Theo. H. Davies & Co., Ltd. v. Republic of Marshall Islands

• Decision Date: 17 November 1998
• Docket Number: No. 96-16876,96-16876
• Citation: 161 F.3d 550
• Parties: 98 Cal. Daily Op. Serv. 8442, 98 Daily Journal D.A.R. 11,743 THEO. H. DAVIES & CO., LTD., dba Pacific Machinery, Plaintiff-Appellant, v. REPUBLIC OF THE MARSHALL ISLANDS; Kwajalein Atoll Development Authority; Kwajalein Atoll Joint Utilities Resources, Defendants-Appellees, and International Bridge Construction, Inc., Defendant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 550

161 F.3d 550

98 Cal. Daily Op. Serv. 8442, 98 Daily Journal

D.A.R. 11,743

THEO. H. DAVIES & CO., LTD., dba Pacific Machinery Plaintiff-Appellant, v. REPUBLIC OF THE MARSHALL ISLANDS; Kwajalein Atoll Development Authority; Kwajalein Atoll Joint Utilities Resources, Defendants-Appellees and International Bridge Construction, Inc., Defendant.

No. 96-16876.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 16, 1998.

Decided Nov. 17, 1998.

Wesley H. Sakai, Jr., Bendet, Fidell, Sakai & Lee, Honolulu, Hawaii, for plaintiff-appellant.

James McCaffrey, San Ysidro, California, and John T. Hoshibata, Crabtree & Hoshibata, Honolulu, Hawaii, for defendants-appellees.

Thomas C. Sterling, Klemm, Blair, Sterling & Johnson, Agana, Guam, for defendant.

Appeal from the United States District Court for the District of Hawaii; Alan C. Kay, District Judge, Presiding. D.C. No. CV-95-01014-ACK/BMK.

Before: REINHARDT, NOONAN and THOMPSON, Circuit Judges.

DAVID R. THOMPSON, Circuit Judge:

This case presents the question whether instrumentalities of a foreign state conducted commercial activity within the United States which deprived them of immunity from suit under the Foreign Sovereign Immunities Act ("FSIA").

Theo. H. Davies & Co., Ltd., doing business as Pacific Machinery ("PacMac"), filed suit in Hawaii state court against the Republic of the Marshall Islands ("RMI"), Kwajalein Atoll Development Authority ("KADA"), Kwajalein Atoll Joint Utilities Resources ("KAJUR") and International Bridge & Construction, Inc. ("IBC") seeking damages for breach of an agreement relating to the overhaul of a Caterpillar generator. After removal to the United States District Court for the District of Hawaii, the district court granted the motion of defendants KADA and KAJUR to dismiss the action as to them for lack of personal jurisdiction, and denied PacMac's subsequent motion for reconsideration. PacMac appeals.

We have jurisdiction pursuant to 28 U.S.C. § 1291, and we reverse. We conclude that because KADA and KAJUR carried on commercial activity in the United States pertaining to PacMac's breach of contract claim, they are denied sovereign immunity by 28 U.S.C. § 1605(a)(2), that subject-matter jurisdiction exists pursuant to 28 U.S.C. § 1330(a), personal jurisdiction is proper under 28 U.S.C. § 1330(b), and the exercise of personal jurisdiction complies with the due process clause of the Constitution.

I FACTS

PacMac is a Hawaii corporation which does business in Honolulu, Hawaii and throughout the Pacific. The Republic of the Marshall Islands ("RMI") is a sovereign nation, KADA is an RMI statutory corporation and KAJUR is an ordinary for-profit corporation. KAJUR is 100% owned by KADA, and was formed by KADA to be the owner and operator of the Ebeye Island, Kwajalein Atoll, electrical generation and water desalinization plant. KADA and KAJUR do not contest being characterized as agencies, instrumentalities, and/or political subdivisions of RMI. IBC is an Ohio corporation based in Guam it operated the Ebeye plant under contract with KADA.

In 1990, KADA, through its agent IBC, bought a Caterpillar 3612 diesel-powered electric generator from PacMac for use in the power plant and desalinization facility in Ebeye, RMI. After the generator was installed, a dispute arose. KADA claimed the generator was defective; it did not function properly from the outset, constantly broke down, and required extensive repairs. PacMac countered that the problems were a result of faulty installation, operation and maintenance by IBC. On May 22, 1993, representatives of KADA, KAJUR, IBC and PacMac met in Guam to discuss the problems with the generator. Technical experts from IBC and PacMac disagreed about the cause of the problems but agreed that an overhaul was necessary.

