Powerex Corp. v. Reliant Energy Services, Inc., et al. (06/18/2007)

Questions presented: (1) Whether petitioner, which is wholly owned by a crown corporation that is itself wholly owned by the Canadian Province of British Columbia, and which performs obligations and exercises rights of the Province pursuant to treaties with the United States, is entitled to the protections of the Foreign Sovereign Immunities Act of 1976, 28 U.S.C. 1602 et seq., as an "organ of a foreign state or political subdivision thereof," 28 U.S.C. 1603(b)(2)? (2) Whether the court of appeals had jurisdiction to review the district court's remand order, notwithstanding 28 U.S.C. sec. 1447(d)?

BY JESSICA DYE, MEDILL NEWS SERVICE

The 2000-2001 California energy crisis subjected hundreds of thousands of citizens to rolling blackouts and astronomical power bills. As soon as the energy crisis ended, the political and legal fallout began.

The California attorney general filed suit against dozens of private power companies, including Reliant Energy Services, alleging they had manipulated a recently deregulated energy market and conspired under the leadership of Enron to fix prices and gouge consumers for billions by creating artificial power shortages.

Reliant and the others then turned around and filed cross-claims for indemnity against two U.S.-government-owned energy corporations, the Western Area Power Administration (WAPA) and Bonneville Power Administration (BPA), a Canadian hydroelectric power company owned by British Columbia's provincial government and its subsidiary company Powerex. In their cross-claim, Reliant said they had done nothing more illegal than the state-run organizations, which, Reliant contended, had waived their sovereign immunity as governmental agencies under the Foreign Sovereign Immunities Act (FSIA) of 1976 by engaging in deregulated commercial activity.

Powerex is the export subsidiary of BC Hydro, a company owned and operated by the British Columbian provincial government. BC Hydro and Powerex were created to harness and distribute Canada's share of hydroelectric power allotted by its 1964 Columbia River Treaty and 1984 Skagit River Treaty, negotiated with the U.S. Powerex markets the surplus energy to states primarily in the western U.S.

All the state-run companies named in the suit removed their cases to the U.S. District Court of Southern California over the objections of the California attorney general, away from the politically contentious California state court, to argue they were entitled to immunity.

Justice Robert Whaley from the Eastern District of Washington was brought in to preside after all California district judges recused themselves. He ruled that the two U.S. agencies, the WAPA and BPA, had not waived their immunity (since only Congress can waive immunity) and that BC Hydro was protected by its ties to the British Columbian government; but that PowerEx had neither BC Hydro's immunity nor the right to remove its case to federal court. Whaley then sent the case back to state court.

The plaintiffs appealed the ruling to the 9th Circuit Court of Appeals. On Dec. 8, 2005, the panel, in an opinion by Chief Judge Mary M. Schroeder upheld the majority of the lower court's decision, although it vacated the remand to state court and ordered the court to award costs to all the parties, except Powerex.

"Powerex offers some evidence that it serves a public purpose," the ruling stated, "[but] its high degree of independence from the government of British Columbia, combined with its lack of financial support from the government and its lack of special privileges or obligations under Canadian law dictate our holding that Powerex is not an organ of British Columbia."

FSIA protects any "agency or instrumentality of a foreign state, a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof." Although Powerex conducted commercial business in the U.S., its lawyers point out it is 100 percent owned by BC Hydro, which is in turn 100 percent owned by the British Columbian government.

Powerex petitioned the Supreme Court for certiorari, calling the 9th Circuit's opinion "a decision that defies the law, the facts, and common sense." The petition asked the Supreme Court to decide whether a subsidiary of a company owned and operated a foreign government's entity could enjoy the same sovereign immunities as its parent company.

As the case pended before the Supreme Court, the Court requested an amicus brief from U.S. Solicitor General Paul Clement. After examining the 9th Circuit decision, Clement found that it conflicted with opinions handed down by the 2nd, 3rd and 5th circuits on similar cases, all of which had granted foreign-sovereign status based on a more flexible analysis of the company's ownership and business practices.

