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Pacific International Inc v United States of America [2004] MHSC 2; 2 MILR 244 (28 June 2004)

2 MILR 244

IN THE SUPREME COURT
REPUBLIC OF THE MARSHALL ISLANDS

S. CT. CIVIL, NO. 03-02
(High Ct. Civil No. 1995-140)

PACIFIC INTERNATIONAL, INC.,
Plaintiff-Appellee,

-v-

UNITED STATES OF AMERICA and UNITED STATES DEPARTMENT OF THE ARMY,
Defendant-Appellant.

APPEAL FROM THE HIGH COURT

JUNE 28, 2004

CADRA, C.J.
GOODWIN, A.J. pro tem¹, and KURREN, A.J. pro term²

Argued and Submitted May 10, 2004

SUMMARY:

The Supreme Court reversed the High Court's decision that plaintiff s claims for monetary damage were "based upon" a "commercial activity" of the United States in the Republic invoking the "commercial activity" exception to the rule of sovereign immunity as set forth in Section 174(d) of the Compact.

DIGEST:

1. APPEAL AND ERROR - Review - Questions of Law: The Court reviews the denial of a motion to dismiss based upon a claim of foreign sovereign immunity de novo.

2. EVIDENCE - Burden of Proof - Sovereign Immunity: Once the plaintiff offers evidence that a Foreign Sovereignty Immunity Act exception to immunity applies, the party claiming immunity bears the burden of proving by a preponderance of the evidence that the exception does not apply.

3. SAME - Same - Same: The foreign state has no obligation to affirmatively eliminate all possible exceptions to sovereign immunity, only those exceptions specifically raised by the plaintiff.

4. STATUTES - Construction and Operation: Section 174(d) of the Compact is analogous to the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. § 1602(a)(2), which provides that a "foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case ... in which the action is based upon a commercial activity carried on in the United States by the foreign state." Due to the similarity in language, the legislative history and judicial interpretation of FSIA § 1602(a)(2) guide the analysis of what constitutes "commercial activity" under Section 174(d) of the Compact.

5. SAME - Same - Commercial Activity: The analysis of whether the "commercial activity" exception applies must begin with identifying the particular conduct "upon" which the action is "based".

6. SAME - Same - Based Upon: The phrase "based upon" means something more than a mere connection with, or relation to, commercial activity.

7. SAME - Same - Commercial Activity: Conduct by a state is considered "commercial activity" where the state exercises "only those powers that can also be exercised by private citizens, as distinct from those powers peculiar to sovereigns.

8. SAME - Same - Same: Operation of military bases, including control of access thereto, is universally considered a purely governmental function and, as such, sovereign in nature, as opposed to commercial.

OPINION BY KURREN A.J.

The United States awarded contractor Wallace O'Connor ("WOC") a contract to perform various construction projects on the United States Army Kwajalein Atoll base. The contract gave the United States Base Commander discretion as to who could enter onto or reside on the base or both. WOC subsequently entered into a subcontract with Pacific International, Inc. ("PII"). PII requested permission from the Base Commander for several of its employees to reside on base. The Base Commander refused the request. PH then filed suit against the United States for, inter alia, Tortious Interference with Prospective Contractual and Business Relations and Economic Advantage. The United States asserted immunity from the suit pursuant to the Compact of Free Association, an agreement between the United States and the Republic of the Marshall Islands ("RMI") regarding, amongst other things, mutual immunity from each other's courts except under certain circumstances. The High Court found that the United States was not immune because the acts complained of fell within the "commercial activity" exception to the applicable foreign sovereign immunity doctrine. The instant appeal followed. We have jurisdiction pursuant to Article VI, Section (2) of the Marshall Islands Constitution, and we REVERSE the High Court's ruling with respect to the issue of sovereign immunity, finding that the United States in this instance is immune from the claims brought by PII.

FACTS AND PROCEDURAL HISTORY

On April 13, 1993, the United States Army Engineer District, Honolulu ("RED") awarded contractor WOC a Contract for various construction projects to be performed at the United States Army Kwajalein Atoll base ("USAKA") (collectively referred to as the "Project").

