Chuck Grassley

United States Senator from Iowa

Instagram

Flickr

Twitter

Facebook

Grassley Looks to Keep State-Owned Enterprises from Skirting U.S. Courts

Sep 15, 2016

WASHINGTON – As foreign governments ramp up purchases of private assets for commercial purposes in other countries, Senate Judiciary Committee Chairman Chuck Grassley of Iowa is working to make sure that these state-owned enterprises don’t attempt to skirt responsibility through the U.S. courts.    

Grassley introduced the State-owned entities Transparency and Accountability Reform (STAR) Act legislation.  Consistent with the original purpose of the Foreign Sovereign Immunities Act, the STAR Act would ensure that state-owned companies affecting American companies and consumers as market participants would have to respond to claims brought in American courts, just like any other foreign company that isn’t owned by a government.

Grassley said that some state-owned enterprises have tried to use the Foreign Sovereign Immunities Act to their advantage in the U.S. judicial system.  State-owned enterprises often have complex ownership structures and then, when facing court proceedings, claim that immunity given to foreign sovereign governments in U.S. courts is also available to the state-owned enterprise at various levels of the organization.

“While foreign direct investment in the United States is generally a good thing, we must ensure that entities, whether owned by a more traditional foreign based company or a foreign government, all play by the same rules when it comes to U.S. laws,” Grassley said.  “But when state-owned enterprises are essentially using a ‘get-out-of-jail’ free card to avoid transparency and accountability through the courts, leaving U.S. companies and consumers holding the bag, changes need to be made.”

Using U.S. law in this way can put non-government owned companies on an unfair playing field.  It gives the state-owned enterprises a leg up and doesn’t require them to operate with the same level of transparency. It also disadvantages U.S. companies and consumers, because they don’t even have the opportunity to make their case.
 
Specifically, the STAR Act would extend the jurisdiction of U.S. courts to state-owned corporate affiliates of foreign state-owned companies insofar as their commercial activities are concerned.  The bill wouldn’t create any additional substantive causes of action against these foreign state-owned companies.  Instead it would mean only that a foreign state-owned company would have to respond to the claims brought by American companies and consumers, just like any other foreign company that isn’t owned by a government.

Grassley’s statement on the Senate floor upon introduction of the bill is below.

 


Prepared Floor Statement of Senator Chuck Grassley of Iowa
Chairman, Senate Judiciary Committee
The State-Owned Entities Transparency and Accountability Reform (STAR) Act of 2016
Wednesday, September 14, 2016

 

Mr. President,

I’ve mentioned before that I’ve been paying attention to foreign state-owned companies’ growing investments in American companies and commercial markets.  I’d like to spend a few minutes discussing that issue today.

It’s becoming increasingly clear that foreign state-owned companies are highly involved in international commerce and competing with companies that are privately owned by shareholders, not governments.  This trend is part and parcel of globalization.  While there are some obvious benefits to globalization, we also need to be aware of the challenges it may bring with it, and I think this is one of those.

To give one example, I’ve seen this trend at work in the agricultural sector.  ChemChina, a Chinese state-owned company, is currently working on a deal to buy the Swiss-based seed company, Syngenta.  About a third of Syngenta’s revenue comes from North America—meaning the company is heavily involved with American farmers, including Iowans—and that’s why I’m interested in the transaction.

I’ve already been considering the approval aspect of this proposed merger.  Senator Stabenow and I asked the Committee on Foreign Investment in the United States to review thoroughly the proposed Syngenta acquisition with the Department of Agriculture’s help.  We raised the issue because, as I’ve said before, protecting the safety and integrity of our food system is a national security imperative.   

Now there’s another aspect of this issue I’d like to focus on today.  Consider this the flip-side of the approval question.  As their involvement in international commerce grows, how can we ensure that foreign state-owned companies are held to the same standards and requirements as their non-state-owned counterparts.

