Appendix — Sumitomo Shoji America, Inc. v. Avagliano

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

7

No. 314—September Term, 1980

(Argued: October 17, 1980 Decided: January 9, 1981)

Docket No. 80-7418

~~

LISA M. AVIGLIANO, DIANNE CHENICEK, ROSEMARY T. CRIS-

TOFARI, CATHERINE CUMMINS, RAELLEN MANDELBAUM,

MARIA MANNINA, SHARON MEISELS, FRANCES PA-

CHECO, JOANNE SCHNEIDER, JANICE SILBERSTEIN, REIKO

TURNER and ELIZABETH WONG,

Plaintiffs-Appellees,

—against—

SUMITOMO SHOJI AMERICA, INC.,

Defendant-Appellant.

t-

Before:

LUMBARD, MANSFIELD and MESKILL,

Circuit Judges.

2a

Interlocutory appeal pursuant to 28 U.S.C. § 1292(b) from

an order of the District Court for the Southern District of New

York, entered by Judge Charles H. Tenney denying defendant’s

motion to dismiss plaintiffs’ claims of discrimination in viola-

tion of Title VII of the Civil Rights Act of 1964, 42 U.S.C.

§§ 2000e, ef seq., on the ground that the 1953 Treaty of

Friendship, Commerce and Navigation between the United

States and Japan exempts defendant from any legal challenge

to its practice of filling its executive-level positions with

Japanese nationals.

Affirmed and remanded.

—

J. PORTIS HICKS, Esq., New York, NY (Wender,

Murase & White, New York, NY, of counsel),

Sor Appellant.

LEwis M. STEEL, Esq., New York NY (Eisner

Levy Steel & Bellman, P.C., New York, NY,

of counsel), for Appellees.

MARCIA B. RUSKIN, Attorney, Equal Employ-

ment Opportunity Commission, Washington,

DC (Leroy D. Clark, General Counsel, Jo-

seph T. Eedins, Associate General Counsel,

Lutz Alexander Prager, Attorney, Equal Em-

ployment Opportunity Commission, Wash-

ington, DC, of counsel), for Amicus Curiae

Equal Employment Opportunity Commis-

sion.

MANSFIELD, Circuit Judge:

Sumitomo Shoji America, Inc. (“Sumitomo”), a New York-

incorporated, wholly-owned subsidiary of a Japanese commer-

cial firm, appeals pursuant to 28 U.S.C. § 1292(b) from an

3a

order of the District Court for the Southern District of New

York entered by Judge Charles H. Tenney, denying its motion

to dismiss this class action against it by female secretarial

employees claiming that its practice of hiring only male

Japanese nationals for management-level positions discrimi-

nates against them on the basis of sex and national origin in

violation of Title VII of the Civil Rights Act of 1964, as

amended, 42 U.S.C. §§ 2000e, et seq. (“Title VII”), the Civil

Rights Act of 1966, 42 U.S.C. § 1981, and the Thirteenth

Amendment. Dismissal was sought by Sumitomo pursuant to

F.R.Civ.P. 12(b)(6) on the ground that the 1953 Treaty of

Friendship, Commerce and Navigation between the United

States and Japan, 4 U.S.T. 2063 (the “Treaty” or “Japanese

Treaty”), exempts Japanese trading companies and their

wholly-owned subsidiaries incorporated in the United States

from the application of Title VII. Judge Tenney denied Sumi-

tomo’s motion insofar as it sought dismissal of plaintiffs’ Title

VII claims,' on the ground that the Treaty was not meant to

protect the employment practices of Japanese subsidiaries

incorporated in the United States. 473 F. Supp. 506. Sumitomo

sought an immediate appeal of this question under 28 U.S.C.

§ 1292(b), and that request was granted.’

! The district court did, however, dismiss plaintiffs’ § 1981 claim on

other grounds, and also found that plaintiffs’ Thirteenth Amendment

claim had been abandoned.

2 Avigliano, et al. v. Sumitomo Shoji America, Inc., No. 77 Civ. 5641

(CHT) (August 9, 1979) (unreported). Judge Tenney refused to certify

two questions of law which plaintiffs had sought to appeal: whether an

allegation of sex and nationality discrimination makes out a valid

cause of action under § 1981, and whether defendant's counterclaims

sounding in common law tort should have been dismissed. Neither

issue is before us this time

Before the appeal could be heard counsel for Sumitomo sought

reconsideration of Judge Teeney’s refusal to dismiss, based on the U.S.

Department of State’s recent release of a number of documents which

apparently were relevant to a proper interpretation of the Japanese

Treaty. Judge Tenney granted Sumitomo’s request for reconsideration,

and this Court in effect remanded to Judge Tenney by denying

Sumitomo’s permission to appeal, but without prejudice to a later

renewal of that request. After reconsideration based on the State

4a

We affirm, but on grounds other than that relied on by the

district court. We hold that Sumitomo was entitled to invoke

the employment provisions of the Treaty, but that the Treaty

does not exempt Japanese companies operating in the United

States, whether or not they are incorporated in the United

States, from American laws prohibiting discrimination in em-

ployment.

The Japanese Treaty is a commercial agreement designed to

encourage trade and investment between the United States and

Japan. It is one of several dozen similar treaties entered into by

the United States in the post-World War II period, and carries

on a tradition antedating the Constitution. See generally,

Walker, 7Jreaties for the Encouragement and Protection of

Foreign Investment: Present United States Practice, § Am. J.

Comp. L. 229, 230-31 (1956) (hereinafter cited as Treaties).

The general aim of these treaties is to

“establish or confirm in the potential host country a

governmental policy of equity and hospitality to the

foreign investor. This means, above all, assurance that the

enterprise and property of the alien will be respected and

that he will be accorded equal protection of the laws alike

with citizens of the country.” /d. at 230.

In the Japanese Treaty, as in almost all other Friendship,

Commerce and Navigation (“FCN”) agreements, the goal of

equal protection of the laws is put into effect by means of

specific provisions “based in general upon the principles of

national and of most-favored-nation treatment unconditionally

accorded.” 4 U.S.T. at 2066.

The heart of the Japanese Treaty is Article VII, which the

State Department has called “the basic ‘establishment’ provi-

Department documents, Judge Tenney once again denied Sumitomo’s

motion to dismiss, this time on the ground that, while Japanese

subsidiaries incorporated in the United States are given some rights by

the Treaty, the specific provision of the Treaty on which Sumitomo was

relying was not intended to apply to subsidiaries. Avigliano, et al. v.

Sumitomo Shoji America, Inc., No. 77 Civ. 5641 (CHT) (November

29, 1979) (unreported).

Sa

sion.” Outgoing Airgram No. A-453, Department of State to

USPOLAD, Tokyo, dated January 7, 1952. Article VII pro-

vides in relevant part that:

“Nationals and companies of either Party shall be ac-

corded national treatment with respect to engaging in all

types of commercial, industrial, financial and other busi-

ness activities within the territories of the other Party,

whether directly or by agents or through the medium of

any form of lawful juridical entity. Accordingly, such

nationals and companies shall be permitted within such

territories: (a) to establish and maintain branches, agen-

cies, offices, factories and other establishments appropri-

ate to the conduct of their business; (b) fo organize

companies under the general company laws of such other

Party, and to acquire majority interests in companies of

such other Party; and (c) to control and manage en-

terprises which they have established or acquired. More-

over, enterprises which they control, whether in the form

of individual proprietorships, companies or otherwise,

shall, in all that relates to the conduct of the activities

thereof, be accorded treatment no less favorable than that

accorded like enterprises controlled by nationals and com-

panies of such other Party.” 4 U.S.T. at 2069. (Emphasis

supplied.)

In order to facilitate the staffing of overseas operations, the

Treaty provides in Article I that:

“Nationals of either Party shall be permitted to enter the

territories of the other Party and to remain therein:

(a) for the purpose of carrying on trade between the

territories of the two Parties and engaging in related

commercial activities. . . .” Jd. at 2066,

and in Article VIII that

“Nationals and companies of either Party shall be permit-

ted to engage, within the territories of the other Party,

accountants and other technical experts, executive person-

6a

nel, attorneys, .agents and other specialists of their

choice.” Id. at 2070. (Emphasis supplied).

Implementing these provisions, the State Department has is-

sued regulations applicable to the FCN treaties which greatly

facilitate the entry into the United States of Japanese nationals

who will work as “treaty traders” for Japanese trading units

set up pursuant to Article VII of the Treaty. 22 C.F.R. § 41.40.

In addressing defendant’s motion to dismiss based on the

Treaty, the district court did not rule on whether the freedom-

of-choice language of Article VII (“companies of either Party

shall be permitted to engage, within the territories of the other

Party, . . . executive personnel . . . of their choice”) was

sufficiently broad to exempt Japanese subsidiaries operating in

the United States from the anti-discrimination provisions of

Title VII of the Civil Rights Act of 1964. 473 F. Supp. at

509-13. Its ruling was instead limited to the question of

Sumitomo’s standing. In its first opinion, the court held that a

U.S.-incorporated subsidiary such as Sumitomo could not

“invoke the aegis of the Treaty as sanction for its employment

practices,” 473 F. Supp. at 509, because the definitional section

of the Treaty, Article XXII(3), provides that:

“Companies constituted under the applicable laws and

regulations within the territories of either Party shall be

deemed companies thereof and shall have their juridical

status recognized within the territories of the other Party.”

Article XXII(3), 4 U.S.T. at 2080; quoted at 473 F. Supp.

at 509. (Emphasis supplied).

In the court’s opinion, the emphasized language of Article

XXII(3) had the effect of classifying Sumitomo as an Ameri-

can, not a Japanese corporation, and thus barred it from

invoking Article VIII. In its second opinion (dated November

29, 1979) the court conceded that

“Article XXII(3) was not intended to bar locally incorpo-

rated subsidiaries of foreign companies from claiming any

substantive rights under the Treaty.”

7a

Nevertheless, despite its finding that Article XXII(3) did no

more than determine “an entity’s status” and was not meant to

limit or define the substantive rights which an entity was to

enjoy under the Treaty, the district court refused to alter its

original view that Sumitomo lacked standing to invoke Article

VIII:

“Articles VI(4) and VII(1) & (4), by their terms, give

‘enterprises in which nationals and companies. . . have a

substantial interest’ and enterprises controlled by na-

tionals and companies, respectively, substantive rights.

The drafters knew how to give locally incorporated sub-

sidiaries rights under specific articles. In Article VIII(1)

they did not do so. The freedom-of-choice rights are given

to ‘nationals and companies of either Party. . . within

the territories of the other Party.’ Because the provision

does not by its own terms extend to locally incorporated

subsidiaries, the Court must look to Article XXII(3) to

determine whether ‘nationals and companies’ can be read

to include subsidiaries. That Article provides that

‘[c]ompanies constituted under the applicable laws and

regulations within the territories of either Party shall be

deemed parties thereof.’ By this language Sumitomo is a

United States company. It is not a Japanese company and

is thereby ineligible for freedom-of-choice protection

within the territories of the United States.”

DISCUSSION

Sumitomo’s Standing

We are satisfied that the Treaty’s provisions may be invoked

by a wholly-owned Japanese subsidiary incorporated in the

United States to the same extent that they may be availed of by

Japanese corporations or firms operating in the United States.

To hold that the Japanese business enterprise forfeits its rights

under the Treaty merely because it chooses to function through

a wholly-owned locally-incorporated subsidiary would in our

view disregard substance for form, something which we have

previously rejected in,treaty construction. Reed v. Wiser, 555

F.2d 1079, 1085-86 (2d Cir.), cert. denied, 434 U.S, 922 (1977).

Moreover, such a reading would overlook the purpose of the

Treaty, which was not to protect foreign investments made

through branches, but rather to protect foreign investments

generally. See generally, Eck v. United Arab Airlines, Inc., 360

F.2d 804, 812 (2d Cir. 1966); Maximov v. United States, 299

F.2d 565, 568 (2d Cir. 1962), affd., 373 U.S. 49 (1963). In

addition, if the district court’s reading were adopted, a Jap-

anese enterprise could easily circumvent such a construction by

simply transforming its wholly-owned U.S. subsidiaries into

branches. To adopt such a reading would also in our opinion

do violence to the admittedly unitary structure of Articles VII

and VIII, see, ¢.g., Foreign Service Despatch No. 2529, from

High Commissioner for Germany to the Department of State,

dated March 18, 1954, p. 1. It is unlikely that the parties to the

Treaty would have agreed to grant each other broad rights to

establish and manage subsidiaries abroad in Article VII, and

then gone on to bar those same subsidiaries from invoking

almost all of the substantive provisions which the Treaty

contains.

Finally, if we were to accept the view that the three provi-

sions in the Treaty which explicitly grant rights to subsidiaries

(Article V1(4), Article VII(1) and Article VII(4) exhaust the

rights to be accorded to them, a crazy-quilt pattern would

emerge. Under such a reading Japanese branches in the United *

States would be guaranteed “access to the courts of justice”

(Article IV(1)), protected against “unlawful entry or molesta-

tion” (Article V1(2)), given the right to dispose of “property of

all kinds” (Article 1X(4)), allowed to obtain and maintain

“patents of invention” (Article X), permitted to make “pay-

ments, remittances and transfers of funds or financial instru-

ments” (Article XII(1)), and allowed to engage in “importation

and exportation” (Article XIV(5)). Japanese subsidiaries, on

the other hand, would not be guaranteed any of the rights

conferred on Japanese branches operating in the United States,

but would instead have to be content with national treatment

in such areas as “the taking of privately owned enterprises into

9a

public ownership and .. . the placing of such enterprises

under public control” (Article V1(4)). It is illogical to infer that

the drafters of the Treaty intended to make such a dramatic

distinction between forms of business operation or to act in

such a haphazard way.

In our view the three provisions in the Treaty which specifi-

cally mention subsidiaries were not intended to define the outer

limits of the rights to be accorded to them, but were instead

designed to add to the rights which parties were to enjoy in

their capacity as “companies of either Party.” This construc-

tion furthers the Treaty’s purpose, which is to support foreign

investment generally, regardless of the specific corporate vehi-

cle employed. Given the complete absence of any evidence in

the Treaty’s legislative history suggesting that only Japanese

branches were to be given the various specific guarantees listed

above but that Japanese subsidiaries were not, we are per-

suaded that the form of business operation was not considered

relevant to the question of which entities could invoke the

substantive provisions of the Treaty, except in three instances

where extra protection was to be accorded to subsidiaries.

This interpretation also finds support in negotiations preced-

ing the ratification of another FCN treaty, that between the

United States and the Netherlands. There, Dutch negotiators

expressed concern that the proposed treaty language (which

was identical in all relevant respects to the language contained

in the Japanese Treaty) might be read as not conferring equal

benefits on branches and subsidiaries (or “controlled compa-

nies,” in the usage of the negotiators). The Dutch were particu-

larly concerned that the provision in Article XXIII(3) of the

Dutch treaty (which tracked the language of Article XXI11(3) of

the Japanese Treaty) would exclude locally-incorporated sub-

sidiaries from all substantive benefits accorded to “companies

of either Party.” State Department negotiators made it clear

that this was not the case, and were even prepared to insert a

clarifying phrase in Article XXIII(3), if necessary:

“[D]espite a superficial appearance to the contrary, the

legal adviser’s formulation of the proviso to be inserted in

10a

Article XXIII paragraph 3 was not calculated to detract in

any way from the rights and privileges a ‘controlled

company’ would otherwise enjoy. . . . [T]he treaty is

always a floor and not a ceiling. The effect of the legal

advisor’s formulation was to assure that the ‘controlled

company’ will always, as a minimum, get everything that

the parent company gets as a matter of treaty right—but

was not calculated to detract from any additional privi-

leges that the ‘controlled company’ may actually

have. . . . The Department has the same interests as [the

Dutch negotiators) in avoiding damage to the position of

‘controlled companies’, because Americans have ‘con-

trolled companies’ abroad just as the Dutch have them in

the U.S.” Official-Informal Letter from Herman Walker,

Jr.,[’] Trade Agreements and Treaty Division, Department

of State, to Counselor for Economic Affairs, American

Embassy, the Hague, Netherlands, dated October 28,

1955. (Emphasis in original).

After extensive discussions on the issue, the Dutch negotiators

concluded that there was in fact no need to include in the

Treaty a provision explicitly conferring parent company rights

on subsidiaries:

“[N]obody would deny to a company controlled by na-

tionals or companies of one of the contracting Parties the

treatment, which is accorded to the parent company,

except perhaps in a very special case e.g. taxation. . . .

As the principle is generally accepted I think it would be

superfluous to spell it out.” Letter from Netherlands

Negotiator to Economic Counselor, U.S. Embassy, The

Hague, Netherlands, dated November 8, 1955.

This incident corroborates our view, based on the language

and purpose of the Japanese Treaty, that those provisions

3

The author's identity, while not appearing on the letter itself, can be

determined by noting the addressee of the letter written in reply,

Official-Informal Letter from Counselor of Embassy for Economic

Affairs, American Embassy, The Hague, Netherlands, dated Novem-

ber 4, 1955,

which specifically grant rights to subsidiaries were not intended

to bar subsidiaries from enjoying the additional rights granted

to branches.

