28 U.S.C. § 1605(a)(2) (1976)
(a) A foreign state shall not be immune from the jurisdiction of courts of the United States
or of the States in any case ....
(2) In which the action is based upon a commercial activity carried on in the United
States by the foreign state; or upon an act performed in the United States in connection
with a commercial activity of the foreign state elsewhere; or 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.
95 See Yessenin-Volpin v. Novosti Press Agency, 443 F. Supp. 849 (1978). For a brief
discussion of this case, see notes 190-94 and accompanying text infra.
96 See Baker, supra note 4, at 931.
mum control over the state trading activity. In view of the advantages
of other forms, the use of a government department further suggests the
high degree of government interest involved.
THE DEVELOPMENT OF THE LAW OF SOVEREIGN IMMUNITY: THE
APPLICATION OF THE RESTRICTIVE THEORY IN THE
The foreign sovereign immunity doctrine, which has been
developed in fields other than antitrust,9 7 was initially formulated in the U.S.
over seventy years prior to the passage of the Sherman Act.98
Surprisingly, however, there exist only a small number of decided antitrust
cases in which the sovereign immunity defense has been invoked.99 As
a result, in determining the application of the sovereign immunity
doctrine to antitrust situations, the principles and precedents which have
97 Maritime claims dominated the early cases and continued to be important as late as 1945.
The state action doctrine, a court-created exemption which arose purely under the antitrust
laws, argues that the antitrust laws were intended to apply only to restraints imposed by private
parties and that they are inapplicable to restraints imposed by U.S. states acting as sovereigns.
For a discussion of the state action doctrine as it relates to sovereign immunity, see Note, American
Antitrust LiabilityofForeignState Instrumentalities:A New .4pplicationofthe ParkerDoctrine, 1
CORNELL INT'L L.J, 305 (1978). In that note, the author states that "although domestic
application of the antitrust laws cannot parallel international application perfectly, future development in
international antitrust law may involve application of current domestic [e.g. the state action]
doctrines." Id at 309-10 (citation omitted). The author continues, stating:
The pattern of development in this area has been for the Court to decide first whether a
particular governmental body may bring suit under the antitrust laws, and then whether it
may also be sued. CompareGeorgia v. Evans, 316 U.S. 159 (1942) (state may bring suit) with
Parker v. Brown, 317 U.S. 341 (1943) (state may not be sued); compare also Chattanooga
Foundry & Pipe Works v. City of Atlanta, 203 U.S. 390 (1906) (city may bring suit) with City
of Lafayette v. Louisiana Power & Light Co., 98 S. Ct. 1123 (1978) (city may be sued). If this
pattern continues, the Court, following its decision in Pfzer, may eventually have to decide
whether foreign governments may be sued under U.S. antitrust laws. It is likely to base its
decision on cases involving the antitrust liability of domestic governmental bodies.
Id at 310 n.38. It is conceded that the courts may consider the state action cases in future antitrust
cases involving the sovereign immunity defense. However, this author believes that the primary
cases to which courts will look will be sovereign immunity cases, particularly those involving
antitrust actions. This is especially likely in view of the Immunities Act. Moreover, in discussing
sovereign immunity, the Antitrust Guide refers exclusively to sovereign immunity cases.
ANTITRUST GUIDE, supra note 4, at 7-8, 50-62.
98 See The Schooner Exchange v. McFaddon, 11 U.S. (7 Cranch) 116 (1812).
99 See Outboard Marine Corp. v. Pezetel, 461 F. Supp. 849 (D. Del. 1978); In re Grand Jury
Investigation of the Shipping Industry, 186 F. Supp. 298 (D.D.C. 1960); In re Investigation of
World Arrangements, 13 F.R.D. 280 (D.D.C. 1952); United States v. Deutsches Kalisyndikat
Gesellschaft, 31 F.2d 199 (S.D.N.Y. 1929).
gaging in commercial activities" or, more broadly stated, private
actsjuregestionis. But the letter offered no standard for differentiating
between a sovereign's public and private acts.' 1 6 Various commentators,
courts and the drafters of the Immunities Act have attempted to devise
standards with limited success. 17 Today, the courts have yet to
establish a clear test for the determination of "commercial activity" under
section 1605(a)(2) of the Act. This is due in part to the inherently
difficult task of categorizing commercial activity in a broadly applicable
manner. One leading commentator has noted that:
[T]he main argument in favour of absolute immunity from jurisdiction
has been the view that what has been considered the only alternative to
absolute immunity-namely, exercise ofjurisdiction based on the
distinction between actsjuregeslionisand actsJureimperil-is impossible of
definition and, therefore, of application."'
There is considerable evidence that, under the restrictive theory
tests, both U.S. and foreign courts have treated essentially the same
kind of activity in different ways. 119 The operation of a railway, for
example, was held to be commercial activity by a Belgian court 20 and
sovereign by American, 12 1French, 22 and German 23 courts.
Purchasing supplies for army use has been held commercial by American' 2 4
116 Victory Transport Inc. v. Comisaria General, 336 F.2d 354, 359 (2d Cir. 1964), cert.denied,
381 U.S. 934 (1965).
117 Id at 359-60. For a discussion of the various standards of application which have been
developed under the restrictive theory, see notes 142-201 and accompanying text notes infra.
118 Lauterpacht, The Problem of JurisdictionalImmunities of Foreign States, 28 BRIT. Y.B.
INT'L L. 220, 222. Professor Lauterpacht reasons that "the law on the subject should-and
canbe placed on a footing different from either the [then] existing doctrine of absolute immunity or
the concession of immunity, by reference to the traditional distinction, in matters jure imperil as
distinguished from those jure gestionis." Id at 225-26. He suggests a third alternative under
which foreign sovereigns would be subject to the jurisdiction of domestic courts in contract and
tort actions as if they were the domestic sovereign. Id at 226-27.
119 See E. ALLEN, THE POSITION OF FOREIGN STATES BEFORE NATIONAL COURTS 30-31
(1933); Harvard Law School Research in Int'l Law, Draft Convention on the Competence of
Courts in Regard to Foreign States (1931) [hereinafter cited as Harvard Draft Convention];
Lauterpacht, supra note 118, at 222-23; Timberg, Sovereign Immunity and Act of State Defenses:
TransnationalBoycotts andEconomic Coercion, 55 TEX. L. REv. 1, 15-16 (1976).
120 See Harvard Draft Convention, supra note 119, at 389 (citing Soci~t6 Anonyme des
Chemins de Fer Li6geois-Luxembourgeois c. Etat. N6er-Landais,  Pasicrisie Beige 1.294).
121 See Oliver Am. Trading Co. v. Mexico, 5 F.2d 659 (2d Cir. 1924), cert. denied,267 U.S. 596
(1925); Bradford v. Director General of Rys. of Mexico, 278 S.W. 251 (Tex. App. 1925); Mason v.
Intercolonial Ry. of Canada, 197 Mass. 349, 83 N.E. 876 (1908).
122 See Harvard Draft Convention, supra note 119, at 389 (citing Carretier c. Chemin de Fer
d'Alsace-Lorraine,  D.P. 1.341).
123 See Harvard Draft Convention, supra note 119, at 389 (citing Bardorf g. Belgischen Staats
u. Eisenbahnfiskus, 62 Ent. des R.G. in 165 (1905)).