At the Guam meeting, it was agreed that PacMac would be paid to overhaul the generator, and in return, PacMac would ensure that the generator would function properly. KADA then paid an initial 25% down payment toward the cost of the overhaul. On October 13, 1993 and April 19, 1994, further meetings with respect to the overhaul were held in Honolulu, Hawaii between representatives of PacMac, KADA and KAJUR.

PacMac overhauled the generator. KADA paid two installment payments for the overhaul work, but then refused to pay the balance of $149,680.43. KADA, KAJUR and IBC contended PacMac hadn't fixed the generator so that it would run to its full capacity and work properly with the desalinization unit.

When PacMac didn't get paid the balance it claimed was due, it sued the defendants in Hawaii state court. RMI removed the action to the United States District Court for the District of Hawaii, and KADA and KAJUR then moved to dismiss the complaint on the grounds of lack of personal jurisdiction, forum non conveniens, insufficiency of service of process, and failure to join an indispensable party under Federal Rule of Civil Procedure 19. RMI did not join in the motion but filed a statement of non-opposition. The district court granted the motion to dismiss. It determined it lacked personal jurisdiction over KADA and KAJUR, and did not reach the other grounds of the motion.

IBC was dismissed from the suit in the state court proceeding. With the district court's dismissal of the action as to KADA and KAJUR, the sole remaining defendant in the district court action was RMI. The district court entered a final judgment as to KADA and KAJUR pursuant to Federal Rule of Civil Procedure 54(b), and this appeal followed.

II DISCUSSION

KADA and KAJUR contend that, under the FSIA, they are entitled to immunity. If they are, the district court lacked jurisdiction, and it correctly dismissed the action as to them. The fundamental issue, therefore, might simply be stated: Did the district court have jurisdiction over KADA and KAJUR?

To state the jurisdiction issue this simply, however, fails to provide sufficient focus for the analysis. "Jurisdiction" consists of subject-matter jurisdiction and personal jurisdiction. Moreover, even if the district court had jurisdiction, its exercise of that jurisdiction must comport with the requirements of the Constitution.

Consistent with these particularized considerations, the Second Circuit provided a framework for addressing the jurisdictional inquiry in Texas Trading & Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300 (2d Cir.1981). There, Judge Kaufman, writing for the majority, stated that in a commercial case involving a claim of foreign sovereign immunity, the court should consider five questions:

1. Does the conduct the action is based upon or related to qualify as a "commercial activity"?

2. Does that commercial activity bear the relation to the cause of action and to the United States described by one of the three phrases of [28 U.S.C.] § 1605(a)(2), warranting the Court's exercise of subject matter jurisdiction under § 1330(a)?

3. Does the exercise of this congressional subject matter jurisdiction lie within the permissible limits of the "judicial power" set forth in Article III?

4. Do subject matter jurisdiction under § 1330(a) and service under § 1608 exist, thereby making personal jurisdiction proper under § 1330(b)?

5. Does the exercise of personal jurisdiction under § 1330(b) comply with the due process clause, thus making personal jurisdiction proper?

Id. at 308.

We are persuaded that the Second Circuit's analytic framework is the appropriate framework within which to consider the jurisdictional issues in this case. The first step is to recognize that jurisdiction has two separate parts: subject-matter jurisdiction and personal jurisdiction. Subject-matter jurisdiction over a foreign state, its agency or instrumentality is conferred by 28 U.S.C. § 1330(a), provided the foreign state, its agency or instrumentality is not entitled to immunity. ¹ The "most frequently relevant" exception to the grant of sovereign immunity is that set forth in 28 U.S.C. § 1605(a)(2). Texas Trading, 647 F.2d at 307. This is the relevant exception in the present case. It provides that immunity for a foreign state shall not exist when:

[An] 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.

28 U.S.C. § 1605(a)(2).

Because neither KADA nor KAJUR contests being characterized as an agency or instrumentality of RMI, subject-matter jurisdiction exists over them under section 1330(a), provided they are not entitled to sovereign immunity. Under the first clause of section 1605(a)(2), they are not entitled to sovereign immunity if PacMac's claim "is based upon a commercial activity carried on [by them] in the United States." 28 U.S.C. § 1605(a)(2).

A "commercial activity" is defined by the FSIA in subsection 1603(d), which provides:

(d) A "commercial activity" means either a regular course of commercial conduct or a particular commercial transaction or act. 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.

28 U.S.C. § 1603(d).

PacMac's claim in this case is based on a regular course of commercial conduct carried on by KADA and KAJUR in the United States. The generator purchased in this case was the third generator bought from PacMac in Hawaii for use by KADA and KAJUR at the Ebeye Power Plant. The first generator cost $206,887.00 and was bought in 1983. The second, bought in 1989, cost $265,800.00. The third, bought in 1990, cost $1,187,612.00.

Because KADA and KAJUR carried on a commercial activity in the United States within the meaning of...