Clause H. 11 of WOC's Contract, entitled "CLEARANCE, ENTRY AND SECURITY REQUIREMENTS," provides:

(a) No employee or representative of the Contractor will be admitted to the site of the work unless he furnishes satisfactory proof that he is a citizen of the United States, or if an alien resident of the United States, that his residence within the United States is legal. Access by Marshallese to the project site is governed by the clause entitled "Restrictions on Local Hire. [Clause H.12]"

The "Restrictions on Local Hire" clause prohibits any person not a United States citizen or legal alien to reside on the USAKA base without the permission of the Base Commander. Specifically, the Contract states in relevant part:

(a) Local hire is limited to Marshallese and to citizens or legal alien residents of the United States, and shall be subject to the written approvals of the Contracting Officer and the Commander of USAKA....

(b) Persons who are not United States citizens or legal alien residents of the United States will not be permitted to reside on any United States defense site in the Kwajalein Atoll without written permission from the Commander of USAKA, but will be permitted to take meals at the Pacific Dining Room, the Kwajalein Snack Bar, and other USAKA facilities on a per-meal cash basis.

Contract at H.12 (emphasis added).

On June 29, 1993, WOC entered into a subcontract with PH for work on the Project (hereinafter the "Subcontract"). PH was aware of the "Clearance, Entry, and Security Requirements" and "Restrictions on Local Hire" clauses in the Contract before it entered into the Subcontract.

On September 30, 1993, PH, in a letter to WOC which was provided to the HED on the same date, formally requested permission for "residence on Kwajalein for four employees who hold Permanent Resident Alien status with the Republic of Marshall Islands." HED rejected the request because the four employees were not members of that class of persons permitted to reside on the USAKA base under the Contract. The HED letter stated:

Your request was discussed with the [USAKA] Commander and he stated that only United States Citizens or permanent legal alien residents of the United States will be allowed to reside on USAKA. He will allow permanent resident aliens of the [RMI] to work on USAKA, but not to live on USAKA. This position has been established USAKA policy and complies with the restrictions outlined in Special Contract Requirements [sic], H.12, Restriction [sic] on Local Hire.

On May 15, 1995, PII filed a Complaint against the United States of America, the United States Department of the Army, the United States Army Corps of Engineers, and the United States Army Kwajalein Atoll, alleging:

(1) Tortious Interference with Contract;

(2) Tortious Interference with Prospective Contractual and Business Relations and Economic Advantage;

(3) Violation of the RMI Constitution;

(4) Violation of the Status of Forces Agreement ("SOFA") and the Compact of Free Association;

(5) Misrepresentation and Breach of Warranty;

(6) Punitive Damages;

(7) vicarious liability;

(8) Declaratory Relief on the issue of whether the U.S. 20% Bid Preference is discriminatory against RMI contractors; and

(9) Injunctive Relief. Extensive motion practice ensued, as well as a failed attempt at Alternative Dispute Resolution.

On January 15, 2003, PII filed a First Amended Complaint ("FAC") against the United States and the United States Department of the Army (hereinafter collectively referred to as the "United States"), alleging:

(1) Tortious Interference with Contract;

(2) Tortious Interference with Prospective Contractual and Business Relations and Economic Advantage;

(3) Violation of the RMI Constitution;

(4) Violation of the SOFA and the Compact;

(5) Misrepresentation/Breach of Warranty;

(6) Punitive Damages;

(7) Declaratory Relief and Damages;

(8) Injunctive Relief;

(9) Bad Faith/Misrepresentation for ADR Process; and

(10) De Facto Debarment.

The United States filed a motion to dismiss the Complaint, asserting, among other arguments, that the claims are barred by the doctrine of foreign state immunity under Section 174 of the Compact of Free Association (hereinafter "Compact").

The motion to dismiss came on for hearing before the High Court on April 16, 2003. In its Memorandum Opinion Pertaining to Preliminary Motions ("Memorandum Opinion") and Order Pertaining to Preliminary Motions, both filed May 13, 2003, the High Court dismissed Counts III through IX of the FAC on the grounds that PII failed to state a claim upon which relief can be granted. The High Court refused to dismiss Count I (Tortious Interference with Contract), Count II (Tortious Interference with Prospective Contractual and Business Relations and Economic Advantage), and Count X (De Facto Debarment), holding that the transactions underlying these Counts were commercial in nature and therefore not subject to foreign sovereign immunity. The instant appeal followed.

STANDARD OF REVIEW

[1] The Court reviews the denial of a motion to dismiss based upon a claim of foreign sovereign immunity de novo. See Honduras Aircraft Registry, Ltd. v. Government of Honduras, [1997] USCA11 2535; 129 F.3d 543, 546 (11th Cir. 1997), cert. denied, 524 U.S. 952 (1998); accord In re Tamini[1999] USCA4 97; , 176 F.3d 274, 277 (4th Cir. 1999) ("[w]e review applications of the [Foreign Sovereign Immunities Act ("FSIA")] de novo"); see also Samson v. Rongelap Atoll Distribution Authority, 1 MILR (Rev.) 280, 284 (Nov 19, 1992) (question of law reviewed de novo).

