[Congressional Record Volume 162, Number 99 (Tuesday, June 21, 2016)]
[Senate]
[Pages S4379-S4381]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                    FOREIGN SOVEREIGN IMMUNITIES ACT

  Mr. GRASSLEY. Madam President, I rise to speak about the changing 
nature of globalization. Everyone is aware globalization has changed 
how economies work. Some people have embraced globalization while 
others are fighting to slow its effects. In America, most people are 
familiar with the modern, multinational corporation. These corporations 
are privately owned by shareholders and operate in countries around the 
world. However, there is a new trend that is becoming increasingly 
evident in commerce today. We are now seeing entities that are owned by 
governments competing with private companies in the automotive, food, 
and airline industries that represent more traditional commerce.
  Over the last several decades, governments, through entities called 
state-owned enterprises, have become highly involved in international 
commerce. We have seen state-owned companies and enterprises buy the 
assets of private companies, such as Smithfield Foods, and start up 
completely new

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companies, such as the new airlines in the Middle East. There is 
nothing inherently wrong with state-owned enterprises paying a premium 
on market value to purchase a company. However, the actions of the 
company and its legal obligations after the transaction is complete are 
what I intend to focus on today.
  In a 2014 report, the United Nations estimated there are over 550 
state-owned transnational companies with cumulative assets of over $2 
trillion. Many would argue the estimate of $2 trillion in assets under 
management is a conservative number. There are many differences between 
state-owned companies and companies that are publicly traded.
  First, state-owned companies are not subject to the same transparency 
requirements as publicly traded companies. Publicly traded companies 
must adhere to GAAP accounting standards and file quarterly and annual 
reports, such as 10-Qs and 10-Ks, with the Securities and Exchange 
Commission.
  Second, state-owned enterprises have the implicit backing of the 
various governments, giving them access to credit oftentimes at cheaper 
rates than individual private companies could hope to find. The most 
valuable companies in America, based on market capitalization, are 
worth between $500 and $600 billion on any given day. While Fortune 100 
companies are large, their resources then pale in comparison to 
government wealth.
  Finally, state-owned enterprises report their strategies, profits, 
and losses to governments. They are not accountable to shareholders in 
the way publicly traded companies are. Therefore, it is prudent we take 
time to consider how foreign, state-owned enterprises are participating 
in this American economy.
  In agriculture, state-owned enterprises have started to buy publicly 
traded American companies. Smithfield Foods was sold to China's 
Shuanghui in 2013 for $4.7 billion in cash. ChemChina is currently 
trying to buy the Swiss-based seed and chemical company Syngenta for 
$43 billion. About one-third of Syngenta's $12 billion in revenue comes 
from North America, which is what makes this transaction very 
concerning for me. While some could argue these investments are similar 
to foreign direct investment, what these foreign, state-owned 
enterprises are really buying are our resources and expertise in food 
production, including the intellectual property that fuels development 
and growth of the agricultural sector. Even if these transactions 
function seamlessly for the first 10 or 15 years, there are strategic 
questions we need to consider before approving the sale of any more of 
our agricultural assets to another government. For that reason, Senator 
Stabenow and I asked the Committee on Foreign Investment in the United 
States, commonly referred to as CFIUS, to thoroughly review the 
proposed Sengenta acquisition with the help of the Department of 
Agriculture. CFIUS is responsible for reviewing the national security 
implications of transactions that result in foreign control of U.S. 
businesses and critical infrastructure. There is a shared sentiment 
among lawmakers, military officials, and everyday Americans that 
protecting the safety and resiliency of our food system is core to 
American national security. The food security of our country is not 
something we can take for granted, and as I have said before, at any 
given time we are only nine meals away from revolution.
  As I mentioned, I also have concerns about the legal obligations and 
accountability of foreign, state-owned companies, particularly as they 
relate to those companies' interactions with American companies and 
consumers.
  Now, I have heard several recent reports noting cases where companies 
owned by foreign governments have claimed that they are immune to 
lawsuits by American companies or American consumers in our very own 
courts.
  They have made this claim even when a foreign, state-owned company or 
one of its corporate affiliates has been engaged in normal commerce 
with American consumers or other American companies.
  In making this argument, these foreign, state-owned companies would 
try both to take advantage of our market and to avoid the rules and 
potential liability that every other market actor must face. Of course, 
that doesn't seem right to me, and it is not the way our laws are set 
up to work.
  It is an age-old rule of international law that one sovereign nation 
should not subject another country acting in its sovereign capacity to 
the authority of domestic courts.
  Our courts recognized this principle long before Congress wrote it 
into statute.
  The theory developed at a time when personal sovereigns ruled foreign 
powers rather than democracies. The sovereign was the same as the 
State. Chief Justice John Marshall acknowledged it in an 1812 Supreme 
Court opinion when he explained that our courts had no jurisdiction to 
hear America's claim against France to recover a ship seized by order 
of Napoleon.
  But there have long been important exceptions to the doctrine of 
foreign sovereign immunity. One of those is the so-called ``commercial 
activity'' exception. Just 12 years after his opinion about Napoleon's 
ship, Chief Justice Marshall explained that ``[w]hen a government 
becomes a partner in any trading company, it divests itself . . . of 
its sovereign character, and takes that of a private citizen.''
  For that reason, over the last several decades, both the State 
Department and the Supreme Court have recognized that the original 
purposes of foreign sovereign immunity--respect for the person and 
governmental acts of a foreign sovereign--are not served when the 
doctrine is invoked to protect a sovereign's private acts.
  This development resulted from the need to ensure stability and 
predictability in international commerce after state monopolization in 
industries like transportation and communication.
  It is based on the notion that when a sovereign nation enters the 
competitive marketplace, it no longer acts as a sovereign at all, and 
it must follow the very same rules as every other market participant.
  So in 1976 we codified those principles in statutory law by enacting 
the Foreign Sovereign Immunities Act, referred to as FSIA. Under the 
FSIA, foreign sovereign immunity extends not only to foreign sovereigns 
but also to political subdivisions and even corporate entities owned by 
foreign sovereigns.
  But, importantly, the FSIA also codifies exceptions to the foreign 
sovereign immunity principle, including--very importantly--the 
commercial activity exception.
  As I said, I have seen reports noting cases where companies owned by 
foreign governments have claimed that they are immune to suits by 
American companies or American consumers in our very own courts when 
they are suspected of doing something wrong. Sometimes, their arguments 
have succeeded, which raises concerns that the exception may not be 
working as designed.
  Let me give one example. America bought much of the drywall used to 
rebuild New Orleans after Hurricane Katrina from Chinese manufacturers. 
Thousands of homes built with that drywall turned out to be 
uninhabitable because residents said the drywall made them sick.
  So these Americans tried to sue the Chinese manufacturers, including 
a manufacturer's parent company, China National Building Materials 
Group, or CNBM.
  The problem for the consumers is that the Chinese Government is 
heavily invested in these manufacturers, among many other commercial 
enterprises.
  Under the general principle of foreign sovereign immunity, a foreign 
government selling Americans a product is not acting as a sovereign but 
as a market competitor. One would assume that the ``commercial 
activity'' exception to foreign sovereign immunity applies, but the 
state-owned manufacturer argued otherwise.
  Here is how it works under statute. Foreign companies are sued in our 
courts all the time. Commonly, these lawsuits, like the drywall case, 
involve claims of American consumers or companies that the foreign 
company engaged in some behavior that harmed them.
  When a foreign company is sued in one of our courts, it has a chance 
to show at the beginning of the case that a foreign government owns a 
majority