First consider two age-old principles of international law.  One is that American courts don’t exercise jurisdiction over foreign governments as a matter of comity and respect for equally independent sovereigns.  This is called “foreign sovereign immunity.”  The second is that when foreign governments do in fact enter into commerce and behave like market participants—conducting a state-owned business, for example—they’re not entitled to foreign sovereign immunity because they’re no longer acting as a sovereign, but rather as a business.  In that case they should be treated just like any other market participant.  This is called the “commercial activity exception” to the principle of foreign sovereign immunity.  Congress codified both of these age-old principles in the Foreign Sovereign Immunities Act of 1976.

These principles are well and good, but I’m concerned that, in some cases, they may not have their intended effects in today’s global marketplace.

Some foreign state-owned companies have recently used the defense of foreign sovereign immunity—the principle that a foreign government can’t be sued in American courts—as a litigation tactic to avoid claims by American consumers and companies that non-state-owned foreign companies would have to answer.  In some cases, foreign state-owned corporate parent companies have succeeded in escaping Americans’ claims.  They’ve done this by arguing that the entity conducted commercial activities only through a particular subsidiary—not a parent company often closer to the foreign sovereign.  Unless a plaintiff—which may be an American company or consumer—is able to show complete control of the subsidiary by the parent company, the parent company is able to get out of court before the plaintiffs can even try to make their case.

This results in two problems.  First, there’s an unequal playing field where state-owned foreign companies benefit from a defense not available to non-state-owned companies.  And second, there’s an uphill battle for American companies and consumers seeking to sue state-owned entities as opposed to non-state-owned entities.  When a foreign state-owned entity raises the defense of foreign sovereign immunity, American companies and consumers don’t even get the chance to prove their case.

Consider the example I talked about a few months ago.  American plaintiffs brought claims against Chinese manufacturers of much of the drywall used to rebuild the Gulf Coast after Hurricanes Katrina and Rita.  The drywall in question was manufactured by two Chinese companies—one owned by a German parent and one owned by a Chinese state-owned parent company. 

The court considering these plaintiffs’ claims had this to say: “In stark contrast to the straightforwardness with which the . . . litigation proceeded against the [German] defendants, the litigation against the Chinese entities has taken a different course.”  The German, non-state-owned parent company appeared in court and participated in a bellwether trial where plaintiffs were allowed to try to make out their cases. 

The manufacturer with a Chinese state-owned parent “failed timely to answer or otherwise enter an appearance” in court—and didn’t do so for nearly two years.  In fact, it waited until the court had already entered a judgment against it.  Only then did the Chinese state-owned company finally appear in court.  And when it did, it argued that it was immune from suit in the United States because it was a state-owned company.  After approximately six years of litigation, it ultimately succeeded in its request for dismissal.  In contrast to the German parent company, the plaintiffs didn’t have a chance to try to prove up their case against the Chinese parent company merely because it happened to be owned by a foreign government.  I think that’s a problem.
 
To address these issues, I’m proposing a modest fix to the Foreign Sovereign Immunities Act.  This change would extend the jurisdiction of United States courts to state-owned corporate affiliates of foreign state-owned companies insofar as their commercial activities are concerned.  It wouldn’t create any additional substantive causes of action against these foreign state-owned companies.  Instead, it would mean only that a foreign state-owned company would have to respond to the claims brought by American companies and consumers, just like any other foreign company that isn’t owned by a government.

The fix has two main results—correcting the problems I just mentioned.  First, it levels the playing field between foreign state-owned and foreign private companies by making both subject to suit in the United States on the same footing, as the “commercial activity exception” originally contemplated.  Second, it brings clarity to the sometimes opaque structure of foreign state-owned enterprises and provides American companies and consumers the chance to prove their case against these companies just as against private companies.

In an age when sovereign owned entities, with increasingly complex structures, are interacting with American companies and consumers more than ever, it’s appropriate to re-examine the “commercial activity” exception and to update it.  We have to make sure it’s working as it was designed and historically understood.

-30-