124 See Et Ve Balik Kurumu v. B.N.S. Int'l Sales Corp., 25 Misc. 299, 204 N.Y.S.2d 971 (Sup.
Ct. 1960), a§'d,17 App. Div. 2d 941, 233 N.Y.S.2d 971 (1962). An American court, in Kingdom of
Roumania v.GuarantyTrust Co., 250 F. 341 (2d Cir.), cert. denied,246 U.S. 663 (1918), also held
and Italian 2 5 courts and sovereign by French'2 6 courts. The operation
of a government trading monopoly was held commercial activity by
Belgian' 27 and Roumanian' 2 8 courts and sovereign by American 129 and
British 30 courts.
In numerous instances American courts have treated functionally
indistinguishable sovereign activity differently.13 1 One example in the
antitrust area is UnitedStates v. DeutschesKalisyndikat Gesellschaft' 32
In this case, the United States brought an action to enjoin violations of
the U.S. antitrust laws by the Societe Commerciale des Potasses
d'Alsace, a French corporation which was eleven-fifteenths owned by
the French government, and which administered potash mines in
Alsace-Lorraine. The French ambassador, who intervened in the suit,
argued that the defendant was a government instrumentality, created and
controlled by the Republic of France for governmental purposes, and,
therefore, that the suit was equivalent to a suit against the Republic of
France. The court held that the defendant company was not equal to
the French Government and therefore was not immune from suit.
Although the court adknowledged that the sovereign and his agents are
immune when engaged in commercial activity, it noted that neither
comity nor law required granting immunity to a foreign corporation
with private shareholders which was a separate legal entity under
French law. The court refused to take into account the alleged public
purpose served by government administration of the potash mines
stating that it was only to be considered in determining whether property
within the jurisdiction of the court had been devoted by a foreign state
to a public use. 133
In In re Investigationof WorldArrangements 34 an antitrust action
Northwestern Journal of
International Law & Business
some twenty years later involving similar facts, the court gave effect to
the public purpose of the activity involved and reached a contrary
conclusion. In this case, Anglo-Iranian Oil Company moved to quash a
subpoena duces tecum arguing that it was a unit of the British
government and therefore immune from the jurisdiction of the court.
AngloIranian, the court found, was an instrumentality of the British
government. The court looked to the fact that the government "controlled"
the company by virtue of its majority ownership of the voting stock. It
also emphasized that the object and purpose of the corporation, "to
insure a proper supply of petroleum, crude oil, and other products for
the British fleet," was "certainly a fundamental government function
serving a public purpose." 13 5 The court concluded that Anglo-Iranian
was "indistinguishable from the Government of Great Britain."' 36
The court in World Arrangements distinguished Deutsches
Kalisyndikat Gesellsehaft arguing that, in the latter case,
the French Government was involved in a commercial venture, entirely
divorced from any governmental function. There is a vast distinction
between a sea faring island-nation maintaining a constant supply of
maritime fuel and a goverment seeking additional revenue in the American
cmoamrkmeetsrcaianldsctrauucstiunrge.a' 37direct injury in the United States to our domestic
This distinction is of little merit, although certain "acts concerning the
armed forces" have traditionally been regarded as strictly sovereign
and political acts.' 38 The purchase, through a British corporate entity,
of petroleum for the British'havy would seem to be no more sovereign
than the purchase, through a similar French corporate vehicle of
potash for the French government. It also can be maintained that the
purchases of potash and oil were equally commercial in nature. In
both cases, a separate corporate entity, which could be sued under local
law, was used to effectuate the purchases. Majority stock ownership by
the government of a private corporation was present in both cases.
Standard commercial contracts were involved in both cases. In short,
the "vast distinction" between the purchases described by the World
Arrangements court is difficult to discern. 139
135 Id at 290.
136 Id at 291.
137 Id The court's decision was influenced by a letter read in open court from the British
Minister of Fuel and Power, that ordered the company not to produce documents, which were not
in the United States, without the authority of the British Government. Id at 289.
138 Victory Transport Inc. v. Comisaria General, 336 F.2d at 360. See also Lalive, Limmuni4
de Jurisdictiondes Etats et des OrganisationsInternaionales,84 RECUEIL DES COURs 205, 285-86
139 See W. FUGATE, supranote 24, at § 3.10; Timberg, supranote 119, at 15-16. Practically, the
distinction presents less of an antitrust enforcement problem today because the Justice
It is unlikely that WorldArrangements would be decided today as
it was in 1952. The subsequent adoption in the Tate Letter of the
restrictive theory and the passage of the Immunities Act make it probable
that the transaction in that case would be held to be "commercial"
activity and that the sovereign purpose emphasized by the court would be
ignored. Moreover, it should be noted that the Department of Justice
specifically rejects the holding in WorldArrangements, stating that it
"seems inconsistent with the later [Dunhill] case and the sovereign
immunity statute, [and] we do not rely on it in our enforcement
Nevertheless, the inconsistency of results in sovereign immunity
cases is extremely problematic from a national as well as international
point of view. So long as courts continue to decide sovereign immunity
cases without developing a fairly specific test of commerciality, the
problem will persist, and, even worse, decisions will continue to lack a
principled basis. Therefore, U.S. courts must endeavor, in spite of the
acknowledged difficulties, to develop a workable "commercial activity"
test which conforms to the general mandate of the Immunities Act
while adhering to a set of sound and equitable legal principles. Such a
test might develop a list of criteria which evidence commercial
conduct-such as the existence of a commercial arbitration clause in a
contract, the use of a private corporate form to effectuate a transaction, or
the existence of a profit motivation.
A commercial activity test must be sufficiently flexible so that it is
not unreasonably rigid or ethnocentric only for the sake of uniformity.
Understandably, in determining whether sovereign immunity should
be granted, national courts tend to develop definitions of sovereign
immunity based upon ideologically biased concepts of the appropriate
role of the sovereign. While such an approach may produce greater
consistency of result, it is often likely, especially in the antitrust context,
to anger foreign sovereigns and their subjects because they view their
conduct as perfectly appropriate sovereign behavior according to their
national values, laws, and ideology. Consequently, there have been
repeated examples in the past several decades of friendly nations such as
Canada, Great Britain, and the Netherlands passing "blocking
statutes"'141 designed to prevent the extraterritorial application of U.S.
ment has specifically rejected WorldArrangements. See ANTITRUST GUIDE, supra note 4, at 8;
Davidow, US. Antirust, Free Trade andNonmarketEconomies, 12 J.WORLD TRADE L. 473, 475
(1978). The position of the Justice Department, however, does not necessarily affect private
140 ANTITRUST GUIDE, supra note 4, at 8 n.21.
141 For a discussion regarding blocking statutes, see Stanford, The Application ofthe Sherman
TESTS DEVELOPED UNDER THE RESTRICTIVE THEORY
Since the adoption of the restrictive theory, courts have found it
difficult to establish tests to distinguish governmental and commercial
activity. Despite the difficulties presented by categorization, a number
of U.S. courts have tried to develop standards, and three major tests
have emerged. The tests are: (1) the "purpose of the transaction" test,
that provides that sovereign acts are those that are performed for a
public purpose; (2) the "Victory Transport" test, adopted by the Second
Circuit in Victory Transport Znc. v. Comisaria General,142 that estab
lishes a list of five strictly political or public acts in the exercise of
which a party is immune from the jurisdiction of the court; and (3) the
"nature of the transaction" test that provides that sovereign acts are
those that cannot be performed by an individual.
