Manuel Terenkian v. The Republic of Iraq

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MANUEL KEVORK TERENKIAN; 

PENTONVILLE DEVELOPERS, LTD.;

MARBLEARCH TRADING, LTD., No. 10-56708

Plaintiffs-Appellees, D.C. No.

v.  2:03-cv-05485-

THE REPUBLIC OF IRAQ; THE CBM-SH

REPUBLIC OF IRAQ, by and through OPINION

State Oil Marketing Organization,

Defendants-Appellants.



Appeal from the United States District Court

for the Central District of California

Consuelo B. Marshall, Senior District Judge, Presiding

Argued and Submitted

December 6, 2011—Pasadena, California

Filed July 16, 2012

Before: John T. Noonan, Ronald M. Gould, and

Sandra S. Ikuta, Circuit Judges.

Opinion by Judge Ikuta;

Dissent by Judge Noonan

8131

8134 TERENKIAN v. REPUBLIC OF IRAQ

COUNSEL

Edward L. Powers (argued), Zukerman Gore Brandeis &

Crossman, LLP, New York, New York; Susan L. Hoffman,

Robert A. Brundage, Bingham McCutchen, LLP, Los Ange-

les, California, for appellant Republic of Iraq.

Melinda W. Ebelhar (argued), Edward D. Vaisbort, G. David

Rubin, Litchfield Cavo LLP, Pasadena, California; Alan

Gura, Gura & Possessky, PLLC, Alexandria, Virginia, for

TERENKIAN v. REPUBLIC OF IRAQ 8135

appellees Pentonville Developers, Ltd. and Marblearch Trad-

ing, Ltd.

OPINION

IKUTA, Circuit Judge:

Pentonville Developers, Ltd., and Marblearch Trading,

Ltd., two Cyprus oil brokerage companies, sued the Republic

of Iraq for unilaterally terminating two contracts for the pur-

chase and sale of Iraqi oil. The district court held it had sub-

ject matter jurisdiction to hear this action notwithstanding

Iraq’s assertion of sovereign immunity under the Foreign Sov-

ereign Immunities Act (FSIA), 28 U.S.C. § 1602 et seq.,

because the lawsuit fell within the “commercial exception” to

that immunity. Because the lawsuit is not based upon com-

mercial activity by Iraq in the United States nor upon an act

in connection with such commercial activity having a direct

effect in the United States, see 28 U.S.C. § 1605(a)(2), we

hold that the district court erred in denying Iraq’s motion to

dismiss for lack of subject matter jurisdiction.

I

Pentonville Developers, Ltd., and Marblearch Trading,

Ltd., are oil brokerage companies that are headquartered in

and formed under the laws of Cyprus. Manuel Terenkian is

the president and sole shareholder of both companies. Begin-

ning in 2000, Pentonville and Marblearch commenced negoti-

ations with Iraq under the auspices of the United Nations Oil

for Food Program to enter into transactions for the purchase

and sale of Iraqi oil.1

1

The Oil for Food Program was a by-product of the United Nations

Security Council’s imposition of an international trade embargo on Iraq as

a sanction for its invasion of Kuwait. The trade embargo had a damaging

8136 TERENKIAN v. REPUBLIC OF IRAQ

In November 2000, pursuant to the Oil for Food Program

requirements, Pentonville entered into a contract to purchase

oil from the State Oil Marketing Organization (SOMO), a

company formed under the laws of and wholly owned by the

Republic of Iraq. A few months later, Marblearch also entered

a contract to purchase oil from SOMO. As specified in the

contracts, Pentonville agreed to purchase one million barrels

of Kirkuk crude oil for the “Europe” market and two million

barrels of Basrah light crude oil for the “USA/Far East” mar-

ket. Marblearch agreed to purchase two million barrels of Kir-

kuk crude oil for “Europe and/or U.S.A.” The contracts were

to be performed in Iraq or Turkey, where title to the crude oil

would pass to the purchaser. Pentonville and Marblearch

agreed that payment for each cargo of crude oil would be

made from the proceeds of an irrevocable documentary letter

of credit directly into a United Nations escrow account. The

contracts additionally specified that Pentonville and Marble-

arch would process the oil in their own refineries; the compa-

nies could use the refineries of third parties only with

SOMO’s prior approval. Moreover, any breach of this obliga-

tion would constitute a default for which SOMO could termi-

nate the contracts. Finally, the contracts provided for

arbitration in accordance with the rules of the International

Chamber of Commerce to settle any disputes arising from the

contracts, and designated the place of arbitration as Baghdad

effect on Iraq’s population. To ameliorate the worsening humanitarian sit-

uation resulting from this embargo, the United Nations Security Council

subsequently passed a resolution establishing an Oil for Food Program

administered by a United Nations committee. This program authorized

Iraq to sell oil and petroleum products to third parties, notwithstanding the

embargo, so long as all revenues from these sales were deposited in a

United Nations escrow account maintained by Banque Nationale de Paris,

S.A., in New York. The funds could then be used to purchase goods that

were necessary for the humanitarian needs of the Iraqi people. To ensure

that the oil revenues would be used only for such humanitarian purposes,

all transactions under the Oil for Food Program required the United

Nations committee’s oversight and approval. See S.C. Res. 986, U.N. Doc.

S/RES/986 (Apr. 14, 1995).

TERENKIAN v. REPUBLIC OF IRAQ 8137

“or any other place mutually agreed upon.” These contracts

were duly approved by the United Nations committee super-

vising the Oil for Food Program.

In July 2003, Pentonville, Marblearch, and Terenkian (col-

lectively referred to here as the plaintiffs) filed a complaint

against the Republic of Iraq by and through SOMO. As

amended in May 2007, the complaint alleged that after the

Pentonville contract had been executed at the Permanent Mis-

sion of Cyprus to the United Nations in New York, Iraqi offi-

cials demanded that Pentonville pay SOMO additional fees

that were not required by the contract. When Pentonville

refused to make these payments, SOMO unilaterally canceled

the contract. After Marblearch subsequently entered into a

substantially similar contract, also executed at the Cyprus

Mission in New York, the same scenario played out: Iraqi

officials demanded additional payments, which Marblearch

refused, and SOMO again canceled the contract.2

Based on these allegations, the plaintiffs filed a complaint

claiming that Iraq and SOMO breached their contracts with

Pentonville and Marblearch, causing Pentonville to lose no

less than $3,750,000 in brokerage fees and Marblearch to lose

no less than $2.5 million in brokerage fees.