In short, as the district court recognized (but did not apply),

Article XXI11(3) defines a company’s nationality for the pur-

pose of recognizing its status as a legal entity but not for the

purpose of restricting substantive rights granted elsewhere in

the Treaty. This view of Article XXII(3) has been adopted

consistently throughout the life of the Treaty, see, e.g., Depart-

ment of State Despatch No. 13 from Office of the United

States Political Adviser for Japan, dated April 8, 1952; Walker,

Provisions on Companies in United States Commercial

Treaties, 50 Am, J. Int’! L. 373, 383 (1956); Department of

State Airgram No. A-105, to American Embassy, Tokyo, dated

January 9, 1976, and in our opinion is supportive of the

general policies underlying the Treaty. The district court's

acceptance of this general proposition is inconsistent with its

eventual conclusion that Article XXII(3) bars Sumitomo from

invoking Article VIII.‘ Since Sumitomo is a wholly-owned

4 Article XXI1(3) leaves open the determination of whether a subsidi-

ary incorporated in the United States is sufficiently “Japanese” to

invoke the Treaty’s various substantive provisions. Resolution of this

issue would depend on a case-by-case analysis of the relevant facts. In

resolving the issue the regulations adopted by the Department of State

in connection with admission of treaty traders are relevant. For a

treaty trader to be admitted,

“The employment must be ... by an organization which is

principally owned by a person or persons having the nationality of

the treaty country.” 22 C.F.R. § 41.40(a).

The State Department has supplemented this basic regulation with visa

rules further prescribing the standards to be met by treaty traders

entering the United States. These rules define the nationality of a

corporation eligible to employ treaty traders as follows:

“The nationality of a firm is determined for the purpose of section

101(a)(15)(E)[8 U.S.C. § 1101(a) of the Immigration and National-

ity Act of 1952] by the nationality of those persons who own the

principal amount (i.¢., more than 50 percent) of the stock of that

corporation, regardless of the place of incorporation.” 9 Foreign

Affairs Manual, Part Il, § 41.40, Note 8. See generally, Matter of

N.S., VILL. & N. Decs, 426, 428 (1957).

12a

subsidiary of a Japanese corporation, it is properly classified

as a Japanese company for the purpose of invoking the

substantive provisions of the Treaty, including Article VIII.’

5 We are aware that the State Department has recently reached a

conclusion on this issue which is at variance with ours. See Letter from

James R. Atwood, Deputy Legal Adviser, U.S. Department of State to

Lutz Alexander Prager, Esq., Assistant General Counsel, Equal Em-

ployment Opportunity Commission, dated September 11, 1979, re-

printed in 74 Am. J. Int’! L. at 158-59 (1980) (“it was not the intent of

the negotiators to cover locally-incorporated subsidiaries”).

Even after giving weight to the State Department’s views, Kolovrat

v. Oregon, 366 U.S. 187, 194 (1961), we do not find its position

persuasive. The September 11, 1979, letter announcing the Depart-

ment’s position directly contradicted a similar letter written on behalf

of the Department less than a year earlier. Letter of Lee R. Marks,

Deputy Legal Adviser, U.S. Department of State to Abner W. Sibal,

General Counsel, Equal Employment Opportunity Commission, dated

October 17, 1978, reprinted in 73 Am. J. Int'l L. at 281-84 (1979) (“In

determining the scope of Article VIII [of the Japanese Treaty], we see

no grounds for distinguishing between subsidiaries incorporated in the

United States . . . and those operating as unincorporated branches”).

Moreover, both letters were conclusory in tone, providing little guid-

ance as to how the author reached the position adopted. Finally,

neither of the letters referred to any documentary evidence supporting

its position, nor did the 1979 letter explain how the 1978 letter writer

had fallen into error.

On September 26, 1980, long after this appeal had been taken,

counsel for the Equal Employment Opportunity Commission

(“EEOC”), which is participating in this case as amicus curiae, sent us

a copy of a State Department document purporting to be a letter dated

September 9, 1980, from the Department of State to the Government

of Denmark to the effect that it was not the intent of negotiators of

such a FCN treaty to permit locally-incorporated subsidiaries to invoke

its provisions. However, the letter bears evidence that the EEOC,

several months prior to the transmittal of the State Department’s letter,

had participated in its preparation (it bears the notations “Clearances:

EEOC/GC L. Prager,” who is counsel for the EEOC as amicus on this

appeal), from which it might be inferred that the letter was designed to

support the EEOC’s position here.

Under the circumstances it was improper for the EEOC to have

submitted the September 9th letter to us. However, since we give it no

weight whatsoever we deny Sumitomo’s motion for permission to

investigate its provenance.

13a

Relationship Between Article VIII of the Treaty and Title VII

of the Civil Rights Act of 1964

Turning to the question of whether the freedom-of-choice

language of Article VIII of the Treaty exempts Sumitomo from

Title VII of the Civil Rights Act of 1964 as far as its executive

personnel are concerned,°® we hold that the Treaty does not

have such effect. The right of Japanese firms operating in the

United States under the Treaty to hire executives “of their

choice” does not give them license to violate American laws

prohibiting discrimination in employment.

The background of the Treaty does not support the expan-

sive interpretation of the words “of their choice” urged by

Sumitomo. At the time when the Treaty was negotiat»\, a

number of American states and many foreign countries

severely restricted the employment of noncitizens within their

boundaries. Note, Commercial Treaties and the American Civil

Rights Laws: The Case of Japanese Employers, 31 Stan. L.

Rev. 947, 952-53 & n.28 (1979); S. Metzger, International Law,

Trade and Finance: Reality and Prospects 151 (1962). The

provision in Article VIII of the Treaty allowing companies of

either party to engage executive personnel “of their choice”

when operating in the other party’s territory was a reaction to

those restrictions. It was primarily intended to exempt compa-

nies operating abroad from local legislation restricting the

6 Although Judge Tenney limited the question being certified to the

narrow issue of Sumitomo’s standing to invoke Article VIII of the

Treaty and made it quite clear that he had not reached any opinion as

to the degree of protection which Article VIII might provide from

charges of discrimination under Title VII, it would be a waste of

judicial resources to remand without reaching the substantive question

which Sumitomo’s motion to dismiss inevitably poses. The issue has

been fully briefed and argued by the parties before us. Evidence

concerning Sumitomo’s hiring practices would not help us resolve the

question. Failure to resolve the question would only open the door to a

wasteful second appeai after trial below. Under these circumstances we

are not limited to deciding the question formulated by the district

court, Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 994-95 (2d Cir.),

cert. denied, 423 U.S. 1018 (1975); Capital Temporaries, Inc. v. Olsten

Corp., 506 F.2d 658, 660 (2d Cir. 1975).

l4a

employment of noncitizens. Walker, Treaties, supra, at 234

(“management is assured freedom of choice in the engaging of

essential executive and technical employees in general, regard-

less of their nationality, without legal interference from ‘per-

centile’ restrictions and the like”). See generally, Foreign Ser-

vice Despatch No. 2529 from HICOG Bonn to Department of

State, dated March 18, 1954 (German FCN treaty); H. Steiner

& D. Vagts, Transnational Legal Problems 37-38 (1968).

Although the clause “of their choice” was also ‘intended, in

furtherance of the overall purpose of the Treaty, to facilitate a

party’s employment of its own nationals to the extent neces-

sary to insure its operational success in the host country, no

evidence supports Sumitomo’s broad interpretation which,

carried to its logical conclusion, would immunize a party not

only from Title VII but also from laws prohibiting employ-

ment of children, § 12 of the Fair Labor Standards Act, 29

U.S.C. § 212, laws granting rights to unions and employees,

Labor Management Relations Act, 29 U.S.C. §§ 141-97, and

the like.

Subjecting a Japanese company to Title VII is consistent

with the language and purpose of Article VIII of the Treaty,

since Title VII, construed in the light of the Treaty, would not

preclude the company from employing Japanese nationals in

positions where such employment is reasonably necessary to

the successful operation of its business. Section 703(e) of Title

VII, 42 U.S.C. § 2000e-2(e), expressly provides that

“it shall not be an unlawful employment practice for an

employer to hire and employ employees, . . . on the basis

of . . . national origin in those certain instances where

. . National origin is a bona fide occupational qualifica-

tion reasonably necessary to the normal operation of that

particular business or enterprise. . . .”

Although the “bona fide occupational qualification” (“bfoq”)

exception of Title VII is to be construed narrowly in the

normal context, Dothard v. Rawlinson, 433 U.S. 321, 334

(1977), we believe that as applied to a Japanese company

enjoying rights under Article VIII of the Treaty it must be

15a

construed in a manner that will give due weight to the Treaty

rights and unique requirements of a Japanese company doing

business in the United States, including such factors as a

person’s (1) Japanese linguistic and cultural skills, (2) knowl-

edge of Japanese products, markets, customs, and business

practices, (3) familiarity with the personnel and workings of

the principal or parent enterprise in Japan, and (4) acceptabil-

ity to those persons with whom the company or branch does

business. To require the Japanese company to go forward with

some evidence of bfoq status does not in our view impose

undue burdens on foreign employers. In the absence of an

evidentiary record on these matters, however, we cannot deter-

mine now whether all or some portion of the executive posi-

tions at Sumitomo qualify for bfoq status.

Accordingly the case is remanded to the district court for

further proceedings consistent with the foregoing.

17a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

No. 80-7418

>

At a stated Term of the United States Court of Appeals for

the Second Circuit, held at the United States Courthouse in the

City of New York, on the ninth day of January one thousand

nine hundred and eighty-one.

Present:

HON. J. EDWARD LUMBARD

HON. WALTER R. MANSFIELD

HON. THOMAS J. MESKILL

Circuit Judges,

*

LISA M. AVIGLIANO, DIANNE CHENICEK, ROSEMARY T. CRIS-

TOFARI, CATHERINE CUMMINS, RAELLEN MANDELBAUM,

MARIA MANNINA, SHARON MEISELS, FRANCES PA.

CHECO, JOANNE SCHNEIDER, JANICE SILBERSTEIN, REIKO

TURNER and ELIZABETH WONG,

Plaintiffs-A ppellees,

sell Ses

SUMITOMO SHOJI AMERICA, INC.,

Defendant-Appeliant.

-

Appeal from the United States District Court for the

Southern District of New York.

18a

This cause came on to be heard on the transcript of record

from the United States District Court for the Southern District

of New York, and was argued by counsel.

ON CONSIDERATION WHEREOF, it is now hereby or-

dered, adjudged, and decreed that the order of said District

Court be and it hereby is affirmed and remanded in accordance

with the opinion of this court with costs to be taxed against the

appellant.

A. DANIEL FUSARO, Clerk

by /s/ ARTHUR HELLER

Arthur Heller,

Deputy Clerk

Judgment Entered 2/10/81

Second Circuit

Raymond J. Burghardt, Clerk

Filed U.S. District Court, S.D. of N.Y.

February 10, 1981

Filed United States Court of Appeals

Second Circuit, January 9, 1981, A. Daniel

Fusaro, Clerk

19a

APPENDIX C

Opinion

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

Soa

June 5, 1979

77 Civ. 5641 (CHT)

+

LISA M. AVIGLIANO, et al.,

Plaintiffs,

—against—

SUMITOMO SHOJI AMERICA, INC.,

Defendant.

_—

APPEARANCES

For Plaintiffs:

EISNER, LEVY, STEEL & BELLMAN, P.C.,

351 Broadway

New York, New York, 10013

Of Counsel:

LEwIs M. STEEL, ESQ.

For Defendant:

WENDER, MURASE & WHITE

400 Park Avenue

New York, New York, 10022

Of counsel:

JIRO MURASE, ESQ.,

J. PORTIS HICKS, EsqQ.,

EDWARD H. MARTIN, ESQ.,

LANCE GOTTHOFFER, ESQ.,

TENNEY, J.

20a

Amicus Curiae:

EQUAL EMPLOYMENT OPPORTUNITY COMMISSION

2401 E Street, N.W.

Washington, D.C., 20506

Of counsel:

ABNER W. SIBAL,

General Counsel

JOSEPH T. EDDINS,

Associate General Counsel

LUTZ ALEXANDER PRAGER, Esq.,

JOHN D. SCHMELZER, Esq.,

Local Counsel (E.E.O.C.):

RONALD COPELAND, Esq.,

Regional Counsel

26 Federal Piaza

New York, New York, 10007

com

In this civil rights case, plaintiffs charge discrimination on

the bases of sex and national origin in violation of Title VII of

the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e et

seq. (1974), and of 42 U.S.C. § 1981 (1970).' They seek class

action status. Plaintiffs are past and present female secretarial

employees of defendant Sumitomo Shoji America, Inc.’

(“Sumitomo”). Sumitomo is an “integrated trading company”?

The complaint also includes a claim under the thirteenth amendment

to the United States Constitution. As this claim apparently bas been

dropped, the Court sees no need to consider its merits.

The plaintiffs are eleven women, all of whom claim to be citizens of

the United States except for one who claims to be a citizen of Japan.

The complaint offers no other details of plaintiffs’ claims.

“Integrated trading companies” engage primarily in the purchase

and resale of goods, mainly in import and export markets. According

to the Affidavit of J. Portis Hicks, sworn to May 18, 1978, there are

fewer than a dozen integrated trading companies and these account for

more than 50% of Japan’s imports and exports.

2la

incorporated in New York as a wholly owned subsidiary of a

Japanese corporation. The parent corporation is not a party to

this action. Plaintiffs, seeking injunctive and compensatory

relief, claim that they have been restricted to clerical jobs and

not trained for or promoted to executive, managerial or sales

positions for which Sumitomo favors male citizens of Japan.

Jurisdiction is based upon 28 U.S.C. § 1331 and § 1343.‘

Sumitomo denies that the company discriminates and now

moves pursuant to Rulel2(b)(6) of the Federal Rules of Civil

Procedure to dismiss the claims asserted under Title VII and

section 1981. Sumitomo claims that the provisions of Title VII

and of section 1981 must yield to the right of freedom of

choice in employment assured by the 1953 Treaty of Friend-

ship, Commerce and Navigation between the United States and

Japan, [1953] 4 U.S.T. 2063, T.1.A.S. 2863 (entered into force

Oct. 30, 1953) (“the Treaty”). In addition to positing that

Sumitomo is insulated from federal review of its employment

practices by the Treaty, Sumitomo claims that plaintiffs’ allega-

tions of discrimination based on sex and national origin fail to

state a claim under 42 U.S.C. § 1981.

Sumitomo also interposes four counterclaims, invoking this

Court’s ancillary jurisdiction essentially to seek redress for

plaintiffs’ alleged abuse of legal process and tortious interfer-

ence with Sumitomo’s business activities. Plaintiffs cross-move

for dismissal of the counterclaims pursuant to Rule 12(b) of

the Federal Rules of Civil Procedure on the grounds that none

states a claim upon which relief can be granted and that the

4 Reference in the jurisdictional statement to 28 U.S.C. §§ 2201 and

2202 (the Federal Declaratory Judgment Act) remains a mystery to the

Court, which can discern no basis for this relief. Plaintiffs seek

judgment (1) enjoining the defendant from engaging in the alleged

unlawful employment practices, both current and future; (2) directing

the defendant to promote plaintiffs to executive and other managerial

and sales positions and to institute a training program to upgrade

plaintiffs and to take affirmative action to remedy the effects of past

discriminatory practices; (3) for compensatory and punitive damages;

and (4) for the cost of the action with reasonable attorney’s fees.

Unless plaintiffs wish to enlighten the Court, the demand for declara-

tory relief will be stricken.

22a

Court lacks subject matter jurisdiction. For the reasons dis-

cussed below, the motions to dismiss plaintiffs’ section 1981

claim and Sumitomo’s first counterclaim are granted, and the

motions to dismiss the Title VII claim and the remaining

counterclaims are denied.

The Treaty

On April 2, 1953 the United States and Japan entered into a

Treaty of Friendship, Commerce and Navigation. The purpose

of the Treaty is

{to strengthen] the bonds of peace and friendship tradi-

tionally existing between them and [to encourage] closer

economic and cultural relations between their peoples

. . . by arrangements promoting mutually advantageous

commercial intercourse, encouraging mutually beneficial

investments, and establishing mutual rights and privileges

. . . based in general upon the principles of national and

most-favored-nation treatment unconditionally accorded

5

4 U.S.T. at 2066. The effect of the Treaty is to assure that

nationals of one party are not discriminated against within the

territory of the other party.°

Article VIII(1) of the Treaty provides, in pertinent part, that

“[{njationals and companies of either Party shall be permitted

to engage, within the territories of the other Party, accountants

and other technical experts, executive personnel, attorneys,

agents and other specialists of their choice.” Jd. at 2070.

Sumitomo, in moving to dismiss the discrimination claims

against it, frames the issue before this Court as whether Title

VII and section 1981 of the Civil Rights Act of 1964 must yield

5 Preface, Treaty of Friendship, Commerce and Navigation Between

The United States of America and Japan (April 2, 1953).

6 See United States v. R.P- Oldham Company, 152 F. Supp. 818 (N.D.

Cal. 1957).

23a

to the right of freedom of choice in executive and other

specialist personnel granted by Article VIII(1) of the Treaty.

However, the Court finds that the issue before it is even more

fundamental; that is, whether Sumitomo can invoke the aegis

of the Treaty as sanction for its employment practices. The

initial inquiry concerns the nationality of Sumitomo.