In the Immunities Act, Congress did not make specific reference to
any of these tests. As mentioned previously, Congress expressly
provided for a "nature" rather than a "purpose" formulation when it
stated, in section 1603(d), that "[t]he commercial character of an
activity shall be determined by reference to the nature of the conduct or
particular transaction or act, rather than by reference to its purpose." 143
In general, adoption of this "nature" formulation has produced
fair results in the few cases involving "commercial activity" that have
arisen under the Immunities Act."4 Courts generally, however, have
failed thus far to examine critically the underlying assumption of the
Immunities Act, that the commercial character of an activity can be
logically or consistently determined by referring to the "nature" of the
activity. As discussed below, the "nature" of a transaction often cannot
be easily discerned. As a result, in many instances, especially those
involving alleged antitrust violations by foreign governments, the
government interest factors must be considered in order to determine
accurately the nature of a transaction.
Act to Conduct Outsidethe United States: A Viewfrom Abroad, 11 CORNELL INT'L L.J. 195, 204
142 336 F.2d 354 (2d Cir. 1964), cert. denied, 381 U.S. 934 (1965).
143 28 U.S.C. § 1603(d) (1976).
144 See, e.g., Outboard Marine Corp. v. Pezetel, 461 F. Supp. 384 (D. Del. 1978) (antitrust suit
against Polish state-owned golf cart exporting firm); United Euram Corp. v. Union of Soviet
Socialist Republics, 461 F. Supp. 609 (S.D.N.Y. 1978) (suit against Soviet Ministry of Culture for
breach of contract to provide artists and give concert performances); Yessenin-Volpin v. Novosti
Press Agency, 443 F. Supp. 849 (S.D.N.Y. 1978) (libel action against official Soviet press agency
and semi-autonomous Soviet press agency).
The Purposeof the Transaction Test
In the early decades of the twentieth century, some courts in the
United States'4 5 and abroad'4 6 developed a test which granted
jurisdictional immunity to sovereigns only when they engaged in activities "for
public purposes" or "destined to public uses"-publicisusibus destinata.
In other words, sovereign activity with an underlying public purpose
was considered to be immune, while sovereign activity lacking a public
purpose was deemed to be private, and, therefore, was denied
The foremost Supreme Court case which adheres to the purpose
test is Berizzi Bros. Co. v. Steamship Pesaro.4' 7 In this case, an action
was brought to attach a ship owned and operated by the Italian
government that was engaged solely in the commercial transport of goods
between Italy and other foreign ports, including the United States. In
Berizzi Bros., Justice Van Devanter, emphasizing the activity in which
the sovereign was engaged, as well as the actor engaged in the activity,
We think the principles are applicable alike to all ships held and used by
a government for a public purpose, and that when, for the purpose of
advancing the trade of its people or providing revenue for its treasury, a
government acquires, mans and operates ships in the carrying trade, they
are public ships in the same sense that war ships are. We know of no
international usage which regards the maintenance and advancement of
pthuerpeocsoenothmainc twheelfmaraeinotefntahnecpeeoapnlde tirnaitniimneg ooffpaeancaevaalsfaonrcye.l'e4s8s a public
The sovereign is immune not merely because he is the sovereign, as is
the case under the absolute theory, but because the activity in which he
is engaged advances a public purpose. Under the absolute theory, as
145 Berizzi Bros. Co. v. S.S. Pesaro, 271 U.S. 562 (1926); Kingdom of Roumania v. Guaranty
Trust Co., 250 F. 341 (2d Cir.), cert.denied,246 U.S. 663 (1918); The Maipo, 259 F. 367 (S.D.N.Y.
1919); The Maipo, 252 F. 627 (S.D.N.Y. 1918); Briggs v. Light Boats, 93 Mass. (11 Allen) 157
146 See De Howorth v. S.S. India,  S. Afr. L.R. 451 (C.P.D. III). In that case, which
involved ownership by the South African government of a commercial shipping line, the court
[A]ny use of a vessel for the purpose of obtaining revenue for the state is a public purpose,
just as its use for the protection of the state is public. By means of revenue obtained from
trading the State is assisted in providing for its army and navy.
Id at 464. See also E. ALLEN, supra note 119, at 234-39 (citing Governo Austriaco v. Fisola,
Corte cass. (Oct. 12, 1893)) (contract with the Austro-Hungarian government to construct
147 271 U.S. 562 (1926).
148 Id at 574. Ironically, it is the lower court opinion of Judge Julian W. Mack, 277 F. 473
(S.D.N.Y. 1921), which was later reversed by the Supreme Court, that is still regarded as one of
the most learned and well reasoned opinions on the subject. See T. GiTraRI, supranote 100, at
expressed by Justice Marshall in Schooner Exchange, the focus is on
the actor rather than the activity engaged in.' 49
In BerizziBros., the court makes no attempt to explain what public
purpose might suffice before immunity would be granted. "[P]roviding
revenue for its treasury"15 and the "advancement of the economic
welfare of a people in time of peace"' 5- are cited as clear public purposes.
If these broad categories would satisfy the Berizzi Bros. court, it would
seem that nearly any activity in which the sovereign is engaged may be
assumed to have a public purpose by virtue of the sovereign's having
undertaken the activity. At this point, the purpose test begins to
resemble the absolute theory. This analysis serves to point out the great
difficulty of separating the various sovereign immunity tests and theories.
In a pair of nearly identical cases both entitled The Mapo,152
which were relied upon by the court in Berizzi Bros., the question of
determination of public purpose was more directly addressed. In The
Maifo, actions in libel were brought against a vessel owned by the
Chilean government that had been chartered to a private party engaged
in international commerce. In the first case, the court held that the ship
was immune from process. Despite the charter of the ship to a private
party for commercial use, the court acknowledged the argument that
"the vessel was used for a governmental purpose in so far as it enabled
Chilean shippers to export their products to the United States and to
bring back from here to Chile commodities needed by the people
there."' 5 3 The broad definition of public purpose in the first Maifo
case, iZe., supplying commodities to the Chilean people, is reminiscent
of the reasoning in Berizzi Bros. A year later, the second Maipo court
squarely addressed the public purpose question saying:
If the Republic of Chile considers it a governmental function to go into
the carrying trade, as would appear to be the case here, that is the
business of the Republic of Chile; and if we do not approve of it, if we do not
like it, if we do not wish any longer to accord that respect to the property
so engaged, which has hitherto been accorded to government property,
then we must say so through diplomatic channels, and not through the
149 In Schooner Exchange, 11 U.S. (7 Cranch) at 137, the Court noted that:
One sovereign being in no respect amenable to another; and being bound by obligations of
the highest character not to degrade the dignity of his nation, by placing himself or its
sovereign rights within the jurisdiction of another, can be supposed to enter a foreign territory only
under an express license, or in the confidence that the immunities belonging to his
independent sovereign station, though not expressly stipulated, are reserved by implication, and will be
extended to him.
150 271 U.S. at 574.
152 2-59 F. 367 (S.D.N.Y. 1919); 252 F. 627 (S.D.N.Y. 1918).
153 252 F. at 629.
According to the second Mapo case, a governmental function would
be anything that the sovereign says it is, and public purpose would be
assumed from the government's involvement in the activity. This
analysis effectively eliminates the restrictive immunity test, and the public
purpose category merges into the absolute theory. Interestingly, the
second Maofpo case may support a "government interest" analysis, to
the extent that the court gives effect to the importance of the
transaction to the Chilean Government. This once again points out the
overlap and potential for confusion between the sovereign immunity
categories and tests.
