• The U.S. Supreme Court is set to consider whether plaintiffs asserting claims against foreign states or their agencies or instrumentalities must meet a heightened pleading standard when invoking exceptions to sovereign immunity.
• The Supreme Court will likely address whether a party seeking to invoke the Foreign Sovereign Immunities Act’s expropriation exception can meet the exception’s “commercial nexus” requirement by alleging that expropriated property was commingled with a state’s general funds.
• The Supreme Court will also likely address whether plaintiffs or defendants bear the burden to trace proceeds from expropriated property to their current location and use.

Introduction

Since 2010, Simon v. Republic of Hungary has ascended and descended the judicial ladder as federal courts have considered how to interpret and apply the “expropriation exception” of the Foreign Sovereign Immunities Act (“FSIA”). On June 24, 2024, the Supreme Court decided to review the case for a second time, granting certiorari as to the following questions:

1. Whether historical commingling of assets suffices to establish that proceeds of seized property have a commercial nexus with the United States under the expropriation exception to the FSIA.

2. Whether a plaintiff must make out a valid claim that an exception to the FSIA applies at the pleading stage, rather than merely raising a plausible inference.

3. Whether a sovereign defendant bears the burden of producing evidence to affirmatively disprove that the proceeds of property taken in violation of international law have a commercial nexus with the United States under the expropriation exception to the FSIA.

Background

Simon was brought in the U.S. District Court for the District of Columbia. 77 F.4th 1077, 1087 (D.C. Cir. 2023). The plaintiffs are individuals seeking compensation from Hungary and its state-owned railroad company for confiscating their property during the Holocaust. Id. at 1087, 1091. The case has been consolidated with Heller v. Republic of Hungary, a more recent case in which two Holocaust survivors sued Hungary seeking compensation for property confiscated from their parents and grandparents during the war. Id. at 1088.

Since the Simon plaintiffs filed their case nearly a decade-and-a-half ago, federal courts have wrestled with whether the defendants are immune from the jurisdiction of U.S. courts under the FSIA. Pursuant to that statute, foreign states, including their agencies and instrumentalities, are immune from suit in U.S. courts unless a statutory exception to sovereign immunity applies. One of the FSIA’s exceptions to sovereign immunity is the “expropriation exception,” 28 U.S.C. § 1605(a)(3). This exception applies when (1) the plaintiff’s claim puts in issue “rights in property taken in violation of international law” and (2) when there is a nexus between the expropriated property, or property exchanged for such property, and commercial activity in the United States. Simon, 77 F.4th at 1090-91.

In Simon, the parties have litigated multiple motions to dismiss on sovereign immunity grounds and multiple appeals, including a prior appeal to the Supreme Court. Id. at 1092-93. In that appeal, the Supreme Court clarified that a foreign state’s taking of property belonging to its own nationals in the context of genocide does not necessarily constitute a taking “in violation of international law” as the expropriation exception requires. Id. at 1093 (citing Fed. Republic of Germany v. Philipp, 141 S. Ct. 703, 712 (2021)). That is because the phrase “international law” as used in the exception refers to the law of property, not human rights law. Id. at 1096 (citing Philipp, 141 S. Ct. at 712). The Supreme Court remanded the case to the district court.

After remand, the district court granted the defendants’ motion to dismiss as to some of the claims but not all. Generally, the district court declined to dismiss the claims asserted by plaintiffs who alleged they were Czechoslovakian nationals at the time of the alleged takings and dismissed the claims of plaintiffs who alleged they were stateless at the time of those confiscations. Id. at 1093-94, 1099.

D.C. Circuit Decision and Circuit Splits

The D.C. Circuit largely affirmed the district court’s decision, including its denial of the motion to dismiss the claims of plaintiffs who alleged they were Czechoslovakian nationals when the defendants took their property. Id. at 1094-95, 1104. The defendants argued that the district court had applied the wrong pleading standard, but the D.C. Circuit disagreed. Id. at 1103. The D.C. Circuit concluded that when assessing whether plaintiffs have satisfied the FSIA’s exceptions to sovereign immunity, a court should apply the same pleading standard that normally applies. Id. at 1102-04. Under that standard, the plaintiff need only plead facts sufficient to state a “plausible” claim for relief.