The complaint also sets forth the alleged basis of the dis-

trict court’s subject matter jurisdiction over the Republic of

Iraq, which plaintiffs alleged was the actual defendant in the

suit. The “sole basis” for United States federal courts to

obtain jurisdiction over a foreign state is the FSIA. Argentine

Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434

2

The complaint further alleges that, in retaliation for this refusal to pay

additional fees, Iraq instituted charges of criminal fraud against Terenkian,

who in September 2002, was taken captive in Syria and imprisoned pend-

ing extradition to Iraq. Terenkian was released on $30,000 bail after 93

days of imprisonment, whereupon he escaped Syria, thus forfeiting the

bail money. Terenkian’s wrongful imprisonment claim based on these

allegations is not before us.

8138 TERENKIAN v. REPUBLIC OF IRAQ

(1989). The FSIA “establishes a comprehensive framework

for determining whether a court in this country, state or fed-

eral, may exercise jurisdiction over a foreign state.” Republic

of Arg. v. Weltover, Inc., 504 U.S. 607, 610 (1992). Under

§ 1604 of the FSIA, “a foreign state shall be immune from the

jurisdiction of the courts of the United States and of the States

except as provided” in various exceptions.

Because the plaintiffs aimed their action at Iraq, they had

the preliminary burden of establishing that Iraq was not enti-

tled to immunity. See Meadows v. Dominican Republic, 817

F.2d 517, 522 (9th Cir. 1987). In an effort to do so, the com-

plaint alleged that the “commercial exception” to sovereign

immunity, set forth in § 1605(a)(2), was applicable. Section

1605(a)(2) 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—

....

(2) in which the action is based [1] upon a commer-

cial activity carried on in the United States by the

foreign state; or [2] upon an act performed in the

United States in connection with a commercial activ-

ity of the foreign state elsewhere; or [3] upon an act

outside the territory of the United States in connec-

tion with a commercial activity of the foreign state

elsewhere and that act causes a direct effect in the

United States[.]

Courts have construed this commercial activity provision to

have three independent clauses, and have used different

criteria for each of the three separate clauses to assess a

claimed exception. See, e.g., Am. W. Airlines, Inc. v. GPA

Grp., 877 F.2d 793, 796-97 (9th Cir. 1989) (applying a

“nexus” requirement to the first clause); Siderman de Blake v.

TERENKIAN v. REPUBLIC OF IRAQ 8139

Republic of Arg., 965 F.2d 699, 709 (9th Cir. 1992) (applying

a “material connection” requirement to the second clause);

Adler v. Fed. Republic of Nigeria, 107 F.3d 720, 726-27 &

n.4 (9th Cir. 1997) (applying a “legally significant acts” test

to the third clause). Citing only the third clause, the complaint

alleged that the plaintiffs may seek monetary damages from

Iraq because it conducted “an act outside the territory of the

United States in connection with a commercial activity of the

foreign state elsewhere and that act cause[d] a direct effect in

the United States.” § 1605(a)(2). In their subsequent motion

for a default judgment, the plaintiffs argued that the district

court had jurisdiction “because the contracts in this action

contemplated the purchase of oil, some of which was intended

for distribution in the United States,” meaning that “Iraq’s

unilateral cancellation of the contracts resulted in a ‘direct

effect’ in the United States.”

After various delays,3 Iraq brought a motion to dismiss for

lack of subject matter jurisdiction on the ground that the

“commercial activity” exception to sovereign immunity under

the third clause of § 1605(a)(2) was not applicable. Iraq based

this assertion on two arguments: first, that Iraq was not a party

to the Pentonville and Marblearch contracts, and second, that

the alleged breaches of contract did not have a “direct effect”

in the United States because SOMO’s place of performance

under the contract was Iraq (where the oil would be delivered

to the plaintiffs’ ship). Furthermore, Iraq argued, there was no

contractual requirement or evidence that any of the oil would

be sold to customers in the United States, and indeed,

Terenkian himself had acknowledged that the oil was to be

delivered to an Italian refinery. In support of this motion to

3

The docket reflects several lengthy delays caused by Iraq’s failure to

respond to the complaint, resulting in the district court’s entry of two

default judgments against Iraq. On Iraq’s subsequent motions, the district

court vacated the entries of default. Although the plaintiffs argued before

the district court that Iraq had not met its burden of establishing that it was

entitled to relief from default, the parties have not raised this issue on

appeal.

8140 TERENKIAN v. REPUBLIC OF IRAQ

dismiss, Iraq submitted copies of the contracts, as well as dec-

larations and other documentary evidence. Iraq further argued

that the breach of contract actions should be dismissed

because neither Pentonville nor Marblearch had arbitrated the

claim as required by the contracts at issue.

In their opposition to the motion to dismiss, the plaintiffs

raised two new bases for abrogating Iraq’s sovereign immu-

nity. Relying for the first time on the first clause of

§ 1605(a)(2), the plaintiffs argued that because both contracts

at issue were executed in New York, their claims arose out of

a commercial activity undertaken by the foreign state which

was carried on in the United States. They also argued, again

for the first time, that because payment was to be made into

the United Nations escrow account at the Banque Nationale

de Paris, Iraq’s alleged breach of the contracts had the “direct

effect” that payments were not deposited in a New York bank.

With respect to Iraq’s assertion of entitlement to arbitration,

the plaintiffs argued that arbitration in Baghdad would be

impossible and/or commercially impracticable because

Terenkian was facing death threats in Iraq. They further

argued that, because Iraq is not a signatory to the Convention

on the Recognition and Enforcement of Foreign Arbitral

Awards, the district court could not compel arbitration in Iraq.