While the purpose test attempted to provide a rational basis for
distinguishing types of sovereign activity, it has been rejected by courts
and commentators for several reasons. First, it can be said that all
activity engaged in by the sovereign has an underlying public purpose. 55
In Victory Transport the court noted that the purpose test was
"unsatisfactory, for conceptually the modem sovereign always acts for a public
purpose."' 56 This point has been advanced by a leading scholar as
well.' 57 If it is conceded that all sovereign activity has a public purpose
or the sovereign would not have engaged in the activity, then the
purpose test ceases to make any distinctions between public and private
activity at all and is, as previously stated tantamount to absolute
Second, the concept of "public purpose" is extremely ideological
and U.S. courts generally do not like to impose their ideas of what is or
is not a proper state purpose or function, particularly when a foreign
government has made a specific representation to the contrary. 58
British courts are similarly disinclined. 15 9 These courts are aware of the
comity implications of describing a state trading activity as proper or
improper. They are also aware of the relative nature of the concept of
public purpose in state trading. For example, the operation by the
govemnment of all national exports may be deemed an essential function by
154 259 F. at 368.
155 Victory Transport Inc. v. Comisaria General, 336 F.2d 354 (2d Cir.), cert. denied,381 U.S.
934 (1964). See also Indian Towing Co. v. United States, 350 U.S. 61, 67 (1955). In Indian
Towing, which involved a tort action against the U.S. Coast Guard for the negligent operation of a
lighthouse, Justice Frankfurter, speaking for the Court, noted that, "all Government activity is
inescapably 'uniquely governmental' in that it is performed by the Government." Id at 67.
156 336 F.2d at 359.
157 S. SUCHARITKUL, supra note 6, at 168.
158 See, e.g., United States v. Deutsches Kalisyndikat Gesellschaft, 31 F.2d 199, 203 (S.D.N.Y.
1929); The Maipo, 259 F. at 368.
159 S. SUCHARITKUL, supra note 6, at 168, 175-78.
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one sovereign and regarded by another as an interference in the private
sector. 60 Whether or not a foreign government has made a statement
to the court, the public purpose test requires a court to make a value
judgment as to the proper functions in which a sovereign should
engage. Courts generally would prefer to avoid placing themselves in
such a position.
Third, any inquiry by a court into the purpose of a sovereign
activity may violate the act of state doctrine. That doctrine, which is related
to the sovereign immunity doctrine,' 6' expresses the strong belief of the
courts that if they were to pass on the validity of foreign acts of state it
"may hinder rather than further pursuit of goals [by the United States]
both for itself and for the community of nations as a whole in the
international sphere."' 162
In can be argued that when a court inquires into the alleged public
purpose of a sovereign activity it necessarily passes on the validity of a
foreign act of state. Originally, out of respect to the foreign
sovereign,16 3 and more recently, in deference to the executive branch, 16 4
United States courts have traditionally chosen not to "sit in judgment"
on the acts of foreign sovereigns.
The "Victory Transport" Test
In the years following the State Department's endorsement of the
restrictive theory in the Tate Letter, numerous courts were faced with
cases involving the allegedly commercial activities of foreign states and
their agencies.' 65 Although the State Department had made it clear
that its policy was to grant immunity for the public, not private,
activities of foreign governments, the Department had not provided any
guidelines describing how courts should differentiate between public
and private sovereign acts. In Victory Transport,Inc. v.
ComisariaGen160 See Friedmann, The Growth ofState Control Over the Indiidual,andits Effect Upon the
Rules ofInternationalState Responsibility, 19 BRIT. Y.B. INT'L L. 118, 126 (1938).
161 See general, H. STEINER & D. VAGTS, TRANSNATIONAL LEGAL PROBLEMS 672-728 (2d ed.
162 Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 423 (1964).
163 See Underhill v. Hernandez, 168 U.S. 250 (1897). In that case, regarded as the classic
formulation of the act of state doctrine, the court said: "Every sovereign State is bound to respect
the independence of every other sovereign State, and the courts of one country will not sit in
judgment on the acts of the government of another done within its own territory." Id at 252.
164 See Timberline Lumber Co. v. Bank of America, 549 F.2d 597, 605 (9th Cir. 1976).
165 See National City Bank v. Republic of China, 348 U.S. 356, rehearingdenied,349 U.S. 913
(1955); New York and Cuba Mail S.S. Co. v. Republic of Korea, 132 F. Supp. 684 (S.D.N.Y.
1955); Et Ve Balik Kurumu v. B.N.S. Int'l Sales Corp., 25 Misc. 2d 299, 204 N.Y.S. 2d 971 (Sup.
Ct. 1960), aj'd,17 App. Div. 2d 941, 233 N.Y.S.2d.1013 (1962); Harris and Co. Advertising, Inc.
v. Republic of Cuba, 127 So.2d 687 (Fla. App. 1961).
eralde Abasdecimientosy Transportes,166 the Second Circuit created a
classification of political and public acts that were to be the only acts
for which foreign sovereigns and their agencies were to be granted
immunity. The criteria set forth in the case are elements of what is known
as the "Victory Transport" test. 167
In Victory Transport,the Spanish Minister of Commerce chartered
a private American vessel for the purpose of transporting a cargo of
wheat from the United States to Spain. The charter agreement
provided for final and binding arbitration of all disputes. The ship
sustained hull damage while discharging its cargo in the Spanish port, and
the Minister of Commerce failed to pay for the damages or submit to
arbitration. Plaintiffs sued and the Spanish Consul, appearing on
behalf of the Minister, asserted that the ,Minister was an arm of the
Spanish Government and immune from suit.
The court referred to the Tate Letter, noting that it charted a
general course in favor of a restrictive theory of sovereign immunity but
provided few guidelines for its implementation. 168 In order to establish
a test for measuring strictly political or public acts that would
immunize the sovereign, the court adopted a classification that had been
presented by Lalive, a Swiss attorney and commentator. 6 9 Those
public acts, the court said, fall into the following categories:
(1) internal administrative acts, such as expulsion of an alien;
(2) legislative acts, such as nationalization;
(3) acts concerning the armed forces;
(4) acts concerning diplomatic activity; or
(5) public loans. 171
In applying these factors to the activity of the Spanish Minister of
Commerce, the court concluded that the chartering of the vessel
"partakes far more of the character of a private commercial act than a
public or political act."'17 1 The court noted that the charter arrangement
had the "earmarks" of a commercial transaction and emphasized the
facts that the wheat was consigned to and shipped by a private
commercial concern and that the parties had included a private commercial
A factor which the Victory Transport court weighed heavily in its
decision was that the State Department had failed or refused to suggest
166 336 F.2d 354 (2d Cir. 1964), cer. denied, 381 U.S. 934 (1965).
167 Joelson & Griffin, The Legal Status ofNation-State Cartels Under UnitedStates Antitrust
andP'ublicInternationalLaw, 9 INT'L LAW. 617, 625 (1975).
168 336 F.2d at 359.
169 Id. at 360. See Lalive, supra note 139, at 285-86.
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jurisdictional immunity for the Spanish Minister of Commerce. The
court clearly implied that it would have followed a suggestion of
immunity by the State Department. 172 It stated, however, that absent such a
suggestion, it would be "disposed" to deny a claim of sovereign
immunity unless the activity in question clearly fell within one of the
categories of "strictly political or public acts."' 173 The Victory Transport test
was approved and followed by a number of courts. Courts seemed to
welcome a test that could be used to implement the restrictive theory.