Article VIII(1) of the Treaty provides that Japanese and

American corporations may engage within the territory of the

other certain personnel of their choice. Article XXII, the

definitional section of the Treaty, states in paragraph 3 that:

[aJs used in the present Treaty, the term “companies”

means corporations, partnerships, companies and other

associations, whether or not with limited liability and

whether or not for pecuniary profit. Companies consti-

tuted under the applicable laws and regulations within the

territories of either Party shall be deemed companies

thereof and shall have their juridical status recognized

within the territories of the other party.

Id. at 2079-80.’ This is entirely consistent with traditional rules

of corporate law which, for most purposes, treat a corporation

as an entity distinct from its shareholders and accord to the

corporation the citizenship of its place of incorporation:

The theory of “corporate personality” permits a corpo-

ration to be regarded as a “person” with an existence—in

the state of incorporation—separate from the natural

persons who own it. . . . [Flor purposes of federal court

jurisdiction . . . a corporation is “deemed” to be a

citizen of the state by which it was created.

Hornstein, Corporate Law and Practice § 281 (1959) (citing

Louisville, Cincinnati, and Charleston R.R. Co. v. Letson, 43

7 This provision has been paraphrased by the court in United States v.

R.P. Oldham Company, supra, 152 F. Supp. at 823:

[Bly the terms of the Treaty itself as well as by established principles

of law, a corporation organized under the laws of a given jurisdic-

tion is a creature of that jurisdiction, with no greater rights,

privileges or immunities than any other corporation of that jurisdic-

tion.

24a

U.S. (2 How.) 497, 555, 11 L. Ed. 353 (1844)). Sumitomo is

incorporated under the laws of New York. Therefore, accord-

ing to the very terms of the Treaty, Sumitomo is a company of

the United States, not of Japan, and as such has no standing to

invoke the freedom-of-choice provision granted by Article

VIII(1) to companies of Japan within the territory of the

United States.

This conclusion is supported by two district court decisions

in which the 1953 Japanese-American Treaty was raised by way

of defense. In United States v. R. R Oldham Co., 152 F. Supp.

818 (N.D. Cal. 1957), a wholly owned American subsidiary of

a Japanese corporation was one of five corporations indicted

for conspiracy in restraint of commerce in Japanese wire nails.

The defendant argued that Article XVIII of the Treaty, which

dealt with antitrust violations, denied the federal court juris-

diction by providing the exclusive remedy. Not only did the

district court hold that Article XVIII provided a supplemental

rather than exclusive remedy, but it also found that, even were

Article XVIII an exclusive remedy, the California-incorporated

subsidiary lacked standing to invoke this provision. The na-

tionality of the defendant was determined by the terms of

Article XXII and the traditional principles of corporate law.

Moreover, the Oldham court found this conclusion not incon-

sistent with the policies underlying the Treaty:

If [the defendant] had wished to retain its status as a

Japanese corporation while doing business in this country,

it could easily have operated through a branch. Having

chosen instead to gain privileges accorded American cor-

porations by operating through an American subsidiary, it

has for most purposes surrendered its Japanese identity

with respect to the activities of this subsidiary.

United States v. R. R Oldham Co., supra, 152 F. Supp. at 823.

In Spiess v. C. Itoh & Co. (America), Inc., 469 F. Supp. 1

(S.D. Tex. 1979), Judge Bue of the Southern District of Texas

recently held that the 1953 Treaty did not provide the New

York-incorporated subsidiary of a Japanese corporation with

immunity from Title VII and section 1981. The motion before

Judge Bue was essentially identical to that before this Court.

25a

Non-Japanese employees of a wholly owned domestic subsidi-

ary of a Japanese corporation filed suit against their employer

alleging racially discriminatory employment practices. The de-

fendant C. Itoh & Co. (America), Inc. (“Itoh-America”)

moved to dismiss, arguing that under the Treaty it has an

absolute right to hire personnel of its choice. In a well reasoned

opinion, Judge Bue held:

Given the Treaty’s own definitional terms, Itoh-

America is a company of the United States for purposes

of the interpretation of Article VIII(1), . . . which ap-

plies only to companies of one party within the territories

of the other party. . . . Itoh-America is a United States

company for purposes of Title VIII and, like other United

States companies, is subject to suit on the grounds that its

employment practices are racially discriminatory.

Id. at 9.°

Itoh-America contended, as does Sumitomo, that subsequent devel-

opments and expansion of the concept of standing renders obsolete the

Oldham analysis of the standing of corporate subsidiaries. Citing

Calnetics Corp. v. Volkswagen of America, Inc., 532 F.2d 674 (%h Cir.

1976), both Itoh-America and Sumitomo argue that the Oldham test

has been implicitly overruled by a liberalized standard. In Ca/netics, a

private antitrust action was commenced against a United States-incor-

porated subsidiary of a West German corporation and its wholly

owned American-incorporated air conditioning subsidiary. The district

court found that the defendants had violated the antitrust laws and

ordered, inter alia, a seven-year import ban in the United States of

Volkswagens with factory-installed air conditioning.

The Ninth Circuit reversed the finding of antitrust violations and

questioned the remedy imposed because the effect might be to discrimi-

nate against West German products in contravention of the German-

American Treaty of 1954. Judge Bue has distinguished Ca/netics, and

this Court concurs in his analysis:

Read in a light most favorable to Itoh-America, Ca/netics stands

for the proposition that a United States incorporated subsidiary of

a foreign corporation has standing to raise the claim that the Treaty

rights of its parent may be affected by court ordered relief. . . . In

Cainetics the Court of Appeals determined that the import ban

ordered by the trial court might discriminate against the products of

VW-Germany in contravention of that company’s Treaty rights. By

contrast. . . Itoh-Japan [the parent company of Itoh-America] has

26a

To avoid the conclusion that it has no standing to invoke the

Treaty, Sumitomo relies upon a four-page letter submitted on

November 17, 1978 by the United States Department of State

to the Equal Employment Opportunity Commission

(“EEOC”). The EEOC, which has submitted an amicus curiae

brief here in opposition to Sumitomo’s motion to dismiss,’ has

posed certain questions to the State Department. To one,

“[djoes the treaty permit subsidiaries of Japanese companies

which are organized under the laws of a state of the United

States to fill all its top management positions with Japanese

nationals admitted as treaty traders,”'® the State Department

replied, in pertinent part:

The phrase “of their choice” should be interpreted to give

effect to [the intention that United States companies

operating in Japan could hire United States personnel for

critical positions, and vice versa], and we therefore believe

that Article VIII(1) permits U.S. subsidiaries of Japanese

companies to fill all of their “executive personnel” posi-

tions with Japanese nationals admitted to this country as

treaty traders... .

Letter from Lee R. Marks, Deputy Legal Adviser, Department

of State, dated October 17, 1978, to Abner W. Sibal, General

Counsel, EEOC.

To another question, “[iJs the situation different if the

company doing business in the United States is not incorpo-

rated in the United States,” the State Department replied, in

pertinent part:

no Article VIII(1) right to staff ltoh-America. Accordingly . . .

even if Itoh-America has standing to invoke the Treaty rights of

Itoh-Japan, it can claim no shield against application of Title VII to

its own employment practices.

Spiess v. C. Itoh & Co. (America), Inc., supra, 469 F. Supp. at 9.

9 The EEOC also filed an amicus brief in support of plaintiffs’ motion

to dismiss the counterclaims. See text infra.

10 See text infra.

27a

[W]e see no grounds for distinguishing between subsidi-

aries incorporated in the United States owned and con-

trolled by a Japanese company and those operating as

unincorporated branches of a Japanese company, nor do

we see any policy reason for making the applicability of

Article VIII dependent on a choice of organizational

form.

Id.

Sumitomo relies upon these statements to confirm its “pref-

erential right and privilege to hire non-immigrant Japanese

nationals” under the Treaty. The Court has carefully consid-

ered the State Department letter and is mindful of the Supreme

Court’s admonition in Kolovrat v. Oregon, 366 U.S. 187, 194,

81S. Ct. 922, 926, 6 L. Ed. 2d 218 (1960), that “[w]hile courts

interpret treaties for themselves, the meaning given them by

the departments of government particularly charged with their

negotiation and enforcement is given great weight.” See also

Factor v. Laubenheimer, 290 U.S. 276, 295, 54S. Ct. 191, 78

L. Ed. 315 (1933). However, in the absence of analysis or

reasoning offered by the State Department in support of its

position,'' this Court does not find in the letter sufficiently

persuasive authority to reject the Treaty’s clear definition of

corporate nationality and the consequent unambiguous mean-

ing of Article VIII(1), or to reject established principles of

corporate law and the precedents in the Fifth and Ninth

Circuits.'?

Il It is disturbing that, in concluding that companies doing business

and companies incorporated in the United States are to be treated

equally under the Treaty, the State Department quotes only the first

portion of the definitional section: “Article XXIII [sic] defines ‘com-

panies’ as ‘corporations, partnerships, companies and other associa-

tions, whether or not with limited liability and whether or not for

pecuniary profit.’ ” The State Department neglects to quote the follow-

ing sentence, which states that companies formed under the applicable

laws of one of the parties are deemed companies thereof.

12 Subsequent to the filing of the district court’s Memorandum and

Opinion in Spiess v. C. Itoh & Co. (America), Inc., supra, the opinion

letter submitted by the Department of State to the EEOC was brought

to the attention of that court, and a motion was filed requesting

certification of the March 1, 1979 Order to the United States Court of

Appeals for the Fifth Circuit pursuant to 28 U.S.C. § 1292(b).

28a

Sumitomo also contends that it retains Japanese identity by

virtue of United States regulations and guidelines adopted in

connection with Article I of the Trea*y, which enables nationals

of either the United States or Japan to enter the territories of

the other and to remain therein for specified purposes. In

connection with Article I of the Treaty, section 1101(a)(15) of

the Immigration and Nationality Act of 1952, 8 U.S.C. § 1101

et seq., provides:

The term “immigrant” means every alien except an

alien who is within one of the following classes of non-im-

migrant aliens... .

(E) an alien entitled to enter the United States under

and in pursuance of the provisions of a treaty of com-

merce and navigation between the United States and the

foreign state of which he is a national. . . .

The Department of State has promulgated regulations that

an alien must satisfy in order to obtain a treaty trader visa

pursuant to section 1101(a)(15)(E)(i). Among these is that if the

Reconsidering his decision in light of the State Department letter,

Judge Bue reaffirmed his holding that Itoh-America is a company of

the United States under the terms of the Treaty and concluded that the

opinion letter did not warrant reversal of the court’s prior order.

Nevertheless, certification was granted because

[t}he Court c~ -cludes that the March 1 Order involves a controlling

question of 1.w as to which there are substantial grounds for

difference of opinion and that an immediate appeal may materially

advance the ultimate determination of this litigation.

Spiess v. C. ltoh & Co. (America), Inc., 469 F. Supp. 9 (S.D. Tex. Apr.

10, 1979).

Accordingly, the following question was certified to the Fifth Cir-

Does the 1953 Treaty of Friendship, Commerce and Navigation

between the United States and Japan provide American subsidiaries

of Japanese corporations with the absolute right to hire managerial,

professional or other specialized personnel of their choice, irrespec-

tive of American law proscribing racial discrimination in employ-

ment?

Id. at 10.

29a

employer is not an individual, it “must be. . . an organization

which is principally owned by a person or persons having the

nationality of the Treaty country.” 22 C.F.R. § 41.40 (1977).

The parameters of this regulation are further described in 9

FOREIGN AFFAIRS MANUAL PART II, which states: “the

nationality of the employing firm is determined by those

persons who own more than 50% of the stock of the employ-

ing corporation regardless of the place of incorporation.”'’

Sumitomo seizes on the regulatory standard to urge that

nationality for purposes of the Treaty should be determined by

the State Department guidelines, explaining that it is by in-

teraction with Article I that the Article VIII “freedom of

choice” provision is implemented. As Sumitomo is a wholly

owned subsidiary of a Japanese company, by this test Sumi-

tomo also would be a Japanese company. The Court agrees

with Judge Bue who, when presented with the same argument,

found that “resort to the treaty trader guidelines to determine

corporate nationality for purposes of interpretation of the

Treaty provisions is unwarranted in the face of the clear

definitional provisions included in Article XXII(3) of the

Treaty itself.” Spiess v. C. Itoh & Co., supra, 469 F. Supp. at

6.'* The purpose of the Treaty is to assure that Japanese

13, The Manual is distributed to all State Department consular offices

and to the offices of District Directors of Immigration.

14 The State Department guidelines are promulgated for the purpose of

determining an individual’s immigration status; they are not designed

for the purpose of defining a corporation’s juridical status. Two

decisions from this district lend support to this conclusion.

In Tokyo Sansei v. Esperdy, 298 F. Supp. 945 (S.D.N.Y. 1969), an

action for review of the determination of the district director of the

Immigration and Naturalization Service (“INS”) was brought by

individuals who had been denied treaty trader status. Their corporate

employer, a wholly owned subsidiary of a Japanese corporation, joined

in the action as a plaintiff. The district court upheld the administrative

determination denying treaty trader status and noted that

the question [whether the employer has standing] is substantial. It

seems likely that without the individual plaintiffs, the corporation,

however great its incidental “interest” as a business matter, could

not maintain the suit. And with the individuals in the case, the

corporation, strictly speaking, is unnecessary. . . .

Id. at 948 n.4,

(Footnote continued)

30a

companies operating in the United States, and vice versa, will

not be discriminated against in favor of domestic corporations.

Sumitomo is a domestic corporation and as such has neither

standing nor need to invoke the aegis of the Treaty. Accord-

ingly, the motion to dismiss the discrimination claims on the

basis of the Treaty is denied.

The Section 1981 Claims

The second issue before the Court is whether the provisions

of 42 U.S.C. section 1981'* apply to claims alleging discrimina-

tion based on sex and national origin. The law in this circuit,

as in others, is clear that section 1981 does not apply to sex

discrimination. New York City Jaycees, Inc. v. United States

Jaycees, Inc., 377 F. Supp. 481 (S.D.N.Y. 1974), rev’d on other

grounds, 512 F.2d 856 (2d Cir. 1975); O’Connell v. Teachers

College, 63 F.R.D. 638 (S.D.N.Y. 1974). See also Vera v.

Bethlehem Steel Corp., 448 F. Supp. 610 (M.D. Pa. 1978);

Apodaca v. General Electric Co., 445 F. Supp. 821 (D.N.M.

1978).

Similarly, in Nippon Express U.S.A., Inc. v. Esperdy, 261 F. Supp.

561 (S.D.N.Y. 1966), a subsidiary of a Japanese express company

sought review of the denial by the INS district director of an applica-

tion made by the corporate employer on behalf of an alien employee

for continuation of her status a» a treaty trader. The district court

concluded that

[t}he Immigration and Naturalization Service has the responsibil-

ity for deciding [treaty trader status]. There is no merit to plaintiffs’

contention that the Japanese employer itself may confer that status

upon any employee it chooses.

Id. at 565.

15 Section 1981 provides:

All persons with the jurisdiction of the United States shall have

the same right in every State and Territory to make and enforce

contracts, to sue, be parties, give evidence, and to the full and equal

benefit of all laws and proceedings for the security of persons and

property as is enjoyed by white citizens, and shall be subject to like

punishment, pains, penalties, taxes, licenses, and exactions of every

kind, and to no other.

3la

However, there is a split of authority among the courts

which have considered the question whether claims of dis-

crimination based on national origin are actionable under

section 1981—a question, it appears, that the Second Circuit

has not yet addressed. Compare, e.g., Apodaca v. General

Electric Company, supra; Vera v. Bethlehem Steel Corp.,

supra; Martinez v. Hazelton Research Animals, Inc., 430 F.

Supp. 186 (D. Md. (1977); Budinsky v. Corning Glass Works,

425 F. Supp. 786 (W.D. Pa. 1977); Kurylas v. United States

Department of Agriculture, 373 F. Supp. 1072 (D.D.C. 1974),

aff'd, 169 U.S. App. D.C. 58, 514 F.2d 894 (D.C. Cir. 1975),

with LaFore v. Emblem Tape & Label Co., 448 F. Supp. 824

(D. Colo. 1978); Ortega v. Merit Insurance Co., 433 F. Supp.

135 (N.D. Ill. 1977).

In Jones v. United Gas Improvement Corp., 68 F.R.D. 1

(E.D. Pa. 1975), the court reviewed carefully the legislative

history of section 1981 and concluded that the section applies

to discrimination based on race and alienage only. It then

characterized the alleged discrimination against Spanish sur-

named individuals as based on national origin and held that no

action lay under section 1981. The court held

that the provisions of 42 U.S.C. § 1981 are limited in their

application to discrimination, the effect of which is to

deny to any person within the jurisdiction of the United

States any of the rights enumerated in that section, to the

extent that such rights are enjoyed by white citizens of this

nation. Discriminatio». on other grounds, such as religion,

sex, or national origin, to which white citizens may be

subject, as well as white non-citizens, non-white citizens,

or non-white non-citizens, is not proscribed by the stat-

ute.

68 F.R.D. at 15 (emphasis in original).'*

16 Although the Supreme Court has not yet considered whether an

allegation of national origin discrimination may be actionable under

section 1981, it has extended the protection of that provision to “racial

discrimination in private employment against white persons,” 96 S. Ct.

2574, 2582, 49 L. Ed. 2d 493. McDonald v. Santa Fe Trail Transporta-

tion Co., 427 U.S. 273, 287 (1976).

