US Law and Chinese Immunity

State-Owned Companies Claim Exemption From Litigation

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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A handful of Chinese companies have relied on a sovereign immunity exemption from U.S. federal courts to escape legal action on lawsuits ranging from shipping damages to bad drywall to breach of contract and defective fireworks. (DTN photo illustration by Nick Scalise)

OMAHA (DTN) -- Hundreds of farmers are tied to a lawsuit against Syngenta over the Agrisure Viptera MIR162 corn trait and how grain harvested from those hybrids affected corn markets because the trait was not approved for import into China.

Though Syngenta is now being sold to a global chemical giant, ChemChina, farmers might not get the same rights to sue the combined company over future seed or chemical disputes. As one of China's largest state-owned enterprises, ChemChina could argue it is immune from such lawsuits in U.S. courts.

Last week the wire service Reuters highlighted a pair of recent court cases in which Chinese companies similar to ChemChina -- owned and controlled by Chinese government agencies -- were able to get U.S. court cases against them dropped. http://dld.bz/…

Federal court rulings as far back as 1995 show that Chinese corporations successfully got cases against them dropped under the Foreign Sovereign Immunities Act -- FSIA -- a law meant to give sovereign nations immunity from being sued. The law was aimed at protecting government agencies acting on behalf of that nation.

A handful of Chinese companies have argued they are part of the Chinese government, and thus also immune from lawsuits. They've used FSIA to escape legal action on suits ranging from shipping damages to bad drywall to breach of contract and defective fireworks.

Chinese state-owned enterprises have more than 300 various investment and business deals in the U.S., totaling nearly $22 billion, according to a report by the Rhodium Group, which tracks Chinese investment in the U.S. http://rhg.com/…

In a recent case, several subsidiaries of the China New Building Materials Group (CNBM Group) exported hundreds of millions of square feet of drywall to the U.S. The drywall, which plaintiffs say released sulfur emissions that led to problems including home odors, appliance failures and health issues. Cases involving more than 4,000 homeowners from state and federal courts were consolidated into one, but the CNBM Group got the case dropped against it in March by citing FSIA law and noting that CNBM Group is wholly owned by the People's Republic of China.

Last month, China's Ministry of Justice sent a letter to the federal judge in the drywall case stating that CNBM's subsidiary, Taishan Gypsum Co. Ltd., is immune to such lawsuits and thus the Ministry would not serve legal papers on the company.

The legal immunity under FSIA raises questions about the rights farmer customers and others including consumer and environmental groups would have if another dispute arose over seeds or chemicals.

"It would be astounding if, in fact, that were allowed to come to pass," said Roger Johnson, president of the National Farmers Union, when asked about the issue by DTN.

Johnson noted National Farmers Union largely has been critical of the merger mania in agriculture because of the rapidly shrinking competition in the seed and chemical businesses. The idea of legal immunity adds new questions about how farmers could be treated under the law under the umbrella of ChemChina.

"It just raised a whole bunch of other questions," Johnson said. "Frankly, I never considered this would be one of those questions raised."

Despite doing more than $3 billion in business in the U.S. through different subsidiaries, ChemChina so far has not faced a litigation case. China National BlueStar and the Israeli crop chemical company ADAMA Agricultural Solutions are both ChemChina businesses involved in agricultural and industrial sectors.

More than 17,000 plaintiffs have filed lawsuits against Syngenta since 2014 in federal courts. The vast majority of those are related to the issues over MIR162 and commodity prices.

Paul Minehart, a spokesman for Syngenta, responded to DTN in an email that ChemChina's staff is not aware of the company or any of its subsidiaries making an immunity argument in court under FSIA. ChemChina officials believe the immunity would not apply to it or its subsidiaries, Minehart stated. "ChemChina recognizes that state-owned companies do not generally qualify for sovereign immunity because their businesses are clearly defined as independent legal entities, which are subject to all civil laws," Minehart stated.

Sen. Charles Grassley, R-Iowa, chairman of the Senate Judiciary Committee, has kept a watchful eye on issues involved in the ChemChina-Syngenta merger and was among a group of lawmakers that sought to have USDA play a greater role in the federal government's regulatory approval of the merger.

The issue of Chinese state-owned businesses being immune to possible litigation was brought up with Grassley in relation to the ChemChina-Syngenta merger, Grassley told DTN in an interview on Monday.

"I and my staff are going to study it, but we haven't drawn any conclusions yet," Grassley said. "But there is some concern."

Grassley noted there are legal exceptions to FSIA immunity, including situations where a foreign state "engages in commercial activity." Still, companies have successfully used the immunity argument. As Reuters noted in its article, Chinese officials sent a diplomatic note last October that U.S. courts do not have jurisdiction over "state-owned properties."

If there is a problem with the sovereignty law that needs to be fixed regarding these legal loopholes, then Congress should address it, Grassley said.

As far back as 1979, the Congressional Research Service pointed out that a legal clarification in the law might be needed. A CRS report noted that an agency from a foreign government could also be a state trading company, mining company, shipping company, airline, bank or other business. At that time, the courts weren't having problems with the issue, but the CRS report stated that the line separating a government agency from a business could blur in the future.

One of the first cases where Chinese companies used the immunity defense was in the 1995 class-action lawsuit filed on behalf of Gulf War veterans who sued companies they claimed were responsible for selling chemicals to Iraq allegedly used to make chemical weapons. A federal judge in Texas dropped a Chinese company and its subsidiary from the case because of FSIA.

Johnson, the NFU president, was surprised that Congress hasn't corrected such a legal loophole. "It seems like if Congress were functional, the remedy here would be to say that this act doesn't apply to agencies operating as companies doing commercial business or something like that," Johnson said.

The legal battles over the Foreign Sovereign Immunities Act often carry over into arguments in federal courts over bilateral investment treaties between the U.S. and other countries. The U.S. often requires countries to waive the legal immunities for state-owned business enterprises. The U.S. has been negotiating such an investment treaty with China since 2008, though China recently missed a self-imposed deadline for providing a new negotiating offer to the U.S.

China is not party to the Trans-Pacific Partnership, but the problem of legal immunity among state-owned companies is big enough that the U.S. has special language included in the Trans-Pacific Partnership preventing state-owned enterprises the 11 other TPP countries from making such claims. The provision states that all TPP countries must provide their courts with jurisdiction over the business activities of state-owned enterprises. State-owned businesses in TPP won't be allowed to claim sovereign immunity. http://dld.bz/…

Chris Clayton can be reached at chris.clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

(GH/SK/AG)

Chris Clayton