In Isbrandtsen Tankers, Inc. v. Presidentof India,'7 4 the
Government of India entered into a voyage-charter for the transportation of
grain to India. The voyage-charterer sought damages for unreasonable
detention of its vessels. The State Department intervened to
recommend that immunity be granted to the Government of India. The
Second Circuit followed the suggestion, but quoted extensively from its
decision in Victory Transport and said that absent the intervention by
the Department of State, it would have adhered to the Victory
Transport classifications and might well have found the actions of the Indian
Government to be "purely private commercial decisions."' 7 5
In PetrolShipping Corp. v. Kingdom of Greece,176 the Greek
Ministry of Commerce entered into a voyage-charter for transportation of
surplus wheat and agreed that disputes were to be referred to
arbitration. In contrast to its position in Isbrandtsen,the Department of State
rejected the defendant's claim of sovereign immunity. The court
proceeded to apply the Victory Transportclassifications, and, upon finding
the activity did not to fall within any of the categories, issued an order
compelling arbitration. 177
Since the passage of the Immunities Act, "legitimate questions
172 Id at 358-59. But see Isbrandtsen Tankers, Inc. v. President of India, 446 F.2d 1198 (2d
173 336 F.2d at 360.
174 446 F.2d 1198 (2d Cir. 1971).
175 Id at 1200.
176 360 F.2d 103 (2d Cir.), cert. denied, 385 U.S. 931 (1966).
177 360 F.2d at 110. Several district courts have followed the approach and guidelines
established by the Victory Transportcourt, and the case continued to form the basis for many sovereign
immunity decisions until the passage of the Immunities Act in 1976. See, e.g., Sea Transport
Corp. v. The S/T Manhattan, 405 F. Supp. 1244 (S.D.N.Y. 1975) (government transport of food
for citizens did not fall within Victory Transportcategories); Rovin Sales Co. v. Socialist Republic
of Romania, 403 F. Supp. 1298 (N.D. Ill. 1975) (operation of wine distributorship did not fall
within Victory Transportcategories); Pan American Tankers Corp. v. Republic of Vietnam, 296 F.
Supp. 361 (S.D.N.Y. 1969) (contract with arbitration clause for the transportation of cement did
not fall within the Victory Transport categories); Ocean Transport Co. v. Gov't of the Republic of
the Ivory Coast, 269 F. Supp. 703 (E.D. La. 1967) (contract for delivery to government of a fishing
boat did not fall within Victory Transfport categories).
have arisen as to the continuing validity of the Victory
Transportclassifications." 78 The Immunities Act established a classification of
"commercial acts" and presumed immunity, unless an act falls within this
definition or another of several unrelated clauses. Victory Transport,
on the other hand, established a class of "political and public acts" and
presumed immunity if an act falls within its classifications. Because of
this, one commentator has suggested that "Victory Transport is no
longer of significant value in determining whether a foreign sovereign
is entitled to jurisdictional immunity."'179
Nevertheless, in view of the success of the Victory Transport
categorization approach to distinguishing private and public acts, it is
surprising that no court has attempted, as was recommended above, to
construct a similar commercial activity classification under the
Immunities Act. A non-exclusive list of the characteristics of commercial
transactions or acts which a court could apply in particular cases would
be a welcome and stabilizing addition to the present ad hoc approach.
The Nature of the Transaction Test
The nature of the transaction test provides that all acts which are
capable of being performed by an individual are private and not
immune from the jurisdiction of the court. Only acts which an individual
could not perform are regarded as public and are granted immunity.
The nature test which existed before the passage of the Immunities Act
maintains that the nature of a transaction, rather than its underlying
purpose, should govern the question of whether immunity should be
granted. 0 This test is reflected in the Immunities Act where, as
previously stated, Congress expressly stated that the commercial character of
178 Von Mehren, The Foreign Sovereign Immunities Act of 1976, in PRIVATE INVESTORS
ABROAD-PROBLEMS AND SOLUTIONS IN INTERNATIONAL BUSINESS 97 (1977).
179 Id at 98.
180 For an early and cogent explication of the nature of the transaction test which had
considerable international influence, see Weiss, Competence ou Incompetence des Trbunaux dIL'egarddes
Etats Etangers,I RECUEIL DES COURS 525, 546-47 (1923). See also Harvard Draft Convention,
supranote 119, at 386-91. Article 10(f) of the Draft Convention states that a State may be made a
respondent in a proceeding instituted in a court of another State:
when, in the territory of another State, it engages in an enterprise which may be engaged in
there by private persons, and the proceeding instituted against it is based on or arises out of
such enterprise. This provision shall not be interpreted to allow a State to be made a
respondent in relation to the contracting of State loans.
But see Lauterpacht, supra note 118, at 222-26. The author notes that the Weiss "nature" test
"merely postpones the difficulty." Id at 225. See generally ADM Milling Co. v. Republic of
Bolivia, 14 I.L.M. 1279 (D.D.C. 1975); Renchard v. Humphries and Harding, Inc., 381 F. Supp.
382 (D.D.C. 1974); Amkor Corp. v. Bank of Korea, 298 F. Supp. 143 (S.D.N.Y. 1969); Ocean
Transport Co. v. Republic of the Ivory Coast, 269 F. Supp. 703 (E.D. La. 1967).
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an activity should be determined by reference to the nature, rather than
the purpose of the transaction. 181
Those who favor this test believe that it is relatively easy to apply,
that it affords the most just remedy to private persons or firms who
have had their rights violated by foreign states or their agents, and that
it increases predictability and consistency of result. In fact, the test
does provide some of these advantages. Nevertheless, while it may
appear clear-cut, the nature of the transaction distinction is actually quite
complicated and raises difficult conceptual and practical problems.
Justice Frankfurter addressed this problem in an insightful
domestic tort decision involving the liability of the United States Coast Guard
under the Federal Tort Claims Act for the negligent operation of a
lighthouse. In Indian Towing Co. v. UnitedStates,182 the United States
Government argued that the Coast Guard should be treated the same
as a municipal corporation, with tort law applicable to both entities.
Adoption of the government's position, noted Justice Frankfurter,
"would thus push the courts into the
'non-governmental'-'governmental' quagmire that has long plagued the law of municipal
corporations."' 83 Justice Frankfurter stated:
Under the Government's theory, some of these acts of negligence would
be actionable, and some would not. . . .The acts were different in time
and place but all were done in furtherance of the officer's task of
inspecting the lighthouse and in furtherance of the Coast Guard's task.... [I]f
the United States were to permit the operation of private lighthouses-not
at all inconceivable-the Government's basis of differentiation would be
gone and the negligence charged in this case would be actionable. Yet
there would be no change in the character of the Government's activity in
the places where it operated a lighthouse, and we would be attributing
bizarre motives to Congress were we to hold that it was predicating
liability on such a completely fortuitous circumstance-the presence or
absence of identical private activity. 184
When applied to the law of sovereign immunity, Frankfurter's
point retains much of its forcefulness. An unyielding test that relies too
heavily on an elusive factor such as whether an activity can be
performed by a private person, will inevitably produce unfair results. This
can be avoided to some extent if courts recognize the problem in
advance and, in particularly difficult cases, apply the relevant government
Since the passage of the Immunities Act, several cases have dealt
181 28 U.S.C. § 1603(d) (1976).
182 350 U.S. 61 (1955).
183 Id at 65.
184 Id at 66-67.
with the commercial activity exception and courts have attempted to
apply the nature of the transaction test. Outboard Marine Corp. v.