32a

A few courts have held that if national origin discrimination

is motivated by or indistinguishable from racial discrimination,

a claim will be actionable under section 1981.'’ However, even

were this Court to find the Jones analysis unpersuasive, on the

facts of the instant action it could not equate plaintiffs’ claims

that they have been discriminated against because they are not

Japanese nationals with discrimination based on their race.

Indeed, from a superficial perusal of the plaintiffs’ names it

appears that at least one of the plaintiffs is non-Caucasian. As

plaintiffs have, and are exercising, an adequate remedy for

redress under Title VII, there is no need for them to strain to

fit their grievances into the mold of racial discrimination. The

Court concludes that the plaintiffs’ allegations of discrimina-

tion based on sex and national origin are insufficient to sustain

a cause of action under section 1981 and that these claims

should be dismissed.

The Counterclaims

Plaintiffs cross-move pursuant to Rule 12(b) of the Federal

Rules of Civil Procedure to dismiss Sumitomo’s amended

counterclaims for failure to state a claim upon which relief can

be granted. Sumitomo counterclaims, first, for attorney’s fees

pursuant to 42 U.S.C. § 2000e-5(k) and punitive damages by

reason of plaintiffs’ “frivolous and spurious” institution of

this lawsuit “in bad faith, vexatiously, willfully and

wrongfully”; second, for damages by reason of plaintiffs’

alleged abuse of the federal administrative and judicial

17 A number of courts have permitted Hispanic individuals to sue

under section 1981 upon evidence that the alleged discrimination was

racial in character. See Enriquez v. Honeywell, Inc., 431 F. Supp. 901

(W.D. Okla. 1977); Martinez v. Hazelton Research Animals, Inc., 430

F. Supp. 186 (D. Md. 1977); Cubas v. Rapid American Corp., Inc.,

420 F. Supp. 663 (E.D. Pa. 1976). However, in Budinsky v. Corning

Glass Works, 425 F. Supp. 786 (W.D. Pa. 1977), an employee's

allegation of discrimination based on his Slavic national origin failed

to state a cause of action under section 1981. Similarly, an allegation of

discrimination by a Polish-American failed to state a cause of action

under this provision in Kurylas v. United States Department of

Agriculture, 373 F. Supp. 1072 (D.D.C. 1974), aff'd, 169 U.S. App.

D.C. 58, 514 F.2d 894 (1975).

33a

process; third, for damages by reason of plaintiffs’ common-

law abuse of process; and fourth, for damages by reason of

plaintiffs’ tortious interference with Sumitomo’s business

operations.

For the reasons discussed below, the motion is granted as to

the first counterclaim only. The remaining counterclaims, over-

lapping as Sumitomo’s theories may be, satisfy the low

threshold required to withstand a Rule 12(b) motion.

1. Alttorney’s Fees

Sumitomo, predicating its first counterclaim on section

706(k) of Title VII, 42 U.S.C. § 2000e-5(k), seeks recovery for

attorney’s fees expended to date and punitive damages for

plaintiffs’ wrongful conduct in commencing an allegedly spuri-

ous and frivolous Title VII action. Plaintiffs move to dismiss

this counterclaim on the ground that section 706(k) will not

support an independent claim for relief.

The question whether a defendant can request section 706(k)

relief by way of counterclaim appears to be a novel one. The

Court concludes that he cannot. Section 706(k) provides: “In

any action or proceeding under this subchapter the court, in its

discretion, may allow the prevailing party. . . a reasonable

attorney’s fee as part of the costs. . . .” To treat this section

as creating a separate cause of action is to ignore the words of

the statute, which provide for reasonable attorney’s fees to the

“prevailing party,” in the context of an existing action or

proceeding “as part of the costs” thereof. This language

necessarily implies a finality that this litigation does not yet

approach. Accordingly, the first counterclaim is not yet justi-

ciable and does not state a claim upon which relief can be

granted. It will be stricken without prejudice to Sumitomo’s

right to make later application to the Court for reasonable

attorney’s fees if the Title VII action is found to be frivolous

or without foundation.'*

18 In Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 422, 98 S.

Ct. 694, 701 (1978), the Supreme Court defined the circumstances

34a

Il. Abuse of Process

The second and third counterclaims are based upon plain-

tiffs’ alleged abuse of process in state and federal administra-

tive and judicial proceedings. The gravamen of the tort of

abuse of process is “misusing or misapplying process justified

in itself for an end other than that which it was designed to

accomplish,” Prosser, Torts, § 121, at 856 (4th ed. 1971), or,

stated in another way, the tortious use of “legal process to

attain some collateral objective.” Board of Education v. Farm-

ingdale Classroom Teachers, 38 N.Y.2d 397, 402, 380 N.Y.S.2d

635, 641, 343 N.E.2d 278 (1975). Sumitomo alleges that plain-

tiffs’ purpose in bringing proceedings before administrative

and judicial tribunals has been to coerce Sumitomo into

acceding to their demands for work assignments for which they

were unqualified and for payment of additional compensation

to which they were not entitled. Such allegations clearly satisfy

the intentional elements of the tort of abuse of process.

For purposes of a motion to dismiss, the court must accept

the allegations of the complaint as true. Conley v. Gibson, 355

U.S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957). Hence Sumitomo

is entitled to prove that the true intent of the plaintiffs was not

legitimately to invoke the processes of the administrative agen-

cies and the courts, but to coerce Sumitomo into yielding to

their demands for promotion and higher pay. See California

Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 92

S. Ct. 609, 30 L. Ed. 2d 642 (1972).

Ill. Prima Facie Tort

The intentional infliction of temporal damages without a

legal motive—commonly referred to as prima facie tort—is a

tort recognizable at law. Smith v. Fidelity Mutual Life Insur-

under which an attorney’s fee should be awarded when the defendant

is the prevailing party:

[A] plaintiff should not be assessed his opponent's attorney's fees

unless a court finds that his claim was frivolous, unreasonable, or

groundless, or that the plaintiff continued to litigate after it clearly

became so.

35a

ance Co., 444 F. Supp. 594 (S.D.N.Y. 1978); Advance Music

Corp. v. American Tobacco Co., 296 N.Y. 79, 70 N.E.2d 401

(1946). Its elements are: (1) the infliction of intentional harm

(2) resulting in damages (3) without excuse or justification (4)

by acts or series of acts that would otherwise be lawful. All

must be established for the cause of action to be upheld.

Sommer v. Kaufman, 59 A. D. 2d 843, 399 N.Y.S.2d 7, 8 (Ist

Dep’t 1977).

In Board of Education v. Farmingdale Classroom Teachers,

supra, the Board of Education brought an action against a

teachers association and its attorney for abusing legal process

by subpoenaing, with intent to injure and harass the school

district, 87 teachers to compel their appearances at an initial

hearing before the public employees’ relations board and

refusing to stagger the appearances, so that the school district

was forced to hire 77 substitutes. The New York Court of

Appeals held that the complaint stated a cause of action for

both abuse of process and prima facie tort. Discussing the

prima facie tort claim, the court stated:

The operative fact here is that defendants have utilized

legal procedure to harass and oppress the plaintiff who

suffered a grievance which should be recognizable at law.

Consequently whenever there is an intentional infliction

of economic damage, without excuse or justification, we

will eschew formalism and recognize the existence of a

cause of action.

38 N.Y.2d at 406, 380 N.Y.S.2d at 644, 343 N.E.2d at 284.

Sumitomo’s fourth counterclaim alleges that by the institu-

tion of vexatious federal and state administrative and judicial

proceedings and by disruptive and harassing activity in the

office, plaintiffs deliberately and without justification inflicted

temporal and economic harm upon Sumitomo. The Court

concludes that this allegation satisfies the elements of prima

facie tort and states a claim upon which relief can be granted.

36a

IV. Section 704(a)

Finally, both plaintiffs and the EEOC, as amicus curiae,

assert that the counterclaims must be dismissed because the

filing of charges before the EEOC and the bringing of a Title

VII suit are absolutely privileged. As the basis for this theory,

they cite section 704(a) of Title VII, which forbids “discrimina-

tion against . . . employees for attempting to protest or

correct allegedly discriminatory conditions of employment.”

McDonnell Douglas Corp. v. Green, 411 U.S. 792, 796, 93 S.

Ct. 1817, 1821, 36 L. Ed. 2d 668 (1973).'°

The Supreme Court has declined to resolve the issue whether

“the protection afforded by § 704(a) extends only to the right

of access [to the EEOC and federal courts] or well beyond it.”

Emporium Capwell Co. v. Western Addition Community Org.,

420 U.S. 50, 71 n.25, 43 L. Ed. 12 (1975). However, the Court

has stated that “[nJothing in Title VII compels an employer to

absolve and rehire one who has engaged in . . . deliberate,

unlawful activity against it.” McDonnell Douglas Corp. v.

Green, supra, 411 U.S. at 803, 93 S. Ct. at 1825. In attempting

to define the limits of protected conduct under section 704(a),

lower courts have relied upon the McDonnell Douglas \an-

guage to conclude that illegal activity and activity that unrea-

sonably interferes with the employer’s legitimate interests are

not immunized by this provision. See Novotny v. Great Ameri-

can Federal Savings and Loan Ass’n, 584 F.2d 1235, 1261 (3d

Cir. 1978); Hochstadt v. Worcester Foundation, 545 F.2d 222,

231 (ist Cir. 1976). In EEOC v. Kallir, Philips, Ross, Inc., 401

F. Supp. 66, 71-72 (S.D.N.Y. 1975), the court stated:

Under some circumstances, an employee’s conduct in

gathering or attempting to gather evidence to support his

19 42 U.S.C. § 2000e-3(a). That section provides:

It shall be an unlawful employment practice for an employer to

discriminate against any of his employees . . . because he has

opposed any practice made an unlawful employment practice by

this subchapter, or because he has made a charge, testified, assisted,

or participated in any manner in an investigation, proceeding, or

hearing under this subchapter.

37a

charge may be so excessive and so deliberately calculated

to inflict needless economic hardship on the employer that

the employee loses the protection of section 704(a), just as

other legitimate civil rights activities lose the protection of

section 704(a) when they progress to the point of de-

liverate and unlawful conduct against the employer.

The Court concludes that the cases cited above are disposi-

tive of plaintiffs’ contentions of immunity. Sumitomo alleges

not only that plaintiffs instituted spurious administrative and

judicial proceedings, but also that plaintiffs have been disrup-

tive in the office, have endeavored to sabotage Sumitomo’s

business, have engaged in calculated acts of insubordination,

have urged other employees to violate their fiduciary duties to

Sumitomo and have harassed and coerced those who would

not, and have attempted to “purloin” confidential corporate

documents. Affidavit of J. Portis Hicks, sworn to July 11,

1978, 4 9. Allegations of such aggressive and Hostile tactics,

which must be accepted as true for purposes of a Rule 12(b)

motion, cannot be dismissed on the basis of section 704(a).

Accordingly, plaintiffs’ section 1981 claims and defendant’s

section 706(k) counterclaim for attorney’s fees are dismissed.

All other motions are denied.

So ordered.

39a

APPENDIX D

Opinion

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

aoe

August 9, 1979

77 Civ. 5641 (CHT)

aod

LISA M. AVIGLIANO, ef al.,

Plaintiffs,

—against—

SUMITOMO SHOJI AMERICA, INC.,

Defendant.

ec

APPEARANCES

For Plaintiffs:

EISNER, LEVY, STEEL & BELLMAN, PC.

351 Broadway

New York, New York 10013

Of Counsel:

LEwIs M. STEEL, Esq.

For Defendant:

WENDER, MURASE & WHITE

400 Park Avenue

New York, New York 10022

Of Counsel:

J. PORTIS HICKS, Esq.

LANCE GOTTHOFFER, Esq.

Amicus Curiae:

EQUAL EMPLOYMENT OPPORTUNITY COMMISSION

2401 E Street, N.W.

Washington, D.C. 20506

Of Counsel:

ISSIE L. JENKINS

Acting General Counsel

JOSEPH T. EDDINS

Associate General Counsel

LUTZ ALEXANDER PRAGER, Esq.

—-

TENNEY, J.

In this action for redress of alleged employment discrimina-

tion both parties have filed applications directed at the Court’s

Opinion and Order dated June 5, 1979 which denied dismissal

of the instant Complaint and certain of the counterclaims and

dismissed one counterclaim and one jurisdictional base as-

serted by the plaintiffs. The defendant seeks an immediate

appeal under 28 U.S.C. § 1292(b), asking the Court to certify

for appellate review the primary question posed in its original

motion to dismiss; that is, whether the defendant is exempted

under the terms of the 1953 Treaty of Friendship, Commerce

and Navigation between the United States and Japan (“the

Treaty”) from sanctions contained in Title VII of the Civil

Rights Act of 1964, 42 U.S.C. § 2000e et seq. (“Title VII”)

against certain allegedly discriminatory employment practices.

The plaintiffs also make applications to the Court, first for a

certification under section 1292(b) of the question whether

their allegation of sex and nationality discrimination consti-

tutes a valid cause of action under 42 U.S.C. § 1981, and

second for reargument of this Court’s refusal to dismiss certain

4la

of defendant’s counterclaims sounding in common law tort.

The Court finds that only the question of the relationship

between the Treaty and the civil rights law is suitable for

section 1292(b) treatment..Therefore, the certification will be

granted only as to that question and ali other applications will

be denied.

Section 1292(b) requires that a district judge

making in a civil action an order not otherwise appealable

under [section 1292 who is of] the opinion that such order

involves a controlling question of law as to which there is

a substantial ground for difference of opinion and that an

immediate appeal from the order may materially advance

the ultimate termination of the litigation . . . shall so

state in writing in such order.

The question whether defendant’s employment practices are

insulated from redress through civil rights actions is a pure

question of law. If defendant is protected by the Treaty, it is

not answerable in court to these claims of discrimination. If

not, then its practices are exposed to judicial evaluation. Since

there is a dearth of authority on the matter, this Court deems it

prudent to follow the lead of Judge Bue of the United States

District Court for the Southern District of Texas, who in Spiess

v. C. Itoh & Co. (America), Inc., 469 F. Supp. 1 (S.D. Tex.

1979), faced almost the identical question as is here posed and

certified the following question to the United States Court of

Appeals for the Fifth Circuit:

Does the 1953 Treaty of Friendship, Commerce and

Navigation between the United States and Japan provide

American subsidiaries of Japanese corporations with the

absolute right to hire managerial, professional or other

specialized personnel of their choice, irrespective of

American law proscribing racial discrimination in em-

ployment?

Id. at 10. Although in contrast to Spiess there has been no class

certification yet in the case at bar, the Court expects that the

litigation will be sufficiently complicated that it would be a

42a

waste of judicial time to try it with the novel jurisdictional

question in limbo. Moreover, because the Court studied and

rejected a Department of State opinion letter which construed

the Treaty favorably to the defendant, see Opinion and Order

at 9; cf. Spiess v. C. Itoh & Co. (America), Inc., supra; the

instant matter now reflects the tension generated by the princi-

ple that “[cJourts are to give substantial weight to the construc-

tion . . . which is placed upon the treaty by the political

branch” although “they are not required to abdicate what is

basically a judicial function.” Kelley v. Societe Anonyme Belge

D’Exploitation de la Navigation Aerienne, 242 F. Supp. 129,

136 (E.D.N.Y. 1965). Therefore, the Court deems it wise to

seek the instruction of the United States Court of Appeals for

the Second Circuit and certifies that the interpretation of the

Treaty poses a controling question of law upon which the

Court and the Department of State differ, the resolution of

which will materially advance the prosecution of this case.

As for plaintiffs’ application to certify the question whether

42 U.S.C. § 1981 applies to these civil rights claims, the Court

sees no reason to grant interlocutory appeal. Any reversal on

the section 1981 issue could not be made in a vacuum and

construction of the Treaty could not be avoided in reaching

that decision. Therefore, immediate appeal on section 1981

would be a superfluity, for if the court of appeals finds that the

Treaty does not immunize the defendant from employment

discrimination suits then the Title VII avenue will be adequate

for plaintiffs to press their claims, and if the Treaty is found to

protect the defendant then such immunization will be invoked

whether the civil rights claim is filed pursuant to Title VII or to

section 1981.

Finally, the plaintiffs again ask for dismissal of counter-

claims 2, 3, and 4, seeking under Rule 9(m) of the General

Rules of the United States District Court for the Southern

District of New York (“General Rules”) to convince the Court

that its refusal to dismiss those counterclaims was error. Al-

though the Court sees nothing in plaintiffs’ Memorandum of

Law on Reargument that migut be called “matters of control-

ling decisions which counsel believes the court has over-

43a

looked,” General Rule 9(m), in a Memorandum of Law sub-

mitted by the Equal Employment Opportunity Commission

(“EEOC”) as amicus curiae the agency argues that Harris v.

Steinem, 571 F.2d 119 (2d Cir. 1978), controls here, and in their

Reply Memorandum of Law the plaintiffs adopt the EEOC

position. The Court does not agree that Harris is dispositive.

There the complaint alleged a violation of federal securities

law, and the defendants counterclaimed for libel purportedly

committed in the complaint itself and on subsequent occasions

in published statements by the plaintiff. The district court

found that the libel charge was a compulsory counterclaim,

was therefore ancillary to the court’s federal question jurisdic-

tion over the complaint, and consequently was jurisdictionally

valid despite the fact that it had no independent base of federal

jurisdiction. The court of appeals disagreed, holding that the

libel charge was not a compulsory counterclaim measured by

the rule that analyzed “whether the essential facts of the

various claims are so logically connected that considerations of

judicial economy and fairness dictate that all the issues be

resolved in one lawsuit.” /d. at 123. Contrasting the issues to

be proved in a securities case with those to be proved in libel,

the Harris court found no overlap and called the logical

relationship between complaint and counterclaim “at best

attenuated,” id. at 124, and dismissed for lack of jurisdiction.