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of its shares. If the foreign company makes that showing, it then 
enjoys a presumption of immunity under the FSIA, meaning that the 
plaintiffs' lawsuit will be dismissed.
  But before that happens, the plaintiffs have one more chance to save 
their case from early dismissal. This is where the ``commercial 
activity'' exception comes into play. The plaintiffs can defeat the 
presumption of immunity by showing that the foreign state-owned company 
was acting as a market participant--that is, engaging in commercial 
activity that takes place in or affects the United States--when it 
caused the harm the plaintiffs complained about.
  This principle--the ``commercial activity'' exception--saves a case 
from early dismissal and gives plaintiffs a chance to move forward and 
try to prove their claims against a foreign, state-owned corporation 
behaving like a market actor.
  But as it turns out, that can be a complicated showing for plaintiffs 
to make at such an early stage in the case. Here is why. Companies 
owned by foreign states are often governed through very complicated 
corporate structure.
  Take, for example, the large Chinese insurance company backed by the 
Chinese state bank in its recent attempt to purchase an American hotel 
chain. In describing the attempted takeover, the Wall Street Journal 
described the Chinese company's ownership structure as ``opaque.''
  Yet in implementing the FSIA, courts require plaintiffs to meet the 
commercial activity exception at every level of corporate organization 
or they must show that various levels of organization acted only as 
corporate pass-throughs and, therefore, can be ignored.
  Here is why I think that may be a problem. Corporate parents can 
exercise an extraordinary level of control over subsidiaries without 
concluding that the subsidiary is a mere pass-through.
  Requiring plaintiffs to show commercial activity at every level of 
corporate organization--at such an early stage in the lawsuit--runs the 
risk of ignoring high-level involvement in the conduct that allegedly 
hurt the plaintiffs. If plaintiffs don't satisfy this showing against a 
parent company at an early stage in their case, they may lose the 
chance to establish their claims.
  Now, what this means, as a practical matter, is that this mechanism 
puts foreign companies that happen to be owned by sovereign states at a 
distinct advantage over private foreign companies. A private foreign 
company has no mechanism for early dismissal of a lawsuit on these 
grounds. A private foreign company would be required to respond to the 
plaintiffs' allegations, and it would have to produce evidence during 
the course of the lawsuit relating both to its control over other parts 
of the conglomerate and also to its involvement in the activities 
alleged.
  As a result of this early dismissal mechanism, the plaintiffs' case 
in New Orleans could only proceed against one subsidiary, and that 
happens to be CNBM. The case against CNBM itself was dismissed.
  Now, it may be that these plaintiffs still wouldn't have been able to 
establish liability on the part of CNBM in the end, but they didn't 
even have that opportunity.
  This is something that I want to consider carefully. If a foreign, 
state-owned company is able to shield parts of its organization behind 
the FSIA to avoid having to answer a lawsuit entirely in a way that the 
FSIA doesn't contemplate, when a privately owned foreign company 
wouldn't enjoy the same luxury, then a fix may be in order.
  The point of the commercial activity exception to foreign sovereign 
immunity is to treat foreign governments like any other market actor 
when they enter into commerce. Nothing about the principles of foreign 
sovereign immunity or the FSIA is designed to afford extra early 
defenses to foreign companies' commercial actions just because the 
companies happened to be owned by foreign states.
  But, currently, foreign, state-owned companies will argue that many 
of their affiliates don't have to answer the claims of American 
companies and American consumers, even when it is clear that at some 
level the company engaged in market activity that may have harmed 
Americans. Sometimes, like in the New Orleans case, the companies are 
succeeding.
  So I think that may be a problem. That is why I took the time to 
speak now on the floor of the Senate, and I intend to look at it very 
carefully and possibly seek legislative remedy.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Wisconsin.

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