Pezetel8' 5 involved an antitrust suit by Outboard Marine Corp., an
American manufacturer of gas and electric golf carts, against Pezetel
Foreign Trade Enterprise of the Aviation Industry, an agency or
instrumentality created by and responsible to the Peoples' Republic of
Poland, which exports golf carts manufactured in Poland to the United
States under the brand name Melex, and against others including
Melex, USA, Inc., a company wholly owned by Pezetel and
incorporated in Delaware. The court, in attempting to better understand what
Congress intended by its express preference for a nature of the
transaction-type test, examined the legislative history, which explained that
[a]ctivities such as a foreign government's sale of a service or a product,
its leasing of property, its borrowing of money, its employment or
engagement of laborers ...or its investment in a security of an American
corporation, would be 18a6mong those included within the definition [of
The court reviewed the activity alleged in the complaint, the
"involvement in the manufacture and sale of golf carts,"' 87 and concluded
beyond question that Pezetel was engaged in commercial activity and was
not immune from suit under the Immunities Act.1 88
The facts in Pezetel did not present a difficult case for the court to
decide. Pezetel quite plainly was engaged in the golf cart business. It
was manufacturing and selling common commercial products for
profit, directly and aggressively competing in the United States market,
and using commercial contracts and a commercial subsidiary to
effectuate its purpose. There did not appear to be any evidence of a special
interest by the Polish government in Pezetel's affairs, and the export of
golf carts does not seem to be vital to the Polish economy, either in
reality or by representation of the Polish government. In this case, the
fact that Pezetel had some organic relation to its government was
merely formalistic, a function of Poland's socialist economic structure.
Therefore, with respect to the government interest factors presented
above, it should not be presumed, especially in the absence of a
statement to that effect by the Polish government, that Poland consciously
created Pezetel to serve a vital state need or that it has a particularly
strong interest in Pezetel's affairs.
In spite of this reasoning, Pezetel does little to explain the meaning
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of "commercial activity" under the Immunities Act. Unfortunately, the
court did not analyze the relevant portions of the House Report or the
Act itself, nor did it clearly explain the basis for its decision. The
recitation of examples from the House Report of what would constitute
commercial activity, without more, provides little insight into the
meaning of commercial activity. A better approach would have
considered, for example, the intended meaning of the phrase "foreign
government's sale of a service or product." '8 9 This analysis could have
outlined the elements of Pezetel's activities and compared them with
the examples in the legislative history of the Immunities Act.
Yessenin- Volpin v. Novosti PressAgency' ° proved more
enlightening than Pezetel. This case involved a libel action against TASS, the
official Soviet news agency, and Novosti, a semi-autonomous state
press agency. In its attempt to determine whether the alleged libels
were "in connection with a commercial activity," within the meaning of
section 1605(a)(2) of the Immunities Act, the court seemed torn
between looking to indicia of commerciality, such as the use of
commercial contracts, and the legal form of the particular defendants.
Although the court held that both TASS and Novosti were
immune, the reasoning was somewhat different with respect to each
defendant. The court seems to have granted immunity to TASS in large
part because it was a government agency. t9 1 Novosti, on the other
hand, which engaged in the same activity, seems to have gained
immunity in part because of its affiliation with TASS. t9 2 The court found
that TASS and Novosti had collaborated with agencies of the Soviet
government in the publication abroad of stories in Soviet journals, and,
in so doing, "Novosti, as well as TASS, was engaged not in
'commercial activity' but in acts of intra-govemmental cooperation of a type
which constitutes much of Novosti's (andpresumablymore of TASS's)
189 Id at 395. Compare United Euram Corp. v. Union of Soviet Socialist Republics, 461 F.
Supp. 609 (S.D.N.Y. 1978). In that case, the State Concert Society of the U.S.S.R., Gosconcert,
breached a contract, established pursuant to a cultural exchange agreement between the United
States and the U.S.S.R., to provide concert performances in the United States. The court rejected
defendant's argument that the concerts were "artistic" and "governmental," not "commercial," for
two reasons. First, the cultural purpose of the activities was irrelevant in determining its
commercial character. Second, the contracts required the plaintiff to pay a fee in cash to Gosconcert,as
well as the salaries of the artists and the expenses of the tour. The receipt by the Soviet society of
a fee in cash led the court to conclude that Gosconcertwas engaged in the "sale of a service,"
which the House Report named as a "commercial activity."
190 443 F. Supp. 849 (S.D.N.Y. 1978).
191 Id at 852.
192 Id at 852-54.
193 Id at 856 (emphasis added).
Novosti Press Agency is instructive in several respects. Unlike
Pezetel, the case provides some fairly concrete criteria that courts can
apply to determine whether an activity is commercial. The court noted
that the activities of Novosti and TASS were not "in connection with a
contract . . [that] would be found commercial under most
circumstances."' 94 Therefore, although it was dictum for the case involved no
contract, the court in NovostiPressAgencydoes say that the presence of
a contract usually would be evidence of the commercial character of an
Moreover, the court holds that intra-governmental cooperation,
absent a contract, is not commercial activity, and is therefore immune.
The distinction the court drew between TASS and Novosti is premised
upon the assumption that an organ of the government is likely to be
involved in intra-govemmental cooperation. This seems to give effect
to the form utilized by the foreign state to engage in a particular
activity and is evidence that government interest factors should be utilized.
In Carey v. National Oil Corp.," the National Oil Corporation
(NOC), a Libyan state oil company wholly owned by the Libyan
Government, allegedly cancelled contracts for the delivery of crude oil to a
refinery company in the Bahamas that was a subsidiary of a New York
corporation. In a suit for breach of contract by the New York
corporation against NOC, the court held that because the oil was sold through
the Bahamas instead of directly to the U.S., the alleged breach did not
have a "direct effect" in the United States. 196 Accordingly, the court
dismissed the suit for lack of jurisdiction under section 1605(a)(2) of
the Immunities Act. 197
In dismissing the action, Judge Duffy made a number of important
and highly controversial statements about the alleged commercial
nature of the acts of the Libyan Government and NOC. Arguing that the
contractual breaches complained of arose out of the nationalization in
1973 of certain oil concessions by the Libyan Government, Judge
Duffy, citing Victory Transport,held that the defendants were immune
because "nationalization is the quintessentially sovereign act, never
viewed as having a commercial character."' 98
Judge Duffy also seemed to be heavily influenced by the foreign
195 453 F. Supp. 1097 (S.D.N.Y. 1978), af'd,592 F.2d 673 (2d Cir. 1979).
196 453 F. Supp. at 1101.
197 The court also said that the case failed to establish the "certain minimum contacts" required
by InternationalShoe v. Washington, 326 U.S. 310, 316 (1945). 453 F. Supp. at 1101.
198 453 F. Supp. at 1102. The view that nationalization is a sovereign act when made in breach
of an express agreement has been strongly challenged. See Brower, Bistline & Loomis, supranote
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policy implications of the case. The court noted that "[t]he petroleum
picture in the Middle East was. . tremendously complicated by the
outbreak of the 'Yom Kippur War' in October of 1973." "1 In response
to a claim that Libya induced NOC's alleged breach of the 1973 oil
contracts, the court noted:
It is beyond cavil that these actions by Libya were no part of a
commercial undertaking; rather, they were deliberate weapons of foreign policy,
aimed at influencing the conduct of other nations, or at least punishing
undesirable conduct. 2°°
The implications of the court's statements regarding
nationalization and foreign policy are far-reaching. The Carey court seems to be
saying that a breach of contract, which would ordinarily be regarded as
a commercial activity, becomes sovereign if it occurs pursuant to an
essentially sovereign act, such as nationalization or economic warfare.
This suggests that the "nature" of a transaction is not fixed, and can
change depending upon the temporal and political context of the act.
Judge Duffy's treatment of the nationalization and foreign policy
aspects of the Carey case reflects a consideration of all the factors
which contributed to the acts of the Libyan Government and NOC.