In so holding, the D.C. Circuit rejected the defendants’ contention that a heightened pleading standard applies. The defendants based their argument on the Supreme Court’s decision, in Bolivarian Republic of Venezuela v. Helmerich & Payne Int’ll Drilling Co., that a “non-frivolous” argument for invoking an exception to sovereign immunity is insufficient to defeat a motion to dismiss. 581 U.S. 170 (2017). Though the Second Circuit has interpreted Helmerich & Payne as adopting a heightened pleading standard for FSIA claims, Rukoro v. Federal Republic of Germany, 976 F.3d 218 (2d Cir. 2020), in Simon the D.C. Circuit adopted a different view. See Simon, 77 F.4th at 1104 (“Rukoro erroneously implies that Helmerich’s requirement of a legally valid (not just nonfrivolous) legal theory equates to a more demanding standard of pleading.”).

The D.C. Circuit also split from the Second Circuit, and the Ninth Circuit, when it analyzed whether the plaintiffs’ claims satisfied the expropriation exception’s “commercial activity” nexus requirement. To meet that requirement, the expropriated property, or property exchanged for that property, must be (1) “present in the United States in connection with a commercial activity carried on in the United States by the foreign state” or (2) “owned or operated by an agency or instrumentality of the foreign state” that is “engaged in commercial activity in the United States.” Id. at 1115 (quoting 28 U.S.C. § 1605(a)(3)).

The D.C. Circuit held that the plaintiffs could satisfy this requirement by alleging that Hungary had liquidated the plaintiffs’ property, commingled the resulting cash with the general state treasury, and used the treasury to fund commercial activity in the United States. Id. at 1118. The D.C. Circuit further held that plaintiffs have no burden to trace their expropriated property to the state’s general treasury. Id. at 1119. Rather, the foreign state has the burden to prove that expropriated funds were not commingled with its current resources. Id. The D.C. Circuit’s conclusions differ from those of the Second Circuit and Ninth Circuit, which require plaintiffs to trace expropriated property to funds spent on property present in the United States. Rukoro, 976 F.3d at 225; Freund v. Societe Nationale des Chemins de fer Francais, 391 F. App’x 939 (2d Cir. 2010); Alperin v. Vatican Bank, 365 F. App’x 74, 76 (9th Cir. 2010).

Supreme Court Review

In February 2024, the defendants petitioned for certiorari, asking the Supreme Court to resolve the disagreements between the different courts of appeals, by addressing the three questions noted above. The plaintiffs agreed that the Supreme Court should review the case to resolve the circuit split and definitively decide whether commingling of funds can support applying the expropriation exception, though the plaintiffs proposed combining the three questions into a single question. The plaintiffs framed the issue as: “Whether allegations or evidence that a foreign state or its instrumentality sold stolen property and commingled the proceeds with other funds, and that the commingled funds are either in the United States in connection with the foreign state’s commercial activity in the United States, or that the instrumentality with the funds does commerce in the United States, meets the expropriation exception unless the foreign state shows that the property does not trace back to the expropriated property.” However, the Court did not adopt this framing and, instead, granted certiorari with respect to the three questions presented in the defendants’ papers.

The next step will be for the defendants, as petitioners, to submit a written brief by August 26, 2024. Then the plaintiffs, as respondents, must submit their written brief by October 11, 2024. The defendants will then have an opportunity to submit a reply brief. After the briefs have been submitted, the Court will schedule oral argument. The Court will hear the case sometime during the 2024-2025 term.

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Foley Hoag will continue to monitor this case through the Supreme Court proceedings and will provide additional updates as the case progresses.