This Court sees a distinction between, on the one hand, facts

involving a sale of stock and a subsequent, purportedly li-

belous statement and, on the other hand, a claim of employ-

ment discrimination accompanied by an allegation of continu-

ing retaliatory activity provoked by the policy complained of.

In this case the defendant claims that

prior to commencing [this action] . . . [the plaintiffs]

entered into a conspiracy to coerce Sumitomo to accede to

plaintiffs’ unreasonable demands for assignment to work

for which they were not qualified and for payment of

additional compensation to which they were not entitled,

and to retaliate against Sumitomo for its refusal to make

such assignments or pay such additional compensation,

by injuring Sumitomo in its business and trade.

44a

Answer and Counterclaim, 4 19. Defendant goes on to com-

plain that “as part of carrying out their conspiracy, plaintiffs in

bad faith vexatiously, willfully and wrongfully commenced

sham administrative proceedings before the Division of Hu-

man Rights of the Executive Department of the State of New

York, and before the United States Equal Employment Oppor-

tunity Commission.” /d., { 20. These are allegations that state

a claim for malicious abuse of process, not—as in Harris—ma-

licious prosecution. A counterclaim for malicious prosecution

would be barred regardless of its compulsory or permissive

nature because the tort is not actionable until the termination

of the main action favorably to the defendant. By contrast, the

tort of malicious abuse of process may be pleaded at any time

because it does not rest on the course of a court proceeding.

Moreover, the Harris court found that its counterclaim fell

“within the well-established narrow line of decisions involving

counterclaims based solely on the filing of the main complaint

and allegedly libelous publication thereafter.” Jd. at 125. There

is no such special niche for these counterclaims. They purport

to involve pre-suit harassment by the plaintiffs and, beyond

complaining of the motive behind bringing the instant case, the

defendant complains of previous actions before governmental

agencies brought for allegedly coersive purposes. Intimating no

judgment on the merits of the counterclaims the Court adheres

to its original finding that they have a logical relationship to

the main action and meet the threshold test for stating a valid

claim upon which relief can be granted.

The defendant’s question concerning the relationship of

Title VII to the Treaty is hereby certified; all other applications

are denied.

So ordered.

Dated: New York, New York

August 9, 1979

CHARLES H. TENNEY

U.S.D.J.

45a

APPENDIX E

Opinion

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF Ni w YORK

—-

November 29, 1979

77 Civ. 5641 (CHT)

~~

LISA M. AVIGLIANO, ef al.,

Plaintiffs,

—against—

SUMITOMO SHOJI AMERICA, INC.,

Defendant.

~_

APPEARANCES

For Plaintiffs:

EISNER, LEVY, STEEL & BELLMAN, PC.

351 Broadway

New York, New York 10013

Of Counsel:

LEwiIs M. STEEL, Esq.

For Defendant:

WENDER, MURASE & WHITE

400 Park Avenue

New York, New York 10022

Of Counsel:

JIRO MURASE, Esq.

J. PORTIS HICKS, Esq.

EDWARD H. MARTIN, Esq.

LANCE GOTTHOFFER, Esq.

Amicus Curiae:

EQUAL EMPLOYMENT OPPORTUNITY COMMISSION

2401 E Street, N.W.

Washington, D.C. 20506

Of Counsel:

LEROY D. CLARK

General Counsel

JOSEPH T. EDDINS

Associate General Counsel

LUTZ ALEXANDER PRAGER

By: MARCIA B. RUSKIN, Esq.

Local Counsel:

EQUAL EMPLOYMENT OPPORTUNITY COMMISSION

90 Church Street, Rm. 1301

New York, New York 10007

By: HARRAIN D. FIGUEROA, Esq.

aod

TENNEY, J.

Defendant Sumitomo Shoji America, Inc. (“Sumitomo”)

has moved for reargument of the Court’s denial of its motion

to dismiss the claims against it, Opinion and Order dated June

5, 1979, reported at 473 F. Supp. 506 (S.D.N.Y. 1979). In its

June 5 decision, the Court held, inter alia, that Sumitomo, as a

United States subsidiary of a Japanese corporation, is not

exempt under Article VIII(1) of the 1953 Treaty of Friendship,

Commerce and Navigation between the United States and

Japan, [1975] 4 U.S.T. 2063, T.1.A.S. 2863 (effective October

47a

30, 1953) (“the Treaty”), from sanctions contained in Title VU

of the Civil Rights Act of 1964, 42 U.S.C. § 2000e ef seq.

(“Title VII”) against certain allegedly discriminatory employ-

ment practices. 473 F. Supp. at 509-13. The provision on which

Sumitomo sought, and still seeks, to rely provides in pertinent

part: “Nationals and companies of either Party shall be per-

mitted to engage, within the territories of the other Party,

accountants and other technical experts, executive personnel,

attorneys, agents and other specialists of their choice.” Article

‘ VIII). In not allowing Sumitomo—a United States subsidi-

ary—to rely on that provision, the Court looked primarily to

Article XXII(3) of the Treaty. Paragraph 3 provides:

As used in the present treaty, the term “companies”

means corporations, partnerships, companies and other

associations, whether or not with limited liability and

whether or not for pecuniary profit. Companies consti-

tuted under the applicable laws and regulations within the

territories of either Party shall be deemed companies

thereof and shall have their juridical status recognized

within the territories of the other Party.

(Emphasis added).

In moving for reargument of the June 5 decision, Sumitomo

relies on documents recently released by the Department of

State that purportedly bear on the intent of the negotiators of

the Treaty. The Court grants the motion to reargue, but

concludes that oral argument is unnecessary. The Court finds

that the documents lend some support to Sumitomo’s conten-

tions, but does not find them sufficiently persuasive io alter its

June 5 decision.

BACKGROUND

Additional Procedural Background

Pursuant to 28 U.S.C. § 1292(b), Sumitomo sought an

immediate appeal of the Court’s decision. The Court agreed to

an immediate appeal, but limited its certification to the issue of

48a

Sumitomo’s standing under the Treaty’s freedom-of-choice

provision. Opinion and Order dated August 9, 1979, reported

at ____ F. Supp. ___. (S.D.N.Y. 1979). Prior to filing a notice

of appeal, Sumitomo requested this Court to withdraw its

certification because the Department of State had on August

15 released documents that Sumitomo wanted the Court to

consider. Letter from J. Portis Hicks to the Court, dated

August 16, 1979. Because the ten-day period for filing a notice

of appeal after certification was about to elapse, see Federal

Rule of Appellate Procedure 5(a), Sumitomo filed its notice of

appeal without waiting for action from this Court, but re-

quested that the court of appeals stay any action until this

Court had had a chance to consider the Department of State

documents. On August 17, the court of appeals denied Sumi-

tomo permission to appeal, but did so without ruling on the

merits and without prejudice to renewal of the appeal after this

Court had had the opportunity to consider the documents—in

effect, a remand of the action to this Court. Order dated

August 17, 1979 in No. 79-8460. Sumitomo subsequently

moved for reconsideration of the Court’s June 5 decision

denying it standing under Article VIII(1). All parties have since

been given the opportunity to file briefs on the effect of the

Department of State documents on the Court’s decision.

In its previous motion to dismiss, Sumitomo relied on an

October 17, 1978 letter from the Department of State to the

Equal Employment Opportunity Commission (“EEOC”). In

the Department of State’s view of the Treaty, as expressed in

that letter, Sumitomo has the freedom of choice to fill all of its

top management positions with Japanese nationals without

being subject to Title VII sanctions. The Department of State

drew no distinctions “between subsidiaries incorporated in the

United States owned and controlled by a Japanese company

and those operating as unincorporated branches of a Japanese

company.” See 473 F. Supp. at 511. The Court, in considering

this letter, was mindful that the meanings given treaties by

government departments charged with their negotiation and

enforcement are given great weight. /d., quoting Kolovrat v.

Oregon, 366 U.S. 187, 194 (1960). Nevertheless, it rejected the

49a

meaning given the Treaty by the Department of State. “[I]n the

absence of analysis or reasoning offered by the State Depart-

ment in support of its position, this Court does not find in the

letter sufficiently persuasive authority to reject the Treaty’s

clear definition of corporate nationality and the consequent

unambiguous meaning of Article VIII(1)” or to reject es-

tablished principles of corporate law and applicable prece-

dents. /d. at 511-12 (footnote omitted).

During te course of the briefing on this motion for reargu-

ment, the Department of State indicated that it had changed its

view on whether the first sentence of Article VIII(1) of the

Treaty (freedom-of-choice provision) covers United States sub-

sidiaries of foreign corporations. Letter from James R. At-

wood, Department of State Deputy Legal Adviser, to Lutz

Alexander Prager, EEOC Assistant General Counsel, dated

September 11, 1979, attached, e.g., as Exh. 1 to Affidavit of

Lewis M. Steel, sworn to September 17, 1979. Because of the

importance of this letter in the consideration of this motion, it

is set out at length:

[T]he Department has conducted an extensive review of

the negotiating files on our bilateral treaties of friendship,

commerce and navigation (FCN), including the 1953 FCN

with Japan, and has carefully weighed the question of

coverage of subsidiaries by this treaty, an issue in Spiess v.

C. Itoh & Co. [, 469 F. Supp. 1 (S.D. Tex.), appeal

docketed, No. 79-2382 (Sth Cir. 1979),] and two other

cases more recently decided in the district court in New

York (Avigliano v. Sumitomo Shoji America, Inc., [473 F.

Supp. 506 (S.D.N.Y. 1979),] and Linskey v. Heidelberg

Eastern, Inc., [470 F. Supp. 1181 (E.D.N.Y. 1979)].

The manner of coverage of subsidiaries is in many

instances complex, making it necessary to rely on the

intent of the negotiators to fully comprehend certain

provisions. On further reflection on the scope of applica-

tion of the first sentence of Paragraph 1 of Article VIII of

the U.S.-Japan FCN, we have established to our satisfac-

tion that it was not the intent of the negotiators to cover

50a

locally-incorporated subsidiaries, and that therefore U.S.

subsidiaries of Japanese corporations cannot avail them-

selves of this provision of the treaty. In terms of selection

of personnel, management or otherwise, the rights of such

subsidiaries are determined by the general provisions of

Article VII (1) and (4), which respectively provide for

national and most-favored-nation treatment of the activi-

ties of such subsidiaries. While we do not necessarily

agree with all points expressed by the Court in deciding

the /toh case on the question of subsidiary coverage, we

do concur in general terms with the Court’s reasoning,

and specifically in the result reached in interpreting the

scope of the first sentence of Article VIII, paragraph 1.

Arguments

The positions of Avigliano, Sumitomo, and the EEOC may

be stated briefly as follows. Avigliano argues that Sumitomo

has no rights under the freedom-of-choice provision in Article

VIII(1). Its foreign owner gave up those rights, as far as

Sumitomo is concerned, when it chose to operate in the United

States as a locally incorporated subsidiary rather than as a

branch. The documents, in Avigliano’s view, indicate that the

Treaty was designed to ensure only national treatment for

foreign controlled companies. They show that the intent be-

hind the Treaty was not to exempt such companies from

United States civil rights laws.

The EEOC, in its amicus brief, argues that the September 11

Department of State letter should be given great weight by the

Court. The documents should not alter the conclusion reached

by the Court in its June 5 Opinion and Order: Sumitomo’s

rights are governed by Article XXII(3), which provides that

companies constituted under the laws of a particular country

shal! be deemed companies of that country. Accordingly, Sumi-

tomo may be granted no greater or lesser rights than any other

domestically created company. Moreover, Article VIII(1), even

were it applicable, would not allow discrimination in favor of

or against Japanese nationals or anyone else. Article VIII(1)

S5la

and Title VII and section 1981 are consistent: all three prohibit

discrimination against anyone.

Sumitomo argues that the Court should disregard the Sep-

tember 11 Department of State letter because it, like the

October i7, 1978 letter expressing a contrary view, offers no

authority or reasoning in support of its position. Sumitomo

argues that the Court should instead rely on the Department of

State documents to establish the intent of the Treaty negotia-

tors. It relies on these documents to establish that Sumitomo

has standing under Article VIII(1), as an intended beneficiary,

to assert freedom of choice in hiring certain personnel. The

confusion, according to Sumitomo, results from the drafters’

failure to distinguish clearly between provisions defining cor-

porate nationality and those granting specific rights. Corporate

nationality is not the intended test for determining standing

under the Treaty, Sumitomo continues; Sumitomo—though

technically a United States company—is entitled to specific

rights under the Treaty, as purportedly demonstrated by the

documents, because it is foreign-owned.

Documents

The documents released by the Department of State address

negotiations and enforcement of this Treaty and similar treaties

with other countries. The first document on which Sumitomo

relies is a Department of State Airgram, signed “Kissinger”

and dated January 9, 1976, to the American Embassy in Tokyo

(“Kissinger Airgram”), Exh. A to Sumitomo Memorandum.

The subject was the proper interpretation of Article XXII(3) of

the Treaty. Because of the differing interpretations of the

Kissinger Airgram, the Court sets it out in its entirety:

Department Legal Adviser’s office has examined meaning

of paragraph 3 of Article XXII of the U.S.-Japanese FCN

Treaty signed at Tokyo April 2, 1953, and fully concurs

with Embassy’s general position as set forth.

Most persuasive arguments we have found are (a) law

review article on FCNs by Herman Walker, Jr., who

52a

formulated modern (i.e., post-WW II) form of FCN

treaty and negotiated many FCNs; and (b) negotiating

record of U.S.-Japan FCN, especially Dispatch No. 13

from Tokyo of April 8, 1952. Both documents are en-

closed. Walker cites (pp 380-81), para 3 of Japanese FCN

as standard definition of company for purposes of treaty,

i.e., in the standard FCN treaty “A ‘company’ is defined

simply and broadly to mean any corporation, partnership,

company or other association which has been duly formed

under the laws of one of the contracting parties; that is,

any ‘artificial’ person acknowledged by its creator, as

distinguished from a natural person, whether or not for

pecuniary profit.” This formulation is intended to avoid

such complex questions as the law to be applied in

determining company status. Every association meeting

tests of valid existence must have its “company” status

duly recognized and is then eligible for substantive rights

granted to companies under the treaty.

In Dispatch 13 (p. 5), Jules Bassin, Legal Attache to

Embassy, stated to Mr. Mikizo Nagai, Chief, Sixth Sec-

tion, Economic Affairs Bureau, that “the recognition

mentioned in the second sentence of paragraph 3... .

meant merely the recognition by either Party of the

existence and legal status of juridical persons organized

under the laws of the other Party.”

Thus, all that para 3 is meant to accomplish is the

establishment of a procedural test for the determination

of the status of an association, i.e., whether or not to

recognize it as a “company” for purposes of the treaty.

Once such recognition is granted, the functional rights

accorded to companies under the FCN (for example, the

Article VII rights of a company to establish and control

subsidiaries) then accrue.

For reasons stated above, argument in para 2 of reftel

that nationality of a company is determined by nationality

of shareholders is not correct. Rather, a company has

53a

nationality of place where it is established (see pp. 382-83

of Walker). However, this does not mean that [the Gov-

ernment of Japan] is free to deny treaty rights to U.S.

subsidiary set up in Japan. While the company’s status

and nationality are determined by place of establishment,

this recognition does not itself create substantive rights,

which are dealt with elsewhere in the treaty. Thus, under

Article VII of the Treaty, a national or company of either

party is granted national treatment to control and manage

enterprises they have established or acquired. Therefore,

an American Company (i.e., one organized under U.S.

law), may manage its Japanese subsidiary (i.e., a com-

pany set up under Japanese law). So too, under Article I,

a U.S. national may enter Japan to direct his investment,

even though the investment is a Japanese company. In

sum, the substantive rights of U.S. nationals and compa-

nies vis-a-vis their Japanese investments accrue to them

because the treaty gives specific rights to U.S. nationals

and companies as regards their investments, and it is

irrelevant that, for the technical reasons noted above, the

status and nationality of the investment are determined by

the place of its establishment.

KISSINGER

Kissinger relied on a law review article by Herman Walker,

Jr., “who formulated modern . . . form of [Friendship, Com-

merce and Navigation Treaty] and negotiated many FCNs.” /d.

Walker set out the definition of corporate status as found in

Article XXII(3) of the Treaty. “Provisions on Companies in

United States Commercial Treaties,” 50 Am. J. Int’] Law 373,

380-81 & n.34 (1956). He thereafter explains that

[t]he adoption of the simple test [of status and nationality

by place of incorporation] has been undoubtedly facili-

tated by the clear distinction maintained in the treaties

between the so-called “civil” and “functional” capacities

of companies. The recognition of status and nationality

does not of itself create substantive rights; these are dealt

with elsewhere on their own merits. Thus the acknowledg-

54a

ment of a fact—the existence and legitimate paternity of

an association—is not confused with problems associated

with the functional rights and activities of alien-bred

associations... . .

Id. at 383.