[2,3] "Once the plaintiff offers evidence that an FSIA exception to immunity applies, the party claiming immunity bears the burden of proving by a preponderance of the evidence that the exception does not apply." Joseph v. Office of Consulate Gen. of Nigeria, [1987] USCA9 1913; 830 F.2d 1018, 1021 (9th Cir. 1987). The foreign state "has no obligation to affirmatively eliminate all possible exceptions to sovereign immunity," only those exceptions specifically raised by the plaintiff. Rodriguez. v. Transnave Inc.[1993] USCA5 2869; , 8 F.3d 284, 287 n.6 (5th Cir. 1993).

DISCUSSION

The question before the Court is whether the High Court erred in holding that PII's claims were based upon a "commercial activity" of the United States in the RMI, thereby invoking the "commercial activity" exception to the rule of sovereign immunity as set forth in Section 174(d) of the Compact. Further, if PII's claims fall within the "commercial activity" exception of Section 174(d) of the Compact, thereby subjecting the United States to the jurisdiction of the RMI Courts, the question is whether the United States is immune from jurisdiction by virtue of the Military Use and Operating Rights Agreement ("MUORA") and Article XV of the SOFA, which establish an exclusive procedure for contractual and non-contractual claims against the United States. Because this Court concludes that the claims do not fall within the "commercial activity" exception of Section 174(d) of the Compact, as discussed below, this Court need not reach the second question.

I. Foreign Sovereign Immunity

On June 25, 1983, the United States and the RMI concluded the Compact which, with other related agreements, created a framework for the mutual relations between the RMI and the United States. See Compact of Free Association, reprinted in 48 U.S.C.A. § 1901, Historical and Statutory Notes; see also Presidential Proclamation No. 5564, 51 Fed. Reg. 40,399 (1986), reprinted in 48 U.S.C.A. § 1681 note. The Compact provided, in part, for the United States' and the RMI's respective immunity from each other's courts.

II. Commercial Activity Exception

In Section 174(d) of the Compact, the United States expressly waives sovereign immunity in instances where its activities are commercial in nature:

The Government[] of the Marshall Islands ... shall not be immune from the jurisdiction of the courts of the United States, and the Government of the United States shall not be immune from the jurisdiction of the courts of the Marshall Islands ... in any case in which the action is based on a commercial activity of the defendant Government ....

In the case below, analyzing what constitutes a "commercial activity," the High Court appears to have reasoned that because the underlying construction Contract between the United States and WOC was clearly commercial in nature, all acts which flowed from this Contract, such as preventing certain employees from residing on or near the work-site, must be commercial as well:

... The Court is then faced with primarily a factual issue: is the transaction forming the basis of Plaintiffs First Amended Complaint a commercial transaction or not?

... The transaction underlying Plaintiff's suit is a commercial building contract in which defendant was owner and Plaintiff was a subcontractor. This is [not] [sic] a sovereign act. This is a commercial transaction. The United States is subject to suit for alleged damages flowing from this commercial transaction.

... One thing Defendant has tried to do is to isolate certain events that occurred in the performance of this building contract and argue that these isolated events were non-commercial sovereign acts. Insofar as the threshold issue of jurisdiction is concerned, these actions involving the performance of the contract do not change the foundation character of the transaction as a commercial one.

Memorandum Opinion, at 2. We do not agree.

[4] Section 174(d) of the Compact is analogous to the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. § 1602(a)(2), which provides that a "foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case ... in which the action is based upon a commercial activity carried on in the United States by the foreign state." Due to the similarity in language, the parties agree, the legislative history and judicial interpretation of FSIA § 1602(a)(2) guide the analysis of what constitutes "commercial activity" under Section 174(d) of the Compact.