Instead of merely looking to the indicia of commerciality, which in a
case like Pezetel may be sufficient, Judge Duffy has realized that the
facts of Carey were so unusual that a broader inquiry was necessary.
Application of the government interest factors can be quite useful
ina case such as Carey and is consistent with Congress' intent to grant
immunity in a transaction where the presence of considerable sovereign
activity-such as nationalization and economic warfare-renders an
activity political or public in nature. The legal form of NOC, a public
corporation, manifested a strong interest in the transaction by the
Libyan government, particularly since NOC was created pursuant to
nationalization. The proximity in time of the alleged contractual breach
to the outbreak of the Yom Kippur War and the subsequent oil
embargo places the transaction in a highly political context, making the
existence of a contract less dispositive of the commercial nature of the
contract than if the transaction had had fewer political overtones.
Other factors, including retaliation, enforceability, and comity with the
United States, suggest that the suit could have impaired the relations
between the United States and Libya, ultimately harming United States
citizens and interests. Moreover, the intervention by the Libyan
Goveminent in the case to secure immunity for NOC should be accorded
weight not only because of the comity implications but also because
such intervention frequently indicates that a government views the
outcome of the case as affecting a vital national interest.
The effect of all of these factors and others that logically flow from
them may convince a court that, despite the potential unfairness to the
plaintiffs, the actual character of the actions of the Libyan Government
is not commercial and therefore ought to be granted immunity. If,
however, a court does not find the government interest factors
convincing or applicable in a particular case, it should not consider them.
They merely provide a specific list of criteria, much like section 40 of
the Restatement (Second)of the Law of ForeignRelationsof the United
States,2 ° t to which a court can turn if it cares to engage in a broader
investigation of the nature of a transaction.
The likelihood of continued state trading, and the formation of
even more nation-state cartels,2°2 raises serious and urgent questions
about how U.S. courts will treat antitrust suits against foreign states
and nation-state cartels. There is little doubt that private °3 and
stateowned 2 4 corporate cartel members are subject to the United States
an201 The Restatement provides:
Where two states have jurisdiction to prescribe and enforce rules of law and the rules they
may prescribe require inconsistent conduct upon the part of a person, each state is required
by international law to consider, in good faith, moderating the exercise of its enforcement
jurisdiction, in the light of such factors as
(a) vital national interests of each of the states,
(b) the extent and the nature of the hardship that inconsistent enforcement actions
would impose upon the person,
(c) the extent to which the required conduct is to take place in the territory of the other
(d) the nationality of the person, and
(e) the extent to which enforcement by action of either state can reasonably be expected
to achieve compliance with the rule prescribed by that state.
RESTATEMENT, supranote 107, at § 40.
202 See, e.g., CartelPhobia,NEWSWEEK, Jan. 28, 1974, at 60; Nations with Raw Materials-Can
They Gang Up on U.S.?, U.S. NEws & WORLD REP., May 6,1974, at 76; OPECforOil,CIPECfor
Copper. What Next-A B,4UPECfor Bauxite?, FORBES, Feb. 15, 1974, at 49; The New Export
Cartel,TIME, Apr. 29, 1974, at 94 (Union of Banana Exporting Countries).
203 See Timken Roller Bearing Co. v. United States, 341 U.S. 593 (1951); United States v.
American Tobacco Co., 221 U.S. 106 (1911); United States v. Aluminum Co. of America, 148 F.2d
416 (2d Cir. 1945); United States v. Watchmakers of Switz. Info. Center, Inc.,  TRADE CAS.
T 70,600 (CCH)(S.D.N.Y. 1962), order modfled,  TRADE CAS. 71,352 (CCH)(S.D.N.Y.
1965); United States v. Bayer Co., 135 F. Supp. 65 (S.D.N.Y. 1955); United States v. Holophane
Co., 119 F. Supp. 114 (S.D. Ohio 1954), aj'd, 352 U.S. 903 (1956); United States v. Imperial
Chem. Indus., Ltd., 100 F. Supp. 504 (S.D.N.Y. 1951); United States v. General Elec. Co., 82 F.
Supp. 753 (D.N.J. 1949); United States v. General Elec. Co., 80 F. Supp. 989 (S.D.N.Y. 1948);
United States v. National Lead Co., 63 F. Supp. 513 (S.D.N.Y. 1945), aj'd,332 U.S. 319 (1947);
United States v. General Dyestuff Corp., 57 F. Supp. 642 (S.D.N.Y. 1944).
204 See United States v. Deutches Kalisyndikat Gesellschaft, 31 F.2d 199 (S.D.N.Y. 1929).
The Antitrust Guide,supranote 4, at 9, states that "in general, foreign firms, including state-owned
titrust laws. Until recently the question of direct suit against foreign
government cartel members was quite unclear.2"5 The decision in
InternationalAss'nof MachinistandAerospace Workers v. Organizationof
Petroleum Exporting Countries (1AM v. OPEC), °6 which is the first
antitrust case to involve a direct suit against a foreign government,
provides an important pronouncement on the antitrust liability of the
member states that comprise OPEC.
In 1AM v. OPEC, IAM, a 900,000 member labor union which
purchases and uses oil and petroleum products in the course of its
business, charged that the well-known and powerful consortium of thirteen
petroleum producing states 20 7 violated section 1 of the Sherman Act by
conspiring to fix the price of crude oil, oil, and petroleum derivative
products sold in the United States. 20 8 IAM claimed that it had been
injured because the artificial increase in the price of crude oil, oil, and
petroleum derivative products "has been passed directly without
reduction to plaintiff and others in the United States through the use of cost
plus contracts, marketing arrangements and schemes, regulations and
other various means. ' 2 9 IAM sought monetary and injunctive
relief,2 10 begins its jurisdictional claim upon the "commercial activity"
exception to the Immunities Act, section 1605(a)(2), as well as upon the
Sherman and Clayton Acts. 2 1 l
The district court held, inter alia, that the activity in which the
OPEC member states21 2 were engaged was not commercial activity
or controlled firms, will be expected to observe the prohibitions of our antitrust laws." See also
§ 1603(d) of the Immunities Act, 28 U.S.C. § 1603(d) (1976).
205 See, e.g., Remarks of Joel Davidow, Chief Foreign Commerce Section, Antitrust Division,
U.S. Dep't of Justice, concerning the Extraterritorial Application of U.S. Antitrust Law in a
Changing World, before the Symposium on Private Investments Abroad, Southwestern Legal
Foundation (June 15, 1976). For a view that suits against OPEC and other nation-state cartels
would succeed under the antitrust laws, see Fine, supra note 5. But see Baker, Antitrust Conflicts
Between Friends.- Canadaandthe UnitedStatesin the Mid-1970s, 11 CORNELL INT'L L.J. 165, 182
206 477 F. Supp. 553 (1979), appealdocketed, No. 79-3673 (9th Cir. Oct. 24, 1979).
207 The members of OPEC named in l4M v. OPEC included the Democratic and Popular
Republic of Algeria, the Republic of Ecuador, the Gabonese Republic, the Republic of Indonesia,
the Imperial Government of Iran, the Republic of Iraq, the State of Kuwait, the Libyan Arab
Republic, the Federal Republic of Nigeria, the State of Qatar, the Kingdom of Saudi Arabia, the
State of the United Arab Emirates, and the Republic of Venezuela.
208 Complaint at 19, International Ass'n of Machinists and Aerospace Workers v. Organization
of Petroleum Exporting Countries, 447 F. Supp. 553 (1979).