The district court denied Iraq’s motion to dismiss. After

concluding that Iraq was a proper defendant (an issue not on

appeal), the district court ruled that Iraq was not entitled to

sovereign immunity because the “commercial activity” excep-

tion applied: namely, the lawsuit was based on “an act outside

the territory of the United States in connection with a com-

mercial activity of the foreign state elsewhere and that act

causes a direct effect in the United States.” § 1605(a)(2). The

district court held that because the contracts required that pay-

ment be made in New York, the breach of those contracts

constituted a commercial activity that had a direct effect in the

United States. Concluding it had subject matter jurisdiction on

this basis, the district court did not reach the plaintiff’s alter-

TERENKIAN v. REPUBLIC OF IRAQ 8141

nate arguments based on execution of the contracts or the

eventual delivery of some of the oil to the United States. The

district court also denied Iraq’s motion to dismiss for failure

to arbitrate on the ground that the parties had not established

that the claims were subject to arbitration at all.

Finally, the district court held that venue in the Southern

District of California was not proper and transferred venue to

the District of Columbia. See 28 U.S.C. § 1391(f) (providing

for venue in the District of Columbia for a civil action against

a foreign state when there is no judicial district in which a

substantial part of the events giving rise to the claim occurred).4

On appeal, Iraq argues that the district court lacked subject

matter jurisdiction, or alternatively, that the case should have

been dismissed for failure to arbitrate. Plaintiffs oppose Iraq’s

arguments on the merits, and they further argue that the

appeal is time-barred because the notice of appeal was not

filed until after the case was docketed in the District Court for

the District of Columbia. See Wilson v. City of San Jose, 111

F.3d 688, 692 (9th Cir. 1997); Lou v. Belzberg, 834 F.2d 730,

733 (9th Cir. 1987); In re Donald, 328 B.R. 192, 197 (B.A.P.

9th Cir. 2005).

II

We begin by addressing Iraq’s jurisdictional argument. See

Sinochem Int’l Co. v. Malay. Int’l Shipping Corp., 549 U.S.

422, 431 (2007) (“[T]here is no mandatory sequencing of

jurisdictional issues.” (quoting Ruhrgas AG v. Marathon Oil

Co., 526 U.S. 574, 584 (1999)) (internal quotation marks

omitted)).

4

Before bringing this appeal, Iraq appealed to the Court of Appeals for

the District of Columbia, which transferred the case to us “without preju-

dice to the authority of [the Ninth Circuit] to determine its own jurisdic-

tion.” See also 28 U.S.C. § 1631 (authorizing transfer “in the interest of

justice” of an appeal brought in the wrong court and providing that an oth-

erwise timely Notice of Appeal will retain its timeliness).

8142 TERENKIAN v. REPUBLIC OF IRAQ

A district court’s denial of a motion to dismiss for lack of

subject matter jurisdiction is subject to interlocutory appeal

under the collateral order doctrine. Phaneuf v. Republic of

Indon., 106 F.3d 302, 304 (9th Cir. 1997). Under the burden-

shifting framework of the FSIA, the defendant must establish

a prima facie case “that it is a sovereign state and that the

plaintiff’s claim arises out of a public act.” Siderman, 965

F.2d at 708 n.9 (quoting Meadows, 817 F.2d at 523) (internal

quotation marks omitted). A presumption then arises “that the

foreign state is protected by immunity.” Id. Once the plaintiff

has met the threshold of alleging that the defendant was not

entitled to immunity due to one of the FSIA exceptions, see

Meadows, 817 F.2d at 522, the defendant may make either a

facial or factual challenge to the district court’s subject matter

jurisdiction, see Doe v. Holy See, 557 F.3d 1066, 1073 (9th

Cir. 2009) (differentiating between facial attacks and fact-

based challenges to subject matter jurisdiction).

Where a defendant claims only “that the allegations con-

tained in a complaint are insufficient on their face to invoke

federal jurisdiction,” Safe Air for Everyone v. Meyer, 373

F.3d 1035, 1039 (9th Cir. 2004), we treat the challenge as

“any other motion to dismiss on the pleadings for lack of

jurisdiction,” Holy See, 557 F.3d at 1073. We therefore deter-

mine whether the complaint alleges “sufficient factual matter,

accepted as true, to ‘state a claim to relief that is plausible on

its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quot-

ing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007));

see also Colony Cove Props., LLC v. City of Carson, 640 F.3d

948, 955 (9th Cir. 2011) (applying Iqbal’s standards to a

motion to dismiss for lack of subject matter jurisdiction and

for failure to state a claim).

If the defendant instead makes a factual attack on subject

matter jurisdiction, the defendant may introduce testimony,

affidavits, or other evidence to “dispute[ ] the truth of the alle-

gations that, by themselves, would otherwise invoke federal

jurisdiction.” Safe Air for Everyone, 373 F.3d at 1039. Under

TERENKIAN v. REPUBLIC OF IRAQ 8143

these circumstances, “no presumptive truthfulness attaches to

plaintiff’s allegations.” Holy See, 557 F.3d at 1073 (quoting

Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987))

(internal quotation marks omitted). “The plaintiff then has the

burden of going forward with the evidence by offering proof

that one of the FSIA exemptions applies.” Id. (quoting Mead-

ows); see also Gates v. Victor Fine Foods, 54 F.3d 1457,

1463 (9th Cir. 1995). Once the plaintiff has presented such

evidence, the defendant bears the burden of proving by a pre-

ponderance of the evidence that the exception to sovereign

immunity does not apply. Siderman, 965 F.2d at 708 n.9

(quoting Meadows). Even where the material facts are dis-

puted, the trial court may still evaluate the merits of the juris-

dictional claims. See Holy See, 557 F.3d at 1073; see also

William W. Schwarzer, A. Wallace Tashima & James M.

Wagstaffe, California Practice Guide: Federal Civil Procedure

Before Trial ¶ 9:104, at 9-31 (The Rutter Group 2009).

In this case, Iraq made fact-based challenges to plaintiffs’

assertion of jurisdiction, and both parties submitted documen-

tary evidence to the district court. On appeal, we must deter-

mine whether plaintiffs have carried their burden of offering

proof that one or more FSIA exceptions to sovereign immu-

nity are applicable, and Iraq has carried its burden of proving

that no exception identified by the plaintiffs is applicable. We

review the district court’s legal rulings de novo and its factual

findings for clear error. See Embassy of the Arab Republic of

Egypt v. Lasheen, 603 F.3d 1166, 1170 (9th Cir. 2010); Adler,

107 F.3d at 723.

III

Plaintiffs relied on the first and third clauses of the “com-

mercial activity” exception to sovereign immunity as set forth

in § 1605(a)(2). We begin by setting forth the frameworks for

evaluating the applicability of these exceptions.