[5,6] The United States Supreme Court instructs that the analysis of whether the "commercial activity" exception applies must begin with identifying the particular conduct "upon" which the action is "based." Saudi Arabia v. Nelson, [1993] USSC 33; 507 U.S. 349, 356 (1993). The phrase "based upon" has been extensively reviewed by the United States Supreme Court, which has determined that the phrase "is read most naturally to mean those elements of a claim that, if proven, would entitle a plaintiff to relief under his theory of the case." Nelson, 507 U.S. at 357 (citing Callejo v. Bancomer, S.A., [1985] USCA5 875; 764 F.2d 1101, 1109 (5th Cir. 1985) (the focus should be on the "gravamen of the complaint")). Significantly, the phrase "based upon" means "something more than a mere connection with, or relation to, commercial activity." Nelson, 507 U.S. at 357-58. Here, the conduct upon which PH's action is based - indeed the gravamen of its complaint - was the Base Commander's refusal to allow certain of PII's employees to reside on the base at Kwajalein Atoll. The gravamen of the complaint is not the contract between the United States and WOC, as was determined by the High Court.³

[7,8] The next inquiry is whether the action at issue - the Base Commander's control over access to the base - is commercial in nature. Conduct by a state is considered "commercial activity" where the state exercises "only those powers that can also be exercised by private citizens, as distinct from those powers peculiar to sovereigns." Nelson, 507 U.S. at 360 (quoting Republic of Argentina v. Weltover, Inc.[1992] USSC 79; , 504 U.S. 607, 614 (1992)) (internal quotation marks omitted). A Base Commander's control over the access to a defense site and decisions regarding who may or may not reside thereupon are not activities which a private citizen would exercise. Rather, operation of military bases, including control of access thereto, is universally considered a purely governmental function and, as such, sovereign in nature.⁴ See, e.g., United States of America v. Public Service Alliance of Canada, [1992] 2 S.C.R. 50, 91 D.L.R. (4th) 449, 1992 Carswell Nat 1005 (with respect to a military base in Canada leased by the United States, the Supreme Court of Canada stated, "I can think of no activity of a foreign state that is more inherently sovereign than the operation of such a base. As such, the United States government must be granted the unfettered authority to manage and control employment activity at the base")); Holland v. Lampen-Wolfe [2000] UKHL 40; [2000] 3 All E.R. 833, [2001] I.L.Pr. 49, 2000 WL 976034 (HL) ("[t]he maintenance of the base itself was plainly a sovereign activity. As Hoffman L.J. (Now Lord Hoffman) said in Littrell v. United States (No. 2), this looks about as imperial an activity as could be imagined"); Cafeteria Workers v. McElroy, [1961] USSC 136; 367 U.S. 886,896 (1961) ("the governmental function ... here was ... to manage the internal operation of an important federal military establishment. In that proprietary military capacity, the Federal Government, as has been pointed out, has traditionally exercised unfettered control") (internal citations omitted).

Therefore, because the action complained of is the Base Commander's decision to refuse residence on base to four of PII's Permanent Resident Alien employees, and such action is purely sovereign in nature, the Court concludes that the United States in this instance is immune from the jurisdiction of the RMI Courts. Accordingly, the decision of the High Court is REVERSED.

____________

¹Honorable Alfred T. Goodwin, Senior Judge, United State's Court of Appeals for the Ninth Circuit, sitting by designation of the Cabinet.

²Honorable Barry M. Kurren, Magistrate Judge, District of Hawaii, sitting by designation of the Cabinet.

³The circumstances in this case are analogous to those in Nelson[1993] USSC 33; , 507 U.S. 349. In Nelson, an American employee at a Saudi hospital and his wife brought suit against Saudi Arabia for injuries arising from the employee's alleged detention and torture by the Saudi Government in retaliation for his being a "whistle blower." Plaintiffs pointed to the employee's recruitment by the hospital and his employment contract as evidence of the alleged commercial name of the acts. In rejecting the claim, the United States Supreme Court found that the gravamen of the complaint was torture and punishment inflicted on the plaintiff by Saudi officials, actions peculiarly sovereign in nature: "[w]hile [the employment of Nelson] led to the conduct that eventually injured the Nelsons, they are not the basis for the Nelsons' suit ... and those facts alone entitle the Nelsons to nothing under their theory of the case." Nelson, 507 U.S. 357. Here, as in Nelson, while the Base Commander's refusal to allow certain of PII's employees to live on the military base would not have occurred but for the construction contract, it is the Base Commander's actions which are at issue here, not the construction contract.

⁴PII argues that evidence indicates that regulation of access by the Base Commander was for commercial purposes. This assertion is irrelevant because "the commercial character of an act is to be determined by reference to its 'nature' rather than its 'purpose'[.]" Nelson, 507 U.S. at 360. Whether or not the purpose of preventing residence on base of certain personnel is commercial, the nature of regulating access to a secure military base is purely governmental.