210 IAM asked for damages under § 4 of the Clayton Act, 15 U.S.C. § 15 (1976), and injunctive
relief under § 16 of the Clayton Act, 15 U.S.C. § 26 (1976), specifically requesting the court to
enjoin the price-setting activities of the defendants. 477 F. Supp. at 558-59.
211 Id. at 559.
212 Early in the proceedings, OPEC, itself was dismissed from the suit because it had not been
properly served under the Immunities Act, which only applies to foreign sovereignties. Id. at 560.
within the meaning of section 1605(a)(2) of the Act and that it
consequently lacked subject matter and personal jurisdiction to try the
suit.2 13 The court characterized the nature of the activity in which the
defendants were engaged as "the establishment by a sovereign state of
the terms and conditions for the removal of a prime natural
resourceto wit, crude oil-from its territory." 214 The court then cited cases and
resolutions from domestic 15 and international2 16 law that it believed
supported the conclusion that efforts by governments to control their
natural resources are sovereign acts. Regarding the activities of the
OPEC governments, the court stated: "The defendants' control over
their oil resources is an especially sovereign function because oil, as
their primary, if not sole, revenue producing resource, is crucial to the
welfare of their nations' peoples."217 As a result, the court concluded
that the price fixing activity complained of was not commercial activity
and that the defendants, therefore, were immune from the jurisdiction
of the court.
In reaching its decision, the court in IAM v. OPECdistinguished
between the various actions of the OPEC member states. It recognized
that "through their activities as partial or total owners of these [oil]
companies, the defendant nations do engage in commercial
activities. 21 8 The court continued, however, and stated that "this does not
mean. . that all activities, even those remotely connected with these
companies, are necessarily commercial."2'19 The court concluded that
the price fixing activities of the OPEC member states were "in their
status as sovereigns, not in their status as proprietors. 2 ° The court left
open the possibility that under a different set of facts the OPEC states
might be subject to its jurisdiction.
The OPEC court seemed unsure of the difference between nature
and purpose, admitting that the standards under the Immunities Act
and its legislative history are "somewhat nebulous."' 22 ' The court
rea213 Id. at 569. Additionally, the court held that a foreign nation is not a "person" under § I of
the Sherman Act and, therefore, cannot be sued under the antitrust laws. Id. at 570-72.
214 Id.at 567.
215 Id. at 568 (citing, inter alia, Parker v. Brown, 317 U.S. 341 (1943)).
216 Id. at 567-68 (citing, inter alia,United Nations Resolution 1803 (XVII) § 1(1), the adopted
version of which declares: "The right of peoples and nations to permanent sovereignty over their
natural wealth and resources must be exercised in the interest of their national development and
of the well-being of the people of the State concerned."). G.A. Res. 1803, § 1(1), 17 U.N. GAOR,
Supp. (No. 17) 15, U.N. Doc A/5217 (1963).
217 Id. at 568.
218 Id. at 568 n.14.
219 Id. at 568-69 n.14.
220 Id. at 569 n.14.
221 Id. at 567.
Northwestern Journal of
International Law & Business
soned that when sovereigns are engaged in activity designed to control
their natural resources, such activity is of a sovereign nature. Is it not
equally true, however, that thepurpose of such sovereign activity is to
manage the exploitation of vital natural resources? The inherent
circularity of this argument may be, as mentioned above, as much a function
of the relative invalidity of the nature/purpose distinction as of the
failure of the court's reasoning. Still, the court fails to recognize the
problems inherent in the nature formulation and does not attempt to
clarify them. The court does mention that a commercial activity is one
that normally could be engaged in by a private party. 2 2 But it fails to
explain, although it might have done so convincingly, why the price
fixing activities of the OPEC member states were of a uniquely
sovereign nature, incapable of performance-at least with an equal degree of
legality or authority-by a private party.
The use of the government interest factors would have aided the
court in reaching its decision. In fact, the court seems to give effect to
various of the factors in a less systematic and structured fashion. In its
decision the court makes several references to matters which would be
relevant to a government interest analysis such as the legal form of the
transaction,22 3 comity,224 the representations of amici curiae 225 and
various experts,22 6 the complex political environment surrounding the
case,2 27 and the status of the government price fixing under the laws of
the various governments.22 8 Additional reliance on the government
interest factors might have improved the decision and provided a more
sound and readily applicable framework for future courts to follow.
The court's holding regarding jurisdiction in L4M v. OPEC is far
reaching and very important. The court could have decided the case
upon narrower grounds, such as on the fact that the plaintiff, as an
indirect purchaser, was precluded from seeking damages under the
doctrine established in Illinois Brick Co. v. Illinois.2u 9 Instead, it chose
223 The Court states, for example, that the defendants are "partial or total owners of these [oil]
companies." Id. at 568 n.14.
224 See generally id at 576 (appendix A).
225 See, e.g., id. at 567 (reference to the amicus curiae brief for the Indonesia-United States
Business Committee for the Indonesian Chamber of Commerce).
226 See, e.g., id at 568 (quotation from the testimony of court-appointed expert, M.A.
227 See generally id. at 575.
228 See, e.g., id. at 568 (excerpt from testimony of M.A. Edelman in which he states that the
OPEC governments "began their price fixing role by levying taxes on foreign companies operating
within their borders.").
229 431 U.S. 720 (1977). The OPEC court discusses Illinois Brick in 447 F. Supp. at 560-64.
to go to the heart of the sovereign immunity question. In doing so the
court seems to be saying that price fixing activities by governments qua
government are necessarily sovereign acts, repugnant perhaps, but
clearly beyond the reach of United States courts under the Immunities
Act. The resolution of such disputes must be pursued through
diplomatic channels between governments, not in the courts. 23 0 The
implications of the OPEC holding, if upheld without considerable
modification, will have a profound and lasting impact on the law of
sovereign immunity and antitrust.
67 Zakariya, supra note 6, at 490.
68 Id at 489.
69 See W. ROBSON, note 6 supra;W. THORNHILL, note 7 supra.
70 See Hochmuth , Aerospace, in BIG BUSINESS AND THE STATE, supra note 6 , at 145.
71 See Mikdashi , Aluminum in BIG BUSINESS AND THE STATE , supra note 6 , at 170.
72 See Jequier , Computers, in BIG BUSINESS AND THE STATE, supranote 6 , at 195.
73 See Wells , Automobiles, in BIG BUSINESS AND THE STATE, supranote 6 , at 255.
74 See Hayward , Steel, in BIG BUSINESS AND THE STATE, supranote 6 , at 229.
75 See generally CENTRE EUROP-EN DE L'ENTREPRISE PUBLIQUE , note 6 supra.
76 See generallyZakariya, note 6 supra.
77 GrowingShadow ofthe PublicSector, supra note 3 , at 17-18.
78 See Stason , AEC ProductionandDistributionofRadiolsotopes: State Tradingin a FreeEnterpriseEconomy , 20 VAND. L. REv. 369 ( 1967 ).
79 Id at 369, 374 - 77 .
80 Zakariya, supranote 6, at 488-89.
81 Id at 482. See The Schooner Exchange v . McFaddon , 11 U.S. (7 Cranch) 116 ( 1812 ) ; Berizzi Bros . Co. v. S.S. Pesaro, 271 U.S. 562 ( 1926 ); Ex Pare Republic of Peru, 318 U.S. 578 ( 1943 ) ; Republic of Mexico v . Hoffman , 324 U.S. 30 ( 1945 ) ; Victory Transport Inc . v. Comisaria General, 336 F.2d 354 ( 2d Cir . 1964 ), cert.denied,381 U.S. 934 ( 1965 ). See also W. FUGATE, supranote 24 , at § 3. 10 .