Argument Preview: Powerex v. Reliant on 4/16

The following argument preview was authored by Mary O’Connor, Elizabeth Barnidge, and Allison Beckham. Allison and Elizabeth are associates in Akin Gump’s Houston office, and Mary is a partner in Akin Gump’s Dallas office.

On Monday, April 16, the Court will hear argument in Powerex Corp. v. Reliant Energy Services, Inc. (No. 05-85). Both of the issues before the Court in this case relate to the Foreign Sovereign Immunities Act of 1976 (“FSIA”) – specifically, interpretation of the Act and its potential implications on procedural remand issues. The questions presented in this case are: (1) whether a corporate entity that is wholly owned by an agency of a foreign state but whose operations mirror those of a private market participant should be considered an “organ of a foreign state” under the FSIA, and therefore entitled to remove a case from state court to federal court, and (2) whether the provisions of 28 U.S.C. § 1447(d) deprived the Ninth Circuit of jurisdiction to review the district court’s remand order. David Frederic of the Kellogg Huber in DC will argue for the petitioners, and he will get support from Douglas Hallward-Driemeier, Assistant to the Solicitor General, for the US as amicus curaie. Leonard Simon of San Diego will argue for the respondents. The parties briefs are available here, and the government’s brief is here.

This case stems from the energy crisis California suffered in 2000-2001. After the crisis, the State of California, along with some of its private and corporate citizens (collectively the “Ratepayers”), filed suit in California state court against Reliant Energy, Duke Energy, and other generators of power in the California energy market (“Defendants”). The Ratepayers alleged that the Defendants conspired to fix prices of wholesale electricity in violation of California law. In response, Duke and Reliant filed cross-claims seeking indemnity from Bonneville Power Administration (“BPA”) and Western Area Power Administration (“WAPA”), both agencies of the U.S. government, as well as cross-claims against British Columbia Hydro and Power Authority (“BC Hydro”) and Powerex Corporation (“Powerex”). BC Hydro is a crown corporation of the Canadian province of British Columbia; Powerex is a wholly owned subsidiary of BC Hydro.

Each of the cross-defendants removed its case to federal court. BPA and WAPA argued that as federal agencies of the U.S. government, they were both entitled to removal under 28 U.S.C. § 1442(a)(1) and, in any event, immune from suit. Both BC Hydro and Powerex argued they were entitled to removal under 28 U.S.C. § 1441(d) as agencies or instrumentalities of a foreign state as defined in the FSIA, and BC Hydro further argued that it was immune from suit as a foreign sovereign under the FSIA. However, Powerex did not claim immunity because it had conducted “commercial activity in the United States” and was thus subject to suit based on those commercial activities.

The Ratepayers moved for remand of the entire case. The district court ruled that BPA, WAPA, and BC Hydro were all immune from suit, but that Powerex was not entitled to removal because it was not an “organ” of a foreign sovereign under the FSIA. The district court then remanded the entire case back to state court, without dismissing BPA, WAPA, and BC Hydro from the suit. All of the defendants and cross-defendants except BC Hydro appealed: Duke and Reliant challenged the district court’s finding that BPA, WAPA, and BC Hydro were all immune from suit; BPA and WAPA challenged the district court’s failure to dismiss them from the suit, and Powerex contested the court’s ruling that it was not an “organ” of a foreign sovereign under the FSIA.

On appeal, the Ratepayers argued that none of the appeals were proper because 28 U.S.C. § 1447(d) prohibits the exercise of appellate jurisdiction over a remand order that is based on lack of subject-matter jurisdiction. The Ninth Circuit, however, determined that it had jurisdiction to review the substantive issues of the case because Section 1447(d) limits review of only the jurisdictional and procedural issues that resulted in the remand. The Ninth Circuit agreed