8144 TERENKIAN v. REPUBLIC OF IRAQ

A

[1] The first clause of § 1605(a)(2) makes an exception to

a foreign state’s sovereign immunity in a case “in which the

action is based upon a commercial activity carried on in the

United States by the foreign state.” The FSIA provides defini-

tions for some of these key terms. A “commercial activity car-

ried on in the United States by a foreign state” means a

commercial activity “having substantial contact with the

United States.” 28 U.S.C. § 1603(e). A “commercial activity”

is “either a regular course of commercial conduct or a particu-

lar commercial transaction or act.” 28 U.S.C. § 1603(d). The

Supreme Court has held that a foreign state engages in com-

mercial activity only where it exercises “those powers that

can also be exercised by private citizens,” or when it acts “in

the manner of a private player within the market,” but not

when it exercises those powers “peculiar to sovereigns.”

Saudi Arabia v. Nelson, 507 U.S. 349, 360 (1993) (quoting

Weltover, 504 U.S. at 614) (internal quotation marks omitted).

In determining whether an activity is “commercial,” a court

must determine the activity’s commercial character “by refer-

ence to the nature of the course of conduct or particular trans-

action or act, rather than by reference to its purpose.” Id. at

359 (quoting § 1603(d)) (internal quotation marks omitted).

“Thus the relevant question ‘is whether the particular actions

that the foreign state performs . . . are the type of actions by

which a private party engages in trade and traffic or com-

merce.’ ” Lasheen, 603 F.3d at 1170 (alteration in original)

(quoting Weltover, 504 U.S. at 614). There is no dispute that

the contracts in question are commercial in nature.

The courts have also explained what it means for an action

to be “based upon” a commercial activity. According to the

Supreme Court, the phrase “based upon” is “read most natu-

rally to mean those elements of a claim that, if proven, would

entitle a plaintiff to relief under his theory of the case.” Nel-

son, 507 U.S. at 357; see also id. (“An action is based upon

the elements that prove the claim, no more and no less.”

TERENKIAN v. REPUBLIC OF IRAQ 8145

(quoting Santos v. Compagnie Nationale Air France, 934

F.2d 890, 893 (7th Cir. 1991) (internal quotation marks omit-

ted))). Thus a court must begin its analysis “by identifying the

particular conduct” on which the plaintiff’s legal action is

“based.” Id. at 356. That “particular conduct” must be a

“commercial activity” as defined by the Act, although “the

first clause of § 1605(a)(2) [does not] necessarily require[ ]

that each and every element of a claim be commercial activity

by a foreign state.” Id. at 358 n.4.

Finally, the requirement that the commercial activity be

“carried on in the United States,” § 1605(a)(2), means that the

lawsuit itself must be based upon the foreign sovereign’s

commercial activity within the United States. Even if the for-

eign sovereign regularly conducts other commercial activity

in the United States, if that activity “has no connection with,

or relationship to, the conduct which gave rise to plaintiff’s

cause of action” it “will not suffice” to abrogate sovereign

immunity under this first clause. Gen. Elec. Capital Corp. v.

Grossman, 991 F.2d 1376, 1383 (8th Cir. 1993) (quoting

Gould, Inc. v. Mitsui Mining & Smelting Co., 947 F.2d 218,

221 (6th Cir. 1991)) (internal quotation marks omitted); see

also Am. W. Airlines, 877 F.2d at 797 (upholding sovereign

immunity because the commercial acts in the United States

were not the “specific acts that form the basis of the suit”

(quoting Joseph v. Office of the Consulate Gen., 830 F.2d

1018, 1023 (9th Cir. 1987)) (internal quotation marks omit-

ted)).

Moreover, the commercial activities in the United States

must be significant ones. See Grossman, 991 F.2d at 1384.

For example, while a foreign nation’s contract negotiations,

including a meeting, and telephone and wire communications,

are commercial activity in the United States, they are insuffi-

ciently significant to meet this exception. See id. at 1383-84.

Similarly, where a plaintiff’s claim was based on activities in

Saudi Arabia (and sounded in tort rather than contract), the

plaintiff could not abrogate the foreign nation’s sovereign

8146 TERENKIAN v. REPUBLIC OF IRAQ

immunity under the first clause of the FSIA by pointing to

preliminary commercial activities in the United States. See

Nelson, 507 U.S. at 357-58.

[2] In sum, in order for a foreign state to lose its sovereign

immunity under the first clause of § 1605(a)(2): (1) the for-

eign state’s commercial activity in the United States must be

the basis of (i.e., a necessary element of) the plaintiff’s claim;

and (2) that commercial activity must be significant and have

substantial contact with the United States.

B

[3] The third clause of § 1605(a)(2) creates an exception to

a foreign state’s sovereign immunity in a case in which the

plaintiff’s lawsuit is based “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.” Instead of requiring that the legal

action be “based upon” commercial activity, as in the first

clause, this clause allows the legal action to be based on an

act outside of the United States so long as the act was taken

“in connection with a commercial activity of the foreign

state.”

In analyzing the third clause, courts have focused on the

language requiring that the act which forms the basis of the

lawsuit cause “a direct effect in the United States.” In inter-

preting this language in Weltover, the Supreme Court held

that an effect is “direct” “if it follows ‘as an immediate conse-

quence of the defendant’s . . . activity.’ ” 504 U.S. at 618

(alteration in original) (quoting Weltover, Inc. v. Republic of

Arg., 941 F.2d 145, 152 (2d Cir. 1991)); see also Adler, 107

F.3d at 726-27.5 We have explained that a consequence is

5

In reaching this conclusion, the Court rejected earlier judicial interpre-

tations, which had held based on legislative history that an act must be

both “substantial” and “foreseeable” in order to have a “direct effect” in

the United States. Weltover, 504 U.S. at 617-18.