Kissinger also relied, as Sumitomo now does, on a Memo-

randum of Conversation from the Office of the United States

Political Adviser for Japan, Tokyo, Despatch No. 13, April 8,

1952 (“Despatch No. 13”), Exh. E to Sumitomo Memoran-

dum. In Despatch No. 13, at 5, quoted in small part in the

Kissinger Airgram, the following portion of a discussion of

Article XXI\ appears:

[The Japanese representative] asked what “juridical

status” meant, and inquired whether the recognition of

juridical status mentioned in paragraph 3 meant anything

more than the recognition of the existence of a juridical

person.

[The U.S. representative] replied that “juridical status”

meant “legal status”, the legal position of an organization

in, or with respect to, the rest of the community. The

recognition mentioned in the second sentence of para-

graph 3, he added, meant merely the recognition by either

Party of the existence and legal status of juridical persons

organized under the laws of the other Party.

Sumitomo also relies on a statement of a United States

negotiator concerning treaty trader employees. The negotiator

stated that Japanese treaty trader employees “would not be

permitted to resign from a Japanese firm in order freely to seek

employment in the United States. It was possible, however, for

this employee to leave one Japanese branch firm to work for

an affiliate or subsidiary of that firm.” Despatch No. 13, at 4.

Sumitomo points to this language to demonstrate that the

negotiators did not intend to distinguish between branches and

subsidiaries regarding employment of treaty trader executives

under the Treaty. It quotes from a document addressing a

similar provision in a treaty then being negotiated between the

United States and the Federal Republic of Germany.

55a

There is no intent . . . to attempt to regulate the particu-

lar form of business entity by which the desired trading

activities are to be carried on. . . . The important con-

sideration is not whether the corporate employer is do-

mestic or alien as to juridical status. The controlling

factors are, instead: (a) whether the corporation is

engaged in substantial international trade principally be-

tween the United States and the other treaty country; (b)

whether it is a “foreign organization” in the sense that the

control thereof is vested in nationals of the other treaty

country, the customary test being whether or not a major-

ity of the stock is held by such nationals; and (c) whether

the individual alien who intends to engage in international

trading activities in the service of the corporation is duly

qualified for status as a treaty trader under. . . applica-

ble regulations.

Department of State Instruction No. A-852 to HICOG, Bonn,

January 21, 1954, at 1, Exh. 9 to Affidavit of Lance Gotthot-

fer, sworn to September 10, 1979 (“Gotthoffer Aff.”).

Avigliano and the EEOC, in addition to arguing on the basis

of the above documents, refer to other Department of State

documents for the proposition that the Treaty negotiators did

not seek to give foreign companies greater rights than those

accorded domestic companies, but rather to ensure national

treatment by barring employment discrimination against

aliens. E.g., Foreign Service Despatch No. 2529 from HICOG,

Bonn to Department of State, March 18, 1954, at 1, Exh. 11 to

Gotthoffer Aff. (the major special purpose of the freedom-of-

choice provision “is to preclude the imposition of ‘percentile’

legislation”).

DISCUSSION

Introduction

The issue on this motion for reconsideration is a narrow one.

The Court is addressing the effect of the recently released

Department of State documents on its June 5, 1979 Opinion

56a

and Order. Specifically, by examining these documents, the

Court seeks to determine whether, in the intent of the Treaty

negotiators, Article XXII(3) bars Sumitomo from standing

under the first sentence of Article VIII(i) or whether Sumi-

tomo is otherwise barred from standing under that sentence.

The issue whether Article VIII(1), if applicable, would insulate

Sumitomo from review of any or all of its employment prac-

tices is beyond the scope of this opinion.

In determining whether Sumitomo has standing under the

freedom-of-choice provision of Article VIII(1), the Court ex-

amines the Department of State documents and the terms of

the Treaty to infer the intent of the parties to the agreement.

Maximov v. United States, 299 F.2d 565, 568 (2d Cir. 1962),

aff'd, 313 U.S. 49 (1963). The Court should “give the specific

words of a treaty a meaning consistent with the genuine shared

expectations of the contracting parties.” /d.

The Department of State looked to the intent of the negotia-

tors because it found that the “manner of coverage of subsidi-

aries is in many instances complex.” Letter dated September

11, 1979, set out supra. After “an extensive review of the

negotiating files” on the Friendship, Commerce and Naviga-

tion Treaties, the Department of State concluded that Sumi-

tomo lacks standing under the first sentence of Article VIII(1).

Sumitomo’s rights are instead. governed by Article VII(1) & (4),

which provides for national and most-favored nation treat-

ment. Jd. The Court does give some weight to the Depart-

ment’s view on a manner within its purview, see Kolovrat v.

Oregon, supra, but not decisive weight in this case. The

Department undoubtedly gave the question serious and

thoughtful attention, but the letter indicates neither the docu-

ments on which the Department relies nor its analysis. In the

absence of either, the letter little aids the Court in its deter-

mination.

The issue of Sumitomo’s standing under Article VIII(1) must

be resolved on the terms of the Treaty and the documents—

against the backdrop of the Court’s prior decision. The docu-

ments raise doubt about the intent of the negotiators on the

narrow question before the Court; accordingly, they render a

57a

decision less certain. Nevertheless, the Court concludes that

Sumitomo, while not denied all protection under the Treaty,

does not have standing to rely on the freedom-of-choice

provision.

Sumitomo’s Standing Under the Treaty Generally

The terms of the Treaty support the proposition that Article

XXII(3) was not intended to bar locally incorporated subsidi-

aries of foreign companies from claiming any substantive

rights under the Treaty. The negotiators appear to have in-

tended a distinction between the status and nationality attrib-

utes of a company as governed by Article XXII(3) and rights a

company may claim under the Treaty’s substantive provisions.

In other words, Article XXII(3) cannot be read to the exclusion

of the Treaty’s other provisions. For example, Article V1I(4)

provides that

enterprises in which nationals and companies of either .

Party have a substantial interest shall be accorded, within

the territories of the other Party, not less than national

treatment and most-favored-nation treatment in all mat-

ters relating to the taking of privately owned enterprises

into public ownership and to the placing of such en-

terprises under public control.

Subsidiaries also have rights under Article VII(1) & (4). Under

Article VII(1), nationals and parties can

organize companies under the general company laws of

such other Party, and . . . acquire majority interests in

companies of such other Party; and . . . control and

manage enterprises which they have established or ac-

quired. Moreover, enterprises which they control .. .

shall, in all that relates to the conduct of the activities

thereof, be accorded treatment no less favorable than that

accorded like enterprises controlled by nationals and com-

panies of such other Party.

Paragraph 4 of Article VII provides that “[nJjationals and

companies of either Party, as well as enterprises controlled by

58a

such nationals and companies, shall in any event be accorded

most-favored-nation treatment with reference to the matters

treated in the present Article.”

The documents also support the distinction between a com-

pany’s rights under the Treaty’s substantive provisions and a

company’s nationality and status under Article XXII(3). Kis-

singer concluded that Article XXII(3) established a “proce-

dural test” of an entity’s status to determine “whether or not

to recognize it as a ‘company’ for purposes of the Treaty.”

Kissinger Airgram. In his view, one then looks to the substan-

tive provisions of the Treaty to determine the company’s

rights. Jd. He concluded on the basis of this distinction that

Japan could not deny treaty rights to a United States subsidi-

ary set up in Japan. The substantive rights he chose as

examples, however, do not support his conclusion directly. The

examples all refer to the Treaty rights of nationals and compa-

nies, not to rights of the subsidiaries that they control. See id.

Nevertheless, the distinction between “company” in the “pro-

cedural” and “substantive” senses lends support to Sumi-

tomo’s contentions.

In determining the intent of the Treaty negotiators, Kissinger

looked to Herman Walker, a principal formulator and negotia-

tor—according to Kissinger—of many Friendship, Commerce

and Navigation Treaties. In the law review article quoted

above—which was personal and not on behalf of the Depart-

ment of State, 50 Am. J. Int’! Law at 373 n.—Walker set out

the distinction between a company’s civil attributes (status and

nationality) and its functional or substantive ones. In a section

entitled “Utilization of the Domestic Company Device,” he

gave a brief history of the right to organize and operate

domestic companies. /d. at 386-88. He concluded that the

treaties current at the time he was writing—including the

Treaty with Japan at Article VII(1)—have revised the previous

approach to rights regarding domestic companies in three

ways. One revision was assuring the “ ‘controlled’ domestic

company. . . national treatment; discrimination against it in

any way by reason of its domination by alien interests is not

permissible.” Jd. at 388.

59a

During negotiation of the Treaty, a United States representa-

tive suggested the same distinction between civil and substan-

tive attributes by stating the limited purpose of Article

XXII(3): “The recognition mentioned in the second sentence of

paragraph 3. . . meant merely the recognition by either Party

of the existence and legal status of juridical persons organized

under the laws of the other Party.” Despatch No. 13, at 5. The

same document suggests that subsidiaries have rights to hire

treaty traders, id. at 4, as does Department of State Instruction

No. A-852. The statements regarding treaty traders do not bear

directly on the rights of the subsidiaries themselves, but they

do suggest that subsidiaries have a place within the scheme of

the Treaty and its implementing regulations. See generally

discussion at 473 F. Supp. at 512-13.

Sumitomo’s Claim of Standing

Under Article VIII(1)

Articles VI(4) and VII(1) & (4), by their terms, give “en-

terprises in which nationals and companies . . . have a sub-

stantial interest” and enterprises controlled by nationals and

companies, respectively, substantive rights. The drafter knew

how to give locally incorporated subsidiaries rights under

specific articles. In Article VIII(1) they did not do so. The

freedom-of-choice rights are given to “nationals and compa-

nies of either Party . . . within the territories of the other

Party.” Because the provision does not by its own terms extend

to locally incorporated subsidiaries,’ the Court must look to

Article XXII(3) to determine whether “nationals and compa-

nies” can be read to include subsidiaries. That Article provides

that “[c]ompanies constituted under the applicable laws and

regulations within the territories of either Party shall be

deemed parties thereof.” By this language Sumitomo is a

United States company. It is not a Japanese company and is

1 Although nationals and companies have some employment rights in

connection with enterprises in which they have financial interests, the

subsidiaries themselves are not in any plain terms given employment

rights.

60a

thereby ineligible for freedom-of-choice protection within, the

territories of the United States.

The documents do not enable Sumitomo to escape this

plain-term reading of the provision. They do not establish that

the negotiators intended to give locally incorporated subsidi-

aries rights under the freedom-of-choice provision. A liberal

reading of the Kissinger Airgram and its background suggest

that he might have given a locally incorporated subsidiary

rights under the freedom-of-choice provision. He did not,

however, explicitly conclude that a subsidiary has such rights,

nor did he refer to any documents that would establish such a

right running to Sumitomo. In his law review article, Walker

explained the difference between the civil attributes and the

functional rights of a company, but he does not indicate that

domestic subsidiaries have standing under Article VIII(1). He

indicates only that such companies are entitled to national

treatment—discrimination against it is impermissible. 50 Am.

J. Int’! Law at 380-83, 385-88. Despatch No. 13 does not even

discuss Article VIII(1), and its discussion of Article XXII(3)

merely supports the proposition—discussed above—that that

article does not by its own terms exclude subsidiaries from all

substantive rights under the Treaty. Sumitomo has failed to

point out any documents that directly support its claims under

Article VIII(1).

Correction of August 9, 1979

Opinion and Order

On page 3 of its Opinion and Order dated August 9, 1979,

___ F. Supp. ___., the Court stated:

If defendant is protected by the Treaty, it is not answer-

able in court to these claims of discrimination. If not,

then its practices are exposed to judicial evaluation.

The Court need not, and does not, reach the question whether

Article VIII(1), were it available to Sumitomo, would exempt

Sumitomo from judicial review against any or all of plaintiffs’

discrimination claims. The Court has no view on that issue, but

in the language quoted above it suggested otherwise. Accord-

6la

ingly, it deletes the quoted language from its August 9, 1979

Opinion and Order.’

Additionally, the word “seeks” on page 4 (second line from

the bottom) of the August 9, 1979 Opinion and Order should

be changed to “sees.”

CONCLUSION

In summary, the Department of State documents support the

conclusion that Article XXII(3) does not bar Sumitomo from

standing under the Treaty generally. However, the Court reaf-

firms its conclusion that the terms of the Treaty do not give

Sumitomo standing under Article VIII(1) and further con-

cludes that the documents do not establish otherwise.

Finally, the Court directs that its August 9, 1979 Opinion

and Order be amended in the manner indicated herein.

So ordered.

Dated: New York, New York

November 29, 1979

CHARLES H. TENNEY

U.S.D.J.

2 Much of the EEOC’s brief is directed to the argument that the

Treaty generally and Article VIII(1) specifically would not entitle

Sumitomo, if it had standing, to more than national treatment.

Walker, however, stated that the Treaty’s employment rights “techni-

cally [go] beyond national treatment,” 50 Am. J. Int’l Law at 386; but

cf. Linskey v. Heidelberg Eastern, Inc., 470 F. Supp. 1181, 1184-87

(E.D.N.Y. 1979) (under freedom-of-choice provision in treaty with

Denmark, foreign corporation does not have absolute privilege to hire

specialized personnel regardless of American laws prohibiting employ-

ment discrimination), but the Court does not reach the issue of the

substantive scope of the Treaty’s employment rights.

63a

APPENDIX F

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

UNITA

Saal

April 24, 1981

Docket No. 79-2382

+

MICHAEL E. SPIESS, JACK K. HARDY and

BENJAMIN F. ROUNTREE,

Plaintiffs-A ppellees,

—

C. ITOH & COMPANY (AMERICA), INC.,

Defendant-Appellant.

ae

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS.

—

Before:

COLEMAN, CHARLES CLARK and REAVLEY,

Circuit Judges.

as

64a

CHARLES CLARK, Circuit Judge:

This interlocutory appeal presents an important issue of first

impression in this circuit. C. Itoh & Company (America), a

New York corporation wholly owned by a Japanese parent

corporation, argues that a 1953 treaty between the United

States and Japan permits it to hire only Japanese citizens for

managerial and technical positions, in spite of American laws

prohibiting discrimination on the basis of national origin. We

hold that the treaty affords American subsidiaries of Japanese

corporations the limited right to discriminate in favor of

Japanese nationals in filling these positions.

Michael E. Spiess and other American employees of C.Itoh-

America filed a class action under Title VII of the Civil Rights

Act and 42 U.S.C. section 1981. The complaint charged that

the company had discriminated against its American employees

by making managerial promotions and other benefits available

only to Japanese citizens. C. Itoh-America filed a motion to

dismiss, asserting that the Treaty of Friendship, Commerce and

Navigation between the United States and Japan, April 2,

1953, 4 U.S.T. 2063, T.1.A.S. No. 2863, precluded the plain-

tiffs’ suit. Article VIII(') of the Treaty provides that

companies of either Party shall be permitted to engage,

within the territories of the other Party, accountants and

other technical experts, executive personnel, attorneys,

agents and other specialists of their choice.

C. Itoh-American argued that the language permitting compa-

nies to engage executive personnel “of their choice” cloaks the

company with absolute immunity from American employment

discrimination laws as to these positions.

The trial court denied C. Itoh-America’s motion to dismiss,

relying primarily on article XXII(3) of the Treaty. Under article

XXII(3),

65a

[clompanies constituted under the applicable laws and

regulations within the territories of either Party shall be

deemed companies thereof and shall have their juridical

status recognized within the territories of the other Party.

The trial court reasoned that C. Itoh-America, a New York

corporation, had been “constituted” under the laws of the

United States. As a result, the court concluded that C. Itoh-

America was a “company of the United States” under the plain

meaning of article XXII(3), even though it was wholly owned

by C. Itoh & Company, Ltd., a Japanese corporation. Because

C. Itoh-America, in this view, was not a company of one party

operating within the territory of the other, the trial court ruled

that it could not assert the article VIII({1) right to choose

executive personnel of its choice. See Spiess v. C. Itoh & Co.

(America), Inc., 469 F.Supp. 1, 6 (S.D.Tex. 1979). Upon a

motion by C. Itoh-America, however, the district court permit-

ted the company to take an interlocutory appeal. The follow-

ing question was certified to this court under 28 U.S.C. section

1292(b):

Does the 1953 Treaty of Friendship, Commerce and Navi-

gation between the United States and Japan provide

American subsidiaries of Japanese corporations with the

absolute right to hire managerial, professional and other

specialized personnel of their choice, irrespective of

American law proscribing racial discrimination in em-

ployment?

The Japanese Treaty is one in a long line of Friendship,

Commerce and Navigation (FCN) treaties negotiated on a

bilateral basis between the United States and other countries.

Since the negotiation of the first FCN treaty with France in

1778, American diplomats have used the FCN device to estab-

lish the ground rules by which private commerce between

American citizens and citizens of other countries is regulated.

66a

See generally Walker, Modern Treaties of Friendship, Com-

merce and Navigation, 42 Minn.L.Rev. 805, 806 (1958) [here-

inafter cited as Modern Treaties}. The FCN format is a flexible

one, and it has been used at different times to serve different

foreign policy goals. The central theme ofthe FCN treaty,

however, has remained. An FCN treaty is the medium through

which two nations provide “for the rights of each country’s

citizens, their property and other interests, in the territories of

the other, and for the rules mutually to govern their trade and

shipping.” Walker, Treaties for the Encouragement and Protec-

tion of Foreign Investment: Present United States Practice, 5

Am.J.Comp.L. 229, 230-31 (1956) [hereinafter cited as United

States Practice}.