"At first glance, the courts of appeals may appear to have adopted similar approaches to determining whether an entity qualifies as an organ of a foreign state," wrote Clement. "A closer study, however, reveals a critical divergence in the manner in which the various circuits apply their seemingly similar tests."

The general test for foreign sovereign corporate immunity was set forth in the Supreme Court's 2003 decision in Dole Foods Co. v. Patrickson, which determined "a foreign state must itself own a majority of the shares of a corporation" at the time of the filing to qualify for immunity. The 9th Circuit interpreted this strictly to mean that British Columbia would have to be the direct owner of Powerex; the other circuits had applied this standard more leniently.

Clement found that this case raised important foreign business questions that needed to be resolved. "[Powerex] marketed power valued at approximately $11 billion Canadian between 2000 and 2004, and a large part of that power goes to States in the Ninth Circuit," Clement wrote. "Thus, if the court of appeals' decision is not overturned, it will bind [the] petitioner in virtually all suits brought against it."

The Canadian and British Columbian governments both filed amicus briefs on behalf of Powerex, since a decision against Powerex could give U.S. courts leave to sue other Canadian companies affiliated with the government and conducting business in the U.S.

"[T]he U.S. entities responsible for carrying out the provisions of the same two treaties were deemed to be sovereign, and that the disparate treatment of similarly situated U.S. and Canadian entities by U.S. courts at the least creates troubling appearances, and quite possibly violates NAFTA," said Roy Englert, counsel for the British Columbian government, which filed an amicus brief on behalf of PowerEx.

On Jan. 19, 2007, the Supreme Court accepted review of the case, and directed the parties to address the question of whether the 9th Circuit even had jurisdiction to hear the appeal to the petition, since the district court decision remanded the case back to state court. Leonard B. Simon, who represents several citizen interest groups against Powerex, called the decision "unappeallable."

The question of jurisdiction could tip the scales against Powerex. California citizens are still outraged by the energy crisis, and the state attorney general has accused Powerex of overcharging state authorities by $850 million.

"Although one need not question the good faith of any judge or any court system, Congress recognized that state courts are inherently in danger of being more politicized than federal courts," said Englert. "Subjecting foreign sovereign instrumentalities to suit in state court is impermissible for that reason."

Meanwhile, California citizens have started receiving state court settlements for their power-related woes. "We have found ways to file additional actions and settle with most of the defendants in the case for hundreds of millions of dollars," Simon said.

On June 18, 2007, a 7-2 Court ruled against Powerex, holding that the 9th Circuit did not have jurisdiction to hear the case.

“Appellate courts must take that jurisdictional prescription seriously, however pressing the merits of the appeal might seem,” Justice Antonin Scalia wrote for the majority. “We hold that §1447(d) bars appellate consideration of petitioner’s claim that it is a foreign state for purposes of the FSIA.”

Since the justices found that the appeals court lacked jurisdiction to review the remand order, they did not address the question as to whether Powerex is immune from suit under FSIA.

Justices Anthony Kennedy and Samuel Altio filed a separate concurrence in the case, urging congressional action to address the concerns of alleged foreign state entities like Powerex.

“When Congress acted through the [FSIA] to codify certain protections and immunities for foreign sovereigns and the entities of those sovereigns, it no doubt considered its action to be of importance for maintaining a proper relationship with other nations,” Kennedy noted. “And so it is troubling to be required to issue a decision that might well frustrate a policy of importance to our own Government…. If it is true that the statute as written and the judgment we issue today are inconsistent with the intent and purpose Congress wanted to express, then the immediate jeopardy that foreign sovereign entities will now face should justify urgent legislative action to enact the necessary statutory revisions.”

A dissent authored by Justice Stephen Breyer, who was joined by Justice John Paul Stevens, also dealt with the dilemmas facing foreign state entities.

“Imagine that a private plaintiff brings a lawsuit in state court against a noncommercial division of a foreign nation’s government, say, a branch of that nation’s defense ministry or, for that matter, against the foreign nation itself,” Breyer wrote. “The FSIA provides a specific guarantee that such a suit cannot continue…. It achieves this objective by authorizing the foreign government to remove the case to federal court where a federal judge will determine if the defendant is indeed a foreign government and, if so, dismiss the case.”