TERENKIAN v. REPUBLIC OF IRAQ 8147

“immediate” if no intervening act breaks “the chain of causa-

tion leading from the asserted wrongful act to its impact in the

United States.” Lyon v. Agusta S.P.A., 252 F.3d 1078, 1083

(9th Cir. 2001); see also id. at 1083 n.3 (holding that the rele-

vant meaning of “immediate” in this context is “ ‘acting or

being without the intervention of another object, cause, or

agency’ ” (quoting Webster’s Third New International Dictio-

nary 1129 (1986)); Guirlando v. T.C. Ziraat Bankasi A.S., 602

F.3d 69, 75 (2d Cir. 2010) (stating that “ ‘the requisite imme-

diacy’ is lacking where the alleged effect ‘depend[s] crucially

on variables independent of’ the conduct of the foreign state”

(alteration in original) (quoting Virtual Countries, Inc. v.

Republic of S. Afr., 300 F.3d 230, 238 (2d Cir. 2002))).

Applying this rule, the D.C. Circuit considered a breach-of-

contract claim brought by Cruise Connections, a U.S. corpo-

ration, against Canada. See Cruise Connections Charter

Mgmt. 1, LP v. Att’y Gen. of Can., 600 F.3d 661, 662-63

(D.C. Cir. 2010). Cruise Connections had entered into a con-

tract with Canada to provide three cruise ships for housing

Canadian security staff near Vancouver during the 2010 Win-

ter Olympics, but just when Cruise Connections was in the

final stages of negotiating subcontracts, Canada canceled the

contract. See id. at 663. Cruise Connections alleged that this

breach caused it to lose revenue it would have obtained from

the subcontractors that supplied the cruise ships and from a

travel agency that would have chartered one of the ships. See

id. Cruise Connections also claimed that the breach resulted

in lost revenues from sales that would have been made to pas-

sengers on those ships. See id. Analyzing Canada’s asserted

sovereign immunity under the FSIA, the D.C. Circuit held

that the lost revenues from the cruise lines and travel agency

constituted “direct effects” of the breach because “no inter-

vening event stood between [the foreign sovereign’s] termina-

tion of the contract and the lost revenues” from third parties.

Id. at 664. On the other hand, the court suggested that lost

revenues from shipboard sales were not “direct effects”

because such losses, which depended entirely on the decisions

8148 TERENKIAN v. REPUBLIC OF IRAQ

of individual purchasers, “might be regarded as subject to an

‘intervening event’ independent of [the foreign sovereign’s]

cancellation of the contract.” Id.

Satisfying the requirement that an effect be “immediate”

and thus “direct” is not sufficient by itself to satisfy the “di-

rect effect” prong of the commercial activity exception, how-

ever, because the effect must also be more than “purely

trivial” or “remote and attenuated.” Weltover, 504 U.S. at 618.

In considering this factor, a court must “ ‘look to the place

where legally significant acts giving rise to the claim

occurred’ in determining the place where a direct effect may

be said to be located.” Adler, 107 F.3d at 727 (quoting United

World Trade, Inc. v. Mangyshlakneft Oil Prod. Ass’n, 33 F.3d

1232, 1239 (10th Cir. 1994)); see also id. at 727 n.4 (citing

cases and noting that the Second, Tenth, and Eighth Circuits

apply the “legally significant acts” test); Gregorian v. Izves-

tia, 871 F.2d 1515, 1527 (9th Cir. 1989) (to establish a direct

effect, the plaintiff must show that “ ‘something legally sig-

nificant actually happened in the U.S.’ ” (quoting Zedan v.

Kingdom of Saudi Arabia, 849 F.2d 1511, 1515 (D.C. Cir.

1988))).

Following this reasoning, courts have held that a mere tan-

gential effect in the United States from a breach that occurs

elsewhere does not constitute a “direct effect” as contem-

plated in the third clause of § 1605(a)(2). See, e.g., United

World Trade, 33 F.3d at 1237-39 (finding no direct effect

when a foreign nation’s cancellation of an otherwise non-U.S.

contract meant that foreign currency no longer needed to be

transferred to a U.S. bank to be converted into dollars); see

also Adler, 107 F.3d at 726-27 (noting that “mere financial

loss by a person—individual or corporate—in the U.S. is not,

in itself, sufficient to constitute a ‘direct effect’ ”). As the

Tenth Circuit explained, “[t]he requirement that an effect be

‘direct’ indicates that Congress did not intend to provide juris-

diction whenever the ripples caused by an overseas transac-

tion manage eventually to reach the shores of the United

TERENKIAN v. REPUBLIC OF IRAQ 8149

States.” United World Trade, 33 F.3d at 1238. Moreover, we

may not interpret § 1605(a)(2) “in a manner that would give

the district courts jurisdiction over virtually any suit arising

out of an overseas transaction in which an American citizen

claims to have suffered a loss from the acts of a foreign state.”

Id. at 1239.

On the other hand, when a foreign sovereign breaches a

contract by failing to complete a contractual obligation that

must be performed in the United States, such a breach is suffi-

cient to be a direct effect in the United States. See, e.g., Welt-

over, 504 U.S. at 618-19. In Weltover, Argentina issued bonds

and agreed to repay certain bondholders by making deposits

into those bondholders’ New York banks as the bonds

matured. Id. at 609-10. When Argentina breached its obliga-

tion to make those payments, the bondholders sued in New

York district court. Id. at 610. The Supreme Court held that

Argentina’s act of rescheduling the maturity dates on the

bonds, which was the basis of the plaintiffs’ breach of con-

tract action in the United States, had a direct, non-trivial effect

in the United States. Id. at 618-19. As the Court explained,

“[b]ecause New York was . . . the place of performance for

Argentina’s ultimate contractual obligations, the rescheduling

of those obligations necessarily had a ‘direct effect’ in the

United States: Money that was supposed to have been deliv-

ered to a New York bank for deposit was not forthcoming.”

Id. at 619; see also Adler, 107 F.3d at 727 (holding that,

because the plaintiff had instructed Nigeria to make payments

to the plaintiff’s account in New York, “New York was the

place of performance of Nigeria’s ultimate contractual obliga-

tion,” and “its failure to satisfy that obligation necessarily had

a direct effect in the United States”).