The FCN treaties, including the Japanese Treaty, are self-ex-

ecuting treaties, that is, they are binding domestic law of their

own accord, without the need for implementing legislation. See

Zenith Radio Corp. v. Matsushita Electric Industrial Co.,

_ Ltd., 494 F.Supp. 1263, 1266 (E.D.Pa.1980). Such treaties are

“the supreme law of the land,” and supersede inconsistent state

law. U.S.Const. art. VI, cl. Il; United States v. Pink, 315 U.S.

203, 230, 62 S.Ct. 552, 565-66, 86 L.Ed. 796, 817-818 (1942);

De Tenorio v. McGowan, 510 F.2d 92, 95 (Sth Cir. 1975). See

also Oregon-Pacific Forest Products Corp. v. Welsh Panel

Co., 248 F.Supp. 903, 910 (D.Or.1965) (Japanese Treaty is

“supreme law of the land”). Even federal statutes “ought never

to be construed to violate the law of nations if any other

possible construction remains.” The Charming Betsy, 6 U.S. (2

Cranch) 64, 118, 2 L.Ed. 208, 226 (1804), quoted in McCulloch

v. Sociedad Nacional de Marineros de Honduras, 372 U.S. 10,

21, 83 S.Ct. 671, 678, 9 L.Ed.2d 547, 555 (1963). Only when

Congress clearly intends to depart from the obligations of a

treaty will inconsistent federal legislation govern. /d. Thus,

unless federal civil rights laws reflect an affirmative disavowal

of the rights provided by the Treaty, it is our duty to implement

the treaty rights.

67a

The district court held that C. Itoh-America was an Ameri-

can company for the purposes of the Treaty, and thus could

not assert the article VIII rights extended to Japanese corpora-

tions operating in this country. In the trial court’s view,

“[a}rticle XXII(3) unequivocally states that for the purpose of

the Treaty the nationality of the corporation is determined by

the place of incorporation.” Spiess v. C. Itoh & Co. (America),

Inc., 469 F.Supp. 1, 6 (S.D.Tex.1979). We reject this construc-

tion of article XXII(3).

The district court’s reading of article XXII(3) is compatible

with the text of the Treaty, but it fails to account for the unique

nature of an international agreement. Unlike domestic legisla-

tion, treaties must create a common ground between differing

cultures before the rights of the parties can be defined. The

negotiating history of the Treaty makes clear that article XXII

(3) was designed for this purpose. A contemporaneous memo-

randum prepared by State Department negotiators demon-

strates that the provision was intended, not to determine which

forms of corporate organization were entitled to assert Treaty

rights, but to ensure that unfamiliar organizations would be

recognized as “companies” by the legal institutions of the

respective countries. The memorandum noted the following

colloquy:

Mr. Nagai [a Japanese negotiator] then asked what

“juridical status” meant, and inquired whether the recog-

nition of juridical status mentioned in paragraph three [of

article XXII] meant anything more than the recognition

of the existence of a juridical person.

Mr. Bassin [the American negotiator] replied that

“juridical status” meant “legal status,” the legal position

of an organization in, or with respect to, the rest of the

community. The recognition mentioned in the second

sentence of paragraph three, he added, meant merely the

recognition by either Party of the existence and legal

68a

status of juridical persons organized under the laws of the

other Party.

Dispatch No. 13, Office of the United States Political Advisor

for Japan, dated April 8, 1952, at 5 [hereinafter referred to as

Bassin Memorandum]. '

FCN authority Herman Walker’ has expressed a similar

understanding of article XXII(3). In a 1956 article, Walker

described the “distinct problems” encountered in defining

“company” broadly enough to accommodate the varied pur-

poses of an FCN treaty. Walker, Provisions on Companies in

United States Commercial Treaties, 50 Am.J. Int’! L. 373, 380

(1956) [hereinafter cited as Provisions on Companies}. Walker

noted that “(t]he standard definition is exemplified by Art.

XXII, par. 3, of the 1953 Japan treaty.” Jd. at 380 n.34. In this

definition, Walker explained,

[a] “company” is defined simply and broadly to mean

. . . any “artificial” person acknowledged by its creator,

as distinguished from a natural person, whether or not for

pecuniary profit. Every association meeting this simple

test of valid existence must be accounted by the other

I The necessity for such a provision is well illustrated by another

excerpt from the memorandum:

Mr. Otabe inquired whether a Zaidan Hojin was covered by

paragraph 3, and, if so, what would be the nature of national

treatment accorded such organizations in the United States. He

explained that a Zaidan Hojin is a duly organized juridical person

with given property, established for the purpose of employing or

disposing of said property for a given public purpose. An example

of a Zaidan Hojin, he added, would be an endowed private library.

Mr. Bassin replied such an organization would be considered a

juridical person in the United States, pursuant to the provisions of

paragraph 3, if it were so considered in Japan.

Bassin Memorandum, at 5.

2 A State Department cable notes that Mr. Walker formulated the

modern concept of FCN treaties and negotiated many treaties on

behalf of the United States. Airgram from Secretary of State Kissinger

to American Embassy in Tokyo, No. A 105, dated Jan. 9, 1976. Mr.

Walker also served the State Department as Advisor on Commercial

Treaties. See United States Practice, supra, at 229.

69a

party a company of the party of its creation, and have its

juridical status recognized without any reservation for the

laws of the forum.

Id. at 380-81. Walker also emphasized that there was a

clear distinction maintained in the treaties between the

so-called “civil” and “functional” capacities of compa-

nies. The recognition of status and nationality does not of

itself create substantive rights; these are dealt with else-

where on their own merits. Thus the acknowledgement of

a fact—the existence and legitimate paternity of an asso-

ciation—is not confused with problems associated with

the functional rights and activities of alien-bred associa-

tions. .

Id. at 383. Thus, both the negotiators on location in Tokyo and

the architect of the modern FCN treaty agree that article XXII

(3) merely guarantees legal recognition to diverse forms of

legal entities and does not determine which of those entities can

assert treaty rights.

The Department of State has remained faithful to this

interpretation of the Treaty. In a 1976 cable from Secretary

Kissinger, the Department informed the American embassy in

Tokyo that

all that para 3 [of article XXII] is meant to accomplish is

the establishment of a procedural test for the determina-

tion of the status of an association, i. e., whether or not

to recognize it as a “company” for purposes of the treaty.

Once such recognition is granted, the functional rights

accorded to companies under the FCN (for example, the

Article VII rights of a company to establish and control

subsidiaries) then accrue.

Airgram from Secretary of State Kissinger to American em-

bassy in Tokyo, No. A 105, dated Jan. 9, 1976. A subsequent

opinion from a State Department legal advisor reaches the

same conclusion. Letter from Lee R. Marks to Abner W. Sibal

(October 17, 1978). Thus, the consistent view of the State

70a

Department has been that American subsidiaries of Japanese

corporations are entitled to the full protection of the Treaty.’

This view weighs heavily in our analysis.‘ See Kolovrat v.

Oregon, 366 U.S. 187, 194, 81 S.Ct. 922, 926, 6 L.Ed.2d 218,

223 (1961).

3

Spiess calls to our attention a State Department letter of September

1979, in which a deputy legal advisor suggests that “it was not the

intent of the negotiators to cover locally incorporated subsidiaries.”

Letter from James R. Atwood to Lutz Alexander Prager (September

11, 1979). This letter represents the first time, to our knowledge, that

the State Department departed from the position expressed in the 1952

Bassin Memorandum, the 1976 Kissinger cable, and the 1978 letter by

James Atwood. For this reason, we regard it as an aberration in State

Department policy.

C. Itoh-America argues that State Department practice in adminis-

tering the immigration laws is further evidence that Japanese subsidi-

aries incorporated in the United States are entitled to Treaty protec-

tion. The company argues that articles I, VII, and VIII of the Treaty

should be read together to create a right of “companies of Japan” to

employ Japanese citizens. Article I(1) permits Japanese citizens to

enter and remain in the United States “for the purpose of carrying on

trade between the territories of the two Parties.” In C. Itoh-America’s

view, this right is implemented by section 101{a){1S)(E){i} of the

Immigration and Nationality Act, 8 U.S.C. § 1101(a)(15)(E)(i) (1970),

which grants foreign nationals special visa privileges to enter the

United States as “treaty traders.” The Department of State has granted

treaty trader status to Japanese employees working for American

subsidiaries of Japanese corporations. See 22 C.F.R. § 4140(a) (treaty

trader must be employed by “an organization which is principally

owned by a person or persons having the nationality of the treaty

country”). C. Itoh-America concludes that the Department has permit-

ted American subsidiaries of Japanese corporations to asser< a right to

entry under article 1, and that it should be permitted to assert rights

under article VIII as well.

Article I grants only a right to individuals to enter the country. C.

Itoh-America can assert this right only as an adjunct of its own right to

employ Japanese citizens. Thus, the argument depends on a unitary

construction of articles I, VII, and VIII. The company has presented

no evidence, other than the text of the Treaty and the immigration

laws, that articles I, VII, and VIII were meant to be interpreted in this

way. Walker lends some support to this theory. See Modern Treaties,

supra, at 813 & n. 18. Nevertheless, because our decision that C.

Itoh-America can assert Treaty rights is amply supported on other

grounds, we need not, and do not, reach this issue.

Tila

Finally, we think that the district court’s interpretation of

article XXII(3) would create an unreasonable distinction be-

tween treatment of American subsidiaries of Japanese corpora-

tions on the one hand, and branches of Japanese corporations

on the other. According to the district court, a company is

considered a “company of Japan” for purposes of the Treaty

only if it is incorporated in Japan. Under this analysis, Ameri-

can-incorporated subsidiaries of Japanese corporations would

be entitled to Treaty protection only when they are specifically

mentioned, and would not fall within the “companies of either

Party” formula used throughout the Treaty. As the Second

Circuit recently has observed, this would create a “crazyquilt

pattern” in which branches of Japanese corporations would

enjoy broad rights under the Treaty, while subsidiaries would

be entitled only to minor protection. See Avigliano v. Sumi-

tomo Shoji America, Inc., 638 F.2d 552 at 556 (2d Cir.1981). In

view of article VII’s guarantee that companies shall be allowed

to conduct business activities “through the medium of any

form of lawful juridical entity,” including both branches and

locally organized subsidiaries, we agree that “[iJt is illogical to

infer that the drafters of the Treaty intended to make such a

dramatic distinction between forms of business operation.”

Avigliano, supra, at 556; cf. also United States Practice, supra,

at 233 (branches and local subsidiaries treated alike in Treaty).

We are aware that other courts have disagreed with our

conclusion. The district court relied on United States v. R.P

Oldham Co., 152 F.Supp. 818, 823 (N.D.Cal.1957), which held

that article XXII(3) precluded American subsidiaries from

asserting Treaty rights. Cf. also, Zenith Radio Corp. v. Mat-

sushita Electric Industrial Co., Ltd., 494 F.Supp. 1263, 1265 n.

4 (E.D.Pa.1980) (standing issue raised but not decided). While

their analysis may be supported by the literal text of article

XXII(3), the clearly established intent of the parties to the

treaty overrides such literalism. Accordingly, we hold that C.

Itoh-America, a New York corporation wholly owned by a

Japanese parent, may assert all rights extended to “companies

of either Party” by the Japanese treaty.’

5 The dissent repeatedly characterizes our holding as a view that “the

nationality of a company under the Treaty is to be determined by the

72a

, IV.

The parties also disagree as to the scope of the rights

established by the Treaty. According to C. Itoh-America,

article VIII(1) provides the company with an absolute exemp-

tion from American employment discrimination laws. On its

face, article VIII(1) seems to confirm this view. It provides that

“companies of either Party shall be permitted to engage. . .

executive personnel . . . of their choice.” We are mindful,

however, especially after our treatment of article XXII(3), that

the apparent plain meaning of a treaty provision may not

always reflect the provision’s actual purpose. Spiess argues

that a literal reading of the “of their choice” provision would

fly in the face of the Treaty’s general policy. In his view, article

VIII(1) provides only national treatment to Japanese corpora-

tions. After a thorough examination of the structure of the

Treaty and the setting in which it was negotiated, we hold that

article VIII(1) does exempt C. Itoh-America from domestic

employment discrimination laws to the extent of permitting

discrimination in favor of Japanese citizens in employment for

executive and technical positions.

nationality of its shareholders.” E. g., post, slip op. at 6357, at __.

This is not the holding of the court. Rather, we assert that article

XXII(3) provides no explicit definition of “company of either Party,”

just as it provides no definition for “national of either Party,” another

oft-used Treaty expression. Our conclusion that C. lioh-America is a

company of Japan for Treaty purposes is based, not on the application

of an explicit test conjured up from the text of the Treaty, but on the

clearly expressed intent of the parties to extend Treaty protection

evenly to subsidiaries whether unincorporated or incorporated under

the law of either Party. We do not reach or decide whether a corporate

subsidiary in which a Japanese trader owns less than a 100 percent

interest should be considered a company of Japan under the Treaty.

Under a proper understanding of our holding, Judge Reaviey’s

views, though reasonable, lose much of their force. We agree with

Judge Reaviey that the Acheson and Kissinger cables belie the view

that the Treaty establishes a test of corporate nationality based on the

nationality of the shareholders. We disagree, however, with the sugges-

tion that these cables convert the language of article XXII(3) into a

definitive test of the Treaty term “companies of either Party.”

73a

A.

The Japanese Treaty belongs to a group of sixteen treaties

negotiated in the years immediately following World War II.

These treaties share the salient characteristics of FCN treaties,

but they reflect several innovations designed to adapt the FCN

device to the realities of modern international commerce.

Thus, these treaties extended explicit protection to corpora-

tions, as well as to natural persons. See Provisions on Compa-

nies, supra at 380. The animating purpose of American treaties

of this period was to provide a stable environment for private

international investment. See United States Practice, supra, at

231.

Under the post-war treaties, the rights of foreign nationals

operating in the host country were measured, for the miost

part, by two so-called “contingent standards.” Modern

Treaties, supra, at 810-11. Under the first standard, foreign

nationals were guaranteed “national treatment,” that is, the

same treatment afforded to native citizens. The national treat-

ment standard was viewed as a progressive one by American

diplomats, and negotiators sought, whenever possible, to use it

as the measure of a foreigner’s rights in the host country. Jd.

The Japanese Treaty reflects this effort, and guarantees its

signatories “national treatment with respect to engaging in all

types of commercial, industrial, financial and other business

activities.” Treaty, art. VII(1); see also art. III (national treat-

ment in pension and social security laws); art. IX(1)(a) (na-

tional treatment in leasing, occupying, and using property).

The nationalistic fervor of the post-war era, however, pre-

vented universal application of the national treatment rule.

Thus, in sensitive areas where the host country could not

ignore the divided loyalties of foreigners—areas such as ship-

building, or domestic air transport—a second standard was

used. Under this standard, foreign nationals were guaranteed

“most favored nation” treatment, or treatment as favorable as

that enjoyed by the citizens of any foreign nation. See United

States Practice, supra, at 236. Thus, article VII(2) of the

Japanese Treaty provides most favored nation treatment for

74a

foreigners who seek to operate a public utility in the host

country, or who would engage in shipbuilding, air or water

transportation, deposit banking, or exploitation of land and

natural resources. See also art. XIII (most favored nation

treatment for foreign travelers entering and leaving country);

art. XIV(5) (most favored nation treatment in matters of

export and import).°

Although the two contingent standards were widely used in

the post-war FCN treaties, they were not the exclusive means

by which the rights of foreigners were protected. As Walker

has observed, there was also “a certain margin for the play of

non-contingent standards, or ‘absolute’ rules in the formula-

tion of treaty provisions.” Modern Treaties, supra, at 811.

Absolute rules were intended to protect vital rights and privi-

leges of foreign nationals in any situation, whether or not a

host government provided the same rights to the indigenous

population. Jd. at 823. According to Walker, foreign nationals

were to receive “not only equal protection, but also a certain

minimum degree of protection, as under international law,

regardless of a Government’s possible lapses with respect to its

own citizens.” United States Practice, supra, at 232. The use of

absolute rules is well illustrated in the Japanese Treaty. Article

I permits foreign nationals to enter and leave the host country,

and provides for rights of free travel, liberty of conscience,

religious freedom, and other personal rights. By the same

token, article II1(2) provides for notification of an alien’s

consulate in the event he is arrested, article V1I(3) guarantees

the payment of just compensation for expropriated property,

and article XX(a) allows nationals of one party freedom of

6 Although the most-favored-nation standard was considered less

desirable than national treatment at the time the Japanese Treaty was

negotiated, it was used in previous treaties to confer special privileges

on aliens. See Modern Treaties, supra, at 811. As a result, the national

treatment and most-favored-nation standards were often used in con-

junction, even in the post-war treaties, to guarantee that foreigners

would benefit from the most extensive protection in every case. See

e.g., Treaty, art. 1V(1) (companies of either party “accorded national

treatment and most-favored-nation treatment with repect to access to

the courts of justice”).

75a

transit by the most convenient route through the territory of

the other party.

Spiess argues that the “of their choice” provision of article

VIII(1) should be read to grant national treatment to compa-

nies of either party. In his view, this reading would comport

well with the Treaty’s emphasis on national treatment; he finds

it incongruous that a treaty providing for equal treatment of all

parties could be used to provide special privileges to foreign

nationals in the host country. This view recently was adopted

by the Second Circuit in the Avigliano case. See Avigliano v.

