California Agricultural Aircraft Services, Inc (CAAS) is a California corporation headquartered in Sacramento. CAAS leases aircraft to crop dusting businesses through California. CAAS entered into a contract with Shànghai Aircraft Company (SAC), a

Question

state-owned enterprise organized pursuant to the laws of the People's Republic of China. The contract provided for the manufacture by SAC and purchase by CAAS of ten crop dusting aircraft at a price of U.S. $2.1 million, a savings of approximately $200,000 compared to crop dusting aircraft available from other manufacturers. One of the aircraft delivered to CAAS was subsequently leased to Central Valley Crop Dusting, Inc (CVCD), a California corporation. One month later, this aircraft crashed during a CVCD spraying operation resulting in a complete loss of the aircraft and serious injuries to the pilot. The pilot stated that the engine lost power and then caught on fire while he was attempting an emergency landing. Subsequent investigations by federal and state authorities determined the sole cause of the crash to be catastrophic engine failure. CVCD and its pilot subsequently initiated litigation in the San Joaquin County Superior Court against CAAS, claiming breach of numerous provisions within the lease agreement, strict product liability and negligence. CAAS immediately notified SAC regarding the litigation and requested indemnification, but SAC did not respond to this request. CAAS is now contemplating joining SAC as a co-defendant to CVCD's lawsuit. What defense could SAC assert to the exercise of personal jurisdiction by the San Joaquin County Superior Court? What does this defense provide? Would this defense be successful in this case? Why or why not?

Answer 1

SAC may assert the Foreign Sovereign Immunities Act (FSIA). FSIA provides that foreign states are immune from litigation in U.S. courts. SAC is a foreign state because it is a state owned enterprise. Specifically, SAC is a separate legal entity from the state, the majority of its stock is owned by a foreign state, and it is not a U.S. citizen or incorporated under laws of a third state (SAC being incorporated pursuant to the laws of state which owns it. SAC's assertion of FSIA will fail in this case due to the commercial activity exception. The commercial activity exception to FSIA provides that a foreign government is not immune from litigation if it acts like a private market participant. There is no sovereign immunity for causes of action based on commercial activities with a U.S. nexus. A commercial activity is a regular course of commercial conduct or a particular commercial transaction or act. The sale of a service or product by a foreign government or state-owned enterprise is a commercial activity. The commercial activity exception also requires a U.S. nexus (i.e. an effect in the United States). There is a nexus between SAC and the United States in this case as it performed a commercial act outside of the United States that caused a direct effect in the United States.