[4] Accordingly, there is an exception to a foreign sover-

eign’s immunity under the third clause when (1) an act out-

side the United States forms the basis of the plaintiffs’ lawsuit

(i.e., constitutes an element of a claim that if proven would

entitle a plaintiff to relief on his theory of the case); (2) the

8150 TERENKIAN v. REPUBLIC OF IRAQ

act is taken in connection with a foreign sovereign’s commer-

cial activity; (3) there is a direct connection between the act

and the effect, without any intervening object, cause, or

agency; and (4) the effect of the act is legally significant and

non-trivial.

IV

We now apply these principles to this case to determine

whether Iraq has met its burden of showing that neither of the

exceptions to sovereign immunity contained in the first and

third clauses of § 1605(a)(2) applies. See Siderman, 965 F.2d

at 708 n.9 (citing Meadows, 817 F.2d at 523).

A

We begin by considering the plaintiffs’ assertion that Iraq

does not have sovereign immunity from suit under the FSIA

because the first clause of the commercial exception in

§ 1605(a)(2) applies on these facts, i.e., the plaintiffs’ action

is based “upon a commercial activity carried on in the United

States” by Iraq.

According to the plaintiffs’ argument, their complaint is

based on the cancellation of the contracts, and the contracts

are the product of Iraq’s commercial activities carried on in

the United States because (1) the contracts were made under

the auspices of the Oil for Food Program administered in New

York by the United Nations and (2) the contracts were exe-

cuted at the Cyprus Mission to the United Nations, which is

located in New York. As further support for this argument,

plaintiffs ask us to take judicial notice of documents filed in

other district court proceedings in which Iraq took the litiga-

tion position that contracts made under the auspices of the Oil

for Food Program constitute commercial activity carried on in

the United States.

TERENKIAN v. REPUBLIC OF IRAQ 8151

[5] We agree that Iraq’s entry into the two contracts for the

sale of oil constituted commercial activity. But neither of the

activities identified by plaintiffs constitute a “commercial

activity carried on in the United States by the foreign state”

for purposes of the first clause of § 1605(a)(2). First, Iraq’s

involvement in the Oil for Food Program is not a “commercial

activity.” Although Iraq’s agreement to comply with the Oil

for Food Program’s restrictions was a condition precedent to

engaging in the transactions at issue, Iraq’s participation in

the program was solely due to its status as a sovereign. Iraq’s

invasion of Kuwait, the resulting trade embargo sanction, and

Iraq’s involvement in the United Nations’ Oil for Food Pro-

gram to relieve the humanitarian needs of its people are public

acts, not “the type of actions by which a private party engages

in trade and traffic or commerce,” Weltover, 504 U.S. at 614

(emphasis and internal quotation marks omitted), or actions

“in the manner of a private player” within a market, Nelson,

507 U.S. at 360. By the same token, the United Nations’ over-

sight of Iraq’s activities to further certain international politi-

cal and humanitarian goals is not a commercial activity

carried on by Iraq in the United States, nor does that oversight

transform Iraq’s activities abroad into significant commercial

activities with substantial contacts to the United States. Fur-

ther, nothing about the Oil for Food Program itself gave rise

to the plaintiffs’ complaint.6

[6] Nor do we agree with plaintiffs’ argument that the exe-

6

Thus we disagree with the dissent’s statement that “[w]hat Iraq was

doing was what any private player could do, trading oil to obtain money

for food.” Dissent at 8159. Although we agree that “there is nothing spe-

cifically sovereign about bartering oil,” a private party trading in oil is not

compelled to subject all aspects of its dealings (including the use it may

make of any revenues received) to the supervision and control of a United

Nations committee. Accordingly, Iraq’s participation as a sovereign nation

in the Oil for Food Program cannot be the basis for our jurisdiction,

because clearly the United Nations’ close oversight of Iraq’s activities is

not the “type of action[ ] by which a private party engages in trade and

traffic or commerce.” Weltover, 504 U.S. at 614 (emphasis omitted).

8152 TERENKIAN v. REPUBLIC OF IRAQ

cution of the contracts at the Cyprus Mission in New York is

sufficiently significant to satisfy the first clause of the com-

mercial activity exception. First, as Iraq argues, plaintiffs

presented no evidence that any Iraqi official actually executed

the contract in New York. Iraq has established that it is a sov-

ereign state, and so it is entitled to a presumption that it has

immunity from suit. See Siderman, 965 F.2d at 708 n.9.

Because Iraq relies on a fact-based challenge to subject-matter

jurisdiction, see Holy See, 557 F.3d at 1073, plaintiffs had the

burden of presenting their evidence that the disputed FSIA

exemption applied. See Siderman, 965 F.2d at 708 n.9. Plain-

tiffs have presented no evidence regarding the locale where

Iraq signed the contract. Because plaintiffs failed to carry

their initial burden of offering evidence that an exception to

immunity applies, we may reject their argument on this

ground. See id.

[7] But even assuming that plaintiffs provided evidentiary

support for this factual allegation, their legal argument is

wrong: execution of a contract in the United States alone,

without more, is not sufficient to satisfy the first clause of

§ 1605(a)(2). The mere happenstance that a contract is exe-

cuted at a location within the physical boundaries of the

United States, by itself, is not sufficient to constitute a signifi-

cant activity or a substantial contact for purposes of the first

clause of § 1605(a)(2). Rather, as noted by the Supreme Court

in a different but related context, a court should consider less

formalistic indicia, such as “prior business negotiations with

future consequences which themselves are the real object of

the business transaction.” Burger King Corp. v. Rudzewicz,

471 U.S. 462, 479 (1985). Here, plaintiffs have not alleged

that substantial prior contractual negotiations, or indeed any

activity related to formation of the contracts other than their

execution, occurred within the United States. Cf. Grossman,

991 F.3d at 1383-84 (holding that a meeting and communica-

tions by wire and telephone were insufficiently significant to

meet the exception in the first clause of § 1605(a)(2)). Nor did

the contracts require Iraq to undertake any activities in New

TERENKIAN v. REPUBLIC OF IRAQ 8153

York. Further, the contracts designated Baghdad as the locale

for arbitration of any disputes and provided that the contracts

would be construed and governed in accordance with the laws

of Iraq. Under these circumstances, the mere signing of the

contract in New York (assuming that Iraq did so) is insuffi-

cient to meet the test for a commercial activity carried on in

the United States by Iraq for purposes of § 1605(a)(2).7

Finally, Iraq’s litigation position in other legal proceedings

is not relevant to our considerations here. Even if Iraq con-

ceded in other litigation that contracts made pursuant to the

Oil for Food Program were commercial activities carried on

in the United States, judicial estoppel is not a substitute for

subject matter jurisdiction, as plaintiffs concede.8 Rather, a

federal court must assure itself of its own jurisdiction to enter-

tain a claim regardless of the parties’ arguments or conces-

sions. See Am. Fire & Cas. Co. v. Finn, 341 U.S. 6, 17-18

(1951) (“The jurisdiction of the federal courts is carefully

guarded against expansion by judicial interpretation or by

prior action or consent of the parties.”); see also Hansen v.