Sumitomo Shoji America, Inc., supra, at 559. A district court

in the Second Circuit had previously applied the same theory to

the Danish FCN treaty, which includes a similar provision. See

Linskey v. Heidelberg Eastern, Inc., 470 F.Supp. 1181, 1185-86

(E.D.N.Y.1979).

We agree that an overriding goal of the Treaty negotiators

was to provide national treatment to foreign businesses operat-

ing in the host country. However, national treatment was not

the Treaty’s exclusive measure of the rights to be accorded to

foreign nationals. It is apparent that article VIII(1)’s “of their

choice” provision was intended, not to guarantee national

treaiment, but to create an absolute rule permitting foreign

nationals to control their overseas investments. As we noted

above, absolute rules played a significant role in defining the

rights of parties. The language of article VIII(1) makes clear

that the “of their choice” provision was designed to establish

such a rule. Use of the phrase “of their choice” does not

express the requirement that the parties are limited to national

treatment. This is accentuated by the fact that the phrase

“nationals of either Party shall be accorded national treat-

ment” appears repeatedly in other provisions of the Treaty.

Considering the Treaty as a whole, the only reasonable in-

terpretation is that article VIII(1) means exactly what it says:

Companies have a right to decide which executives and techni-

76a

cians will manage their investment in the host country, without

regard to host country laws.

Our understanding of article VIII(1) is reinforced by Walker

and the negotiating history of the Treaty. In discussing immi-

gration rights under the FCN treaties, Walker notes that,

firm rights are provided for the entry and indefinite

sojourn of international traders and principal investors.

Though equal provision for subordinate investor-en-

terprise employees is not yet possible owing to lack of

statutory authority, such personnel is to an extent pro-

vided for, in that management is assured freedom of

choice in the engaging of essential executive and technical

employees in general, regardless of their nationality,

without legal interference from “percentile” restrictions

and the like.

United States Practice, supra, at 234. In a footnote, Walker

identifies article VIII(1) as an example of this kind of provi-

sion. /d. at 234 n. 15. Walker also explains that “[iJn the

matter of employment, provisions have been developed techni-

cally going beyond national treatment, to prevent the imposi-

tion of ultranationalistic policies with respect to essential

executive and technical personnel.” Provisions on Companies,

supra, at 386. Again, Walker identifies the Japanese Treaty as

an example of this principle, and continues in a footnote to

point out that article VIII(i) allows “free choice” in the

selection of specialized personnel. /d. at 386 n. 62.

Despite the clear evidence that article VIII(1) was intended

to go beyond national ~eatment, Spiess insists that, if it is

broader, it does not go far enough beyond national treatment

to immunize C. Itoh-America from American employment

discrimination laws. According to Spiess, if the “of their

choice” provision goes beyond national treatment, it does so

only to protect Japanese companies from state laws that

restrict the activities of aliens employed in the United States. In

this view, article VIII(1) would protect C. Itoh-America from

“ultranationalistic” state laws discriminating against Japanese

citizens, but not from federal laws forbidding the company

77a

itself to discriminate. In much the same vein, the Second

Circuit held that the Treaty could be interpreted to be consis-

tent with the nation’s employment discrimination laws. See

Avigliano, supra, at 559. The Equal Employment Opportunity

Commission also raised this possibility in an amicus curiae

brief submitted in this case. Under this theory, the Title VII

exemption for bona fide occupational qualification (bfoq)

requirements is broad enough to encompass any rights that

Japanese corporations legitimately could assert under the

Treaty.

Although the Treaty and commentary offer some support

for this point of view, the argument misapprehends the nature

of a right created in the course of international bargaining.

From the American perspective, the Japanese Treaty was

“intended primarily to facilitate American private-sector in-

vestment in foreign nations.” Zenith Radio Corp. v. Mat-

sushita Electric Industrial Co., Ltd., 494 F.Supp. 1263, 1267

(E.D.Pa.1980); Avigliano, supra, at 556; see United States

Practice, supra, at 231. The article VIII(1) right to free choice

of technical and managerial personnel sought to ensure that

the American businessman’s investment in the host country

would remain within his control. The legislative history cited to

us by C. Itoh-America demonstrates that the Senate, in con-

senting to ratification of the Treaty, was concerned about the

right of American companies to use American personnel to

control their investments in Japan. See Commercial Treaties—

Treaties of Friendship, Commerce & Navigation, with Israel,

Ethiopia, Italy, Denmark, Greece, Finland, Germany, and

Japan: Hearings before the Subcom. of the Senate Comm. on

Foreign Relations, 83d Cong., Ist Sess. 2, 3, 6-9 (1953). It is

self-evident that this same goal of American negotiators in

formulating article VIII(1) was the goal of Japanese negotia-

tors who sought it to protect Japanese companies operating in

the United States.

Clearly, article VIII(1) provides some right to Japanese

companies to manage their own affairs.’ It is irrelevant

7 Even Avigliano concedes that “the clause ‘of their choice’ was also

intended, in furtherance of the overall purpose of the Treaty, to

78a ‘7

whether the source of potential interference with that right is

state legislation characterized as “ultranationalistic” or a fed-

eral statute labeled “progressive.” The right of Japanese com-

panies to choose essential personnel is a right to maintain

Japanese control of the overseas investment. To make this

right subject to Title VII’s bfoq requirements, or to interpret it

to override only state law, would render its inclusion in the

Treaty virtually meaningless. Thus, we hold that the article

VIII(1) “of their choice” provision permits Japanese compa-

nies to discriminate in favor of their fellow citizens.*

Title VII was enacted after the Treaty, and thus might be

thought to nullify inconsistent principles of domestic law

created as a by-product of the Treaty. The general rule is that

subsequent federal legislation will invalidate treaty obligations

if the congressional intent to do so is clearly expressed.’ See,

e.g., McCulloch v. Sociedad Nacional de Marineros de Hon-

duras, 372 U.S. 10, 21, 83 S.Ct. 671, 678, 9 L.Ed.2d 547, 555

facilitate a party’s employment of its own nationals to be the extent

necessary to ensure its operational success in the host country.”

Avigliano, supra, at 559.

8 Spiess suggest that implementation of the article VIII(1) right would

permit companies like C, Itoh-America to violate, not only Title VII,

but also labor relations statutes and laws preventing exploitation of

workers and practices such as child labor. The Second Circuit has

expressed a similar concern. See Avigliano, supra, at 559. C. Itoh-

America, on the other hand, argues that the “of their choice” provi-

sion entails a broad immunity from all domestic employment legisla-

tion. The extent to which this principle applies outside the context of

national origin discrimination is unclear. See Note, Commercial

Treaties and the American Civil Rights Laws: The Case of Japanese

Employers, 31 Stan.L.Rev. 947, 955 (1979). We need not decide in

today’s case whether the article VIII(1) right extends beyond dis-

crimination in favor of Japanese nationals in executive and technical

positions, supervisory jobs which would hardly be filled by union

members, minors or exploited workers. We note only that article

VIII(1) is based on the principle of home office control of the foreign

investment.

9 Spiess and his fellow plaintiffs filed suit under section 1981 as well as

under Title VII. Because the Treaty was ratified after the enactment of

section 1981, it supersedes the federal statute. See Hijo v. United

States, 194 U.S. 315, 324, 24 S.Ct. 727, 729, 48 L.Ed. 994, 996 (1904).

79a

(1963). No evidence suggests that Congress intended to repudi-

ate article VIII(1) when it enacted Title VII. Domestic employ-

ment discrimination laws occupy a high priority on the na-

tion’s agenda, and courts often resolve statutory conflicts in

their favor. In this case, however, resolving doubts in favor of

Title VII would go beyond the judicial sphere of interpreta-

tion. In the absence of congressional guidance, we decline to

abrogate the American government’s solemn undertaking with

respect to a foreign nation.

Spiess raises an additional argument which merits attention.

He contends that any right to discriminate afforded by the

Treaty is contrary to the Charter of the United Nations and

thus is invalid because it is in conflict with higher law. Spiess

points out that article 55 of the Charter encourages “universal

respect for, and observance of, human rights and fundamental

freedoms for all without distinction as to race, sex, language or

religion.” Spiess argues that this language prohibits the United

States and Japan from agreeing to allow each other’s busi-

nesses to hire fellow citizens when operating in the other

country.

We note initially that the national origin distinction at issue

in this case does not fall within the enumerated categories of

“race, sex, language or religion.” In any event, the Charter of

the United Nations, although adopted by the United States, is

not a self-executing international obligation. Hitai v. Immigra-

tion and Naturalization Service, 343 F.2d 466, 468 (2d Cir.

1965); Davis v. District Director, Immigration and Naturaliza-

tion Service, 481 F.Supp. 1178, 1183 n. 7 (D.D.C.1979). Spiess

argues that even though the Charter is not self-executing, Title

VII was enacted to implement its provisions, and thus partakes

of the /ex superior chavacteristics of the Charter. We do not

agree. Title VII is legislation independent of the Charter. It was

enacted in the domestic interest of the nation. It thus possesses

no overriding authority and does not, of its own accord,

invalidate antecedent treaty obligations of the United States.

80a

Vv.

In summary, we hold that C. Itoh-America may assert article

VIII(1) rights under the Treaty, and that those rights permit it

to hire only Japanese personnel for executive and technical

positions. The opinion of the district court is reversed, and the

case is remanded with directions to dismiss.

REVERSED AND REMANDED WITH DIRECTIONS.

-

REAVLEY, Circuit Judge, dissenting:

The majority opinion concludes that C. Itoh-America is

exempt from the requirements of Title VII of the Civil Rights

Act of 1964 because article VIII(1) of the FCN Treaty between

Japan and the United States grants to “companies of [Japan]”

the right to hire executive and technical personnel “of their

choice.” Obviously, this conclusion depends upon the finding

that a company incorporated in the United States and doing

business here is nevertheless a “company of Japan” merely

because it is owned by a Japanese parent corporation. In my

view, the drafters of the Treaty created in article XXII(3) a

precise definition for the term “company of [Japan],” clearly

stating that a corporation has the nationality of its place of

incorporation. That interpretation of the article is consistent

with the other provisions of the Treaty, while the majority view

creates substantial inconsistencies and redundancies. Further-

more, secondary sources of the highest authority support the

conclusion that C. Itoh-America is a company of the United

States and not of Japan.

I. The Article XXII(3) Definition

The drafters of the Treaty wanted to distribute the benefits

of commercial exchanges between the United States and Japan

broadly and expediently. In choosing the terminology of the

document that would achieve this end, they faced the historical

8la

and cultural fact that Japan and the United States had devel-

oped widely diverse forms of commercial organization.' The

drafters thus chose to avoid problems of semantics by adopting

only two basic terms of art to describe the commercial entities

indigenous to each nation: “nationals of either Party” and

“companies of either Party.” The term “nationals” obviously

covers individual businesspersons and entrepreneurs having

United States or Japanese citizenship. The term “companies”

is specifically defined in article XXII(3) of the Treaty to

include every form of business association: “As used in the

present Treaty, the term ‘companies’ means corporations,

partnerships, companies and other associations, whether or not

with limited liability and whether or not for pecuniary profit.”

Article XXII(3). The Treaty also recognized a third form of

business entity that is likely to come into existence when, for

example, a national or company of Japan’ euters the United

States under the broad commercial and legal rights established

by the Treaty. That third entity is the individual proprietorship

or company (in the broad Treaty sense) that is formed in the

United States, does business here, and yet is owned and

controlled, in whole or part, by a national or company of

Japan. The treaty’s term of art for this third form of interna-

tional commercial activity is “enterprises controlled by na-

tionals and companies of [Japan].”’ The Treaty generally

distributes rights among private parties by specific reference to

one or more of these three forms of commercial entities.

1 For example, the Bassin Memorandum records an exchange between

Mr. Bassin and Mr. Otabe, one of the Japanese representatives, as to

whether a zaidan hojin would be considered a “company” under the

Treaty. A zaidan hojin is a juridical person charged with the duty of

using or employing certain property for a public purpose, such as an

endowed public library. Bassin Memorandum at 5.

2 I will not attempt to use neutral terms at all points but will

occasionally discuss the Treaty only in tecms of the right it confers

upon Japan to do business in the United States. | adopt this conven-

tion for simplicity of expression and because that choice embodies the

specific legal question we face in this case.

3 See the Treaty sections quoted in notes 6-10 below.

82a

But the term “company of [Japan]” is not completely

defined merely by saying that every form of business associa-

tion shall be deemed a company under the terms of the Treaty.

Thus article XXII(3) continues in a second sentence to specify,

first, the test of when a corporation may claim nationality

from either Japan or the United States and, second, when a

juridical entity entitled to be called a “company” comes into

existence: “Companies constituted under the applicable laws

and regulations within the territories of either Party shall be

deemed companies thereof and shall have their juridical status

recognized within the territories of the other Party” (emphasis

added).

The first purpose of this sentence, to define a test of

corporate nationality, is addressed by the simple phrase placed

in italics. The second purpose, to define the creation of a

juridical entity that must be recognized as a “company”, is

addressed by the remainder of the sentence after the italicized

phrase. The two purposes become conceptually muddled, espe-

cially in some of the documents cited by the majority, only

because they coincide in one event: when either nation creates a

company under its own laws, that company has the nationality

of the creating nation and must be recognized as a juridical

entity by the other nation.

The primary flaw in the majority’s analysis is that it ignores

the existence of the phrase “shall be deemed companies

thereof” in article XXII(3). The majority argues that the only

purpose of this article is to determine when the juridical entity

designated as a “company” exists. I agree that is one purpose

of the article, but the phrase “shall be deemed companies

thereof” is totally unnecessary to that end. What is the mean-

ing of this phrase if not to determine corporate nationality for

the purposes of the Treaty? If the majority rejects the plain

meaning of this phrase, it has three initial problems. The first

is to say what this phrase does mean. The second is to explain

how the drafters could fail to specify an answer to a question

as important as the determination of corporate nationality,‘ for

4 The importance of the term “company of [Japan or the United

States]” iv shown by the fact that it is used at least 40 times in the

83a

the issue is certainly addressed nowhere else in the Treaty or

Protocol. The third problem is that the majority must justify

its own conclusion that the nationality of a corporation is to be

determined by the nationality of some unspecified percentage

of shareholders,’ because this test is only one of several other

possibilites, and the majority cites no authority for its own

choice. For instance, an international corporation could claim

nationality based upon place of incorporation, nationality of

shareholders, place of principal office, place of principal

assets, derivation of income, or any combination thereof.

International law has for many years resolved this complex

question with the principle that an international corporation

has the nationality of its place of incorporation.* Article

Treaty and Protocol. Article XXI(1)(e) is another indication that the

drafters were highly sensitive to the issue of corporate nationality. That

section addresses the possibility that nationals of third countries might

try to gain Treaty rights illegitimately merely by incorporating in Japan

or the United States. That article is fully discussed in section I1.B. of

this dissent.

5 The majority states in footnote 5 of their opinion that they do not

mean to establish a general test of corporate nationality under the

Treaty. This may reserve a question of degree or quantity, but the effect

of their construction of the Treaty is nevertheless to derive the

nationality of a company from the nationality of the controlling

shareholders.

If the majority means to imply that they might reach a different test

of corporate nationality if a company were only 70% (or 51% or 40%)

owned by Japanese interests, they make the Treaty even more ambig-

uous and vague.

6 The principle was clearly stated in the celebrated decision of the

International Court of Justice in Barcelona Traction, Light and Power

Company, Limited (Belgium v. Spain), 1970 1.C.J. Rep. 3, 42:

In allocating corporate entities to States for purposes of diplomatic

protection, international law is based, but only to a limited extent,

on an analogy with the rules governing the nationality of individ-

uals. The traditional rule attributes the right of diplomatic protec-

tion of a corporate entity to the State under the laws of which it is

incorporated and in whose territory it has its registered office.

These two criteria have been confirmed by long practice and by

numerous international instruments.

(footnote continued on next page)

84a

XXII(3) certainly appears to follow this well established princi-

ple and if the majority rejects that view, it must justify its own

choice.

Il. Analysis of the Treaty

Structure and Articles

Anyone doubting that article XXII(3) was intended to spec-

ify that a corporation has the nationality of its place of

incorporation should examine the Treaty structure and the

internal consistency of the other articles. The results of such an

analysis confirm that article XXII(3) means exactly what it

says. |

A. The Basic Terms of Art

To begin with the basic semantics of the Treaty, the drafters

consistently used three terms of art to allocate benefits among

private parties, “nationals of [Japan or the United States],”

“companies of [Japan or the United States],” and “enterprises

controlled by such nationals or companies.” The very creation

of these three terms of art is a strong indication that the

drafters viewed each as representing a distinct entity. Yet under

the majority view a company incorporated in the United States

but controlled by a Japanese national or company (which I will

refer to as a “Japanese-controlled American company”) is

already a “company of Japan.” That view equates the latter

two terms, deprives the last term of all meaning and purpose,

and creates the additional confusion and redundancy that I will

discuss below.

B. Provisions Based on the Place of Incorporation Test

Two articles of the Treaty are clearly based on the assump-

tion that a company has the nationality of its place of incor-

Dr. Herman Walker, the FCN authority so heavily relied upon by the

majority, has called this the “simple ‘classical’ test” of corporate

nationality. H. Walker, Companies, ch. VII, in R.R. Wilson, United

States Commercial Treaties and International Law 182, 193 (1960).

85a

poration. The firs

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