Harper Excavating, Inc., 641 F.3d 1216, 1227-28 (10th Cir.

2011) (declining to apply judicial estoppel to the question

whether the court had Article III jurisdiction to entertain the

claim); Gray v. City of Valley Park, Mo., 567 F.3d 976,

980-82 (8th Cir. 2009) (same).

7

We also note that plaintiffs’ complaint is not “based upon” contract

formation, but rather it is based upon Iraq’s alleged breach of the con-

tracts. The parties do not dispute that they entered into enforceable con-

tracts. Therefore, proof that the contract was executed is neither an

element “that prove[s] the claim” nor the “particular conduct” that forms

the basis of plaintiffs’ action. Nelson, 507 U.S. at 356-57 (internal quota-

tion omitted).

8

We grant the requests for judicial notice of certain pleadings and court

filings in the New York litigation submitted by plaintiffs and Iraq. See

Reyn’s Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n.6 (9th Cir.

2006) (holding that judicial notice of court filings and other matters of

public record is proper).

8154 TERENKIAN v. REPUBLIC OF IRAQ

[8] Accordingly, we hold that Iraq has met its burden of

showing that the exception to sovereign immunity contained

in the first clause of 28 U.S.C. § 1605(a)(2) does not apply.

B

We next turn to plaintiffs’ argument that the exception to

sovereign immunity contained in the third clause of

§ 1605(a)(2) is applicable to Iraq, i.e., that plaintiffs’ claim is

based “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 plaintiffs argue that Iraq’s breach of the contracts had

multiple direct effects in the United States. Specifically, the

plaintiffs allege that under the contracts, some of the oil

intended for purchase was meant for the U.S. market and pay-

ment for any oil purchased was to be made by deposit into a

New York bank account. Due to the cancellation of the con-

tracts, plaintiffs argue, the oil never reached the United States,

and the money was never paid in New York. Therefore, the

plaintiffs allege that their complaint is based on Iraq’s breach

of the two contracts, which resulted in a “direct effect” in the

United States.

[9] We reject this argument because the alleged effects in

the United States, the non-deposit of payments for oil in a

New York bank (due to the non-purchase of the oil) and the

non-sales of the non-purchased oil to potential customers in

the United States, do not constitute direct effects as defined

in § 1605(a)(2) and subsequent case law. While the cancella-

tion of the contracts directly precluded plaintiffs from buying

oil, the non-deposit of payment for the oil in a New York

bank was merely an indirect effect of Iraq’s breach and is not

the “legally significant” act that gave rise to the plaintiffs’

claim, which is based on the breach, not the non-deposit of

payment. See Adler, 107 F.3d at 727 (a court must “ ‘look to

TERENKIAN v. REPUBLIC OF IRAQ 8155

the place where legally significant acts giving rise to the claim

occurred’ in determining the place where a direct effect may

be said to be located” (quoting United World Trade, 33 F.3d

at 1239)). Iraq’s breach may have had ripple effects in New

York and elsewhere, including depriving a New York bank of

the use of funds that might have been deposited in the bank

at some future point, but a potential financial loss by an entity

in the United States is not, in itself, sufficient to constitute a

direct effect. See id.

Weltover and Adler are not to the contrary. Those cases

held that the foreign sovereign’s failure to perform its obliga-

tion to make certain payments necessarily had a direct effect

in the United States where the foreign sovereign’s place of

performance was the United States. See Weltover, 504 U.S. at

619 (“Because New York was thus the place of performance

for Argentina’s ultimate contractual obligations, the res-

cheduling of those obligations necessarily had a ‘direct effect’

in the United States . . . .”); Adler, 107 F.3d at 730 (“Nigeria

was obligated to make payment in New York. Nigeria’s acts

had a direct effect in the United States.”). But here, Iraq had

no obligation to perform in the United States; the contracts

required Iraq only to deliver oil to the possession of the plain-

tiffs in either Iraq or Turkey, and the act that forms the basis

of plaintiffs’ lawsuit, Iraq’s cancellation of the contracts,

occurred in Iraq. See Guirlando, 602 F.3d at 76 (“The deci-

sion by a foreign sovereign not to perform is itself an act, but

it is not an act in the United States; it is an act in the foreign

state.”). While the failure of the breaching party to perform a

contractual obligation in the United States is a “direct effect,”

see Weltover, 504 U.S. at 618-19, here, by contrast, there was

neither a failure by Iraq to perform in the United States nor

any other legally significant event in this country.

[10] Nor is there any immediate connection between Iraq’s

cancellation of the contracts and the failure of oil to reach

customers in the United States. While the contracts generally

indicated that the United States was one of several intended

8156 TERENKIAN v. REPUBLIC OF IRAQ

markets for the oil, neither Pentonville nor Marblearch had

assumed any contractual obligation to U.S. buyers. Many

additional steps remained, including such fundamental

requirements as finding potential U.S. purchasers and negoti-

ating mutually acceptable agreements. Indeed, the only evi-

dence that plaintiffs’ had identified any potential purchasers

of oil at all appeared in Terenkian’s declaration (submitted

into evidence by Iraq), which indicated that he was in discus-

sions with an Italian refinery. Because the contracts forbade

plaintiffs from using third-party refineries without the permis-

sion of Iraq, the plaintiffs could not have proceeded even with

this non-U.S. sale without obtaining such permission, another

contingency that weighs against the plaintiffs’ claim of a

direct effect in the United States. The distant potential of sell-

ing oil to customers in the United States sharply contrasts

with the situation in Cruise Connections, where the court

emphasized that the foreign nation’s breach of contract “led

inexorably to the loss of revenues under the third-party agree-

ments,” which either had been finalized, or were final but for

the signature. 600 F.3d at 665. Rather, this case is more like

the remote and attenuated losses from potential shipboard

sales in Cruise Connections that likely did not amount to “di-

rect effects” because they “might be regarded as subject to an

‘intervening event’ independent of [the foreign sovereign’s]

cancellation of the contract.” Id. In sum, any connection

between Iraq’s cancellation of the contracts and Iraqi oil not

reaching customers in the United States, if it existed at all, is

too “remote and attenuated,” Weltover, 504 U.S. at 618, to

qualify as a “direct effect” under § 1605(a)(2).

[11] Accordingly, because no legally significant act had a

direct effect in the United States, we hold that Iraq has met

its burden of showing that the third clause of 28 U.S.C.

§ 1605(a)(2) does not apply.

TERENKIAN v. REPUBLIC OF IRAQ 8157

V

[12] Iraq has therefore carried its burden of proving that

neither of the “commercial activity” exceptions to sovereign

immunity raised by plaintiffs is applicable. Plaintiffs’ claim is

based on neither a legally significant commercial act that

occurred in the United States nor an act that had a direct and

legally significant effect in the United States. Accordingly,

the federal courts have no subject matter jurisdiction over Iraq

in this action. See 28 U.S.C. § 1604. Although we may decry

the practices conducted by the regime of Saddam Hussein, see

Dissent at 8157, 8159, we best serve our nation’s principles

of equity and justice by applying the law in a fair and even-

handed manner to all parties before us. We therefore reverse,

vacate the district court’s transfer of venue to the District of

Columbia, and remand to the district court with instructions

to dismiss.9

REVERSED, VACATED, AND REMANDED.

NOONAN, Circuit Judge, dissenting:

Iraq, run by the dangerous despot, Suddam Hussein,

entered into two contracts to buy oil from two companies

owned by a United States citizen M.K. Terenkian. The con-

tracts were executed in New York City. Terenkian was to pay

9

Because we lack subject matter jurisdiction, we do not reach Iraq’s

argument that the case should be dismissed for failure to arbitrate. See

Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25

n.32 (1983) (holding that there must be some independent basis for federal

jurisdiction before arbitration can be compelled); see also Lowden v. T-

Mobile USA, Inc., 512 F.3d 1213, 1215 n.1 (9th Cir. 2008) (observing, in

a case involving enforcement of an arbitration agreement, that “[w]e must

assure ourselves that the constitutional standing requirements are satisfied

before proceeding to the merits”). Nor do we reach the plaintiffs’ argu-

ment that we lack appellate jurisdiction for lack of a timely appeal.

8158 TERENKIAN v. REPUBLIC OF IRAQ

for the oil by letters of credit drawn on a bank in New York

City. The contracts were approved in New York City by the

committee of the United Nations managing its Oil for Food

Program. Formed in New York, the contracts were to be paid

for in New York. The contracts received necessary approval

in New York. It is very difficult to see why these were not all

significant steps linking the contracts to the United States.

The majority suggests that the place of formation of the

contracts was not significant because their formation is not at

issue. Formation was the first essential element for the plain-

tiffs to establish in order to establish jurisdiction. The plain-

tiffs established that formation occurred in New York City.

The majority finds that the place where payment was to be

made was not significant. In our case, as in most cases, the

place of performance of a promise to pay is significant.

Terenkian would not have wanted payment to be made in

Baghdad.

The majority argues that Iraq’s participation in the Oil for

Food Program was not commercial activity by Iraq but,

rather, a humanitarian relief program undertaken to obtain

food for the people of Iraq. The majority cites as authority

Republic of Argentina v. Weltover, Inc., 504 U.S. 607 (1992)

and Adler v. Republic of Nigeria, 107 F.3d 720 (1997). Each

of these cases found a foreign government to be liable for its

commercial activity in the United States.

As Justice Scalia set out for a unanimous Supreme Court

“commercial” is the key to the exception for commercial

activity created by the Foreign Sovereign Immunities Act. Its

meaning is to be found in “the restrictive theory at the time

the statute was enacted.” Weltover at 613. Under this

approach, a foreign state that exercises powers that can also

be exercised by private parties is not immune as a sovereign.

Id. at 614. So in Weltover, Argentina acted not “as regulator

of a market” but “as a private player within it” and was not

TERENKIAN v. REPUBLIC OF IRAQ 8159

immune. Id. As Justice Scalia pointed out, the motive of the

state was irrelevant. It was the type of action that counted. Id.

at 614. In our case, the majority focuses on Iraq’s “humanitar-

ian” motive, which is irrelevant. What Iraq was doing was

what any private player could do, trading oil to obtain money

for food.

In Adler, we followed Weltover and looked not to “the

motive” or “the purpose” of the foreign government but to

whether its actions were of the type “by which a private party

engages in commerce.” Adler at 724. Hence, we held Nigeria

might be sued when through the government-owned Nigerian

National Petroleum Corporation it entered into a computeriza-

tion of certain oil fields in Nigeria. As we observed “there is

nothing uniquely sovereign about computerizing oil fields.”

Id. So here there is nothing specifically sovereign about bar-

tering oil.

The majority brushes off the showing that in New York

today Iraq takes the position that there is federal jurisdiction

of claims under the Oil for Food Program. The majority char-

acterizes that as a “litigation position,” which does not create

jurisdiction. True, it does not create jurisdiction. But positions

cannot be taken arbitrarily or fraudulently in filing or answer-

ing a complaint. A position asserted in such a document is

sworn to be true. Iraq may not honestly say there is jurisdic-

tion in New York and deny that there is jurisdiction of similar

claims in San Diego.

In our case, in order to protect its treasury the Republic of

Iraq has chosen to step into the shoes of the wretched regime

that once ruled the country. Equities do not create jurisdiction.

Equities may discourage us from stretching beyond precedent

to find reasons for letting Iraq off the hook on what the Hus-

sein regime hung after its alleged attempts at extorting bribes

had failed.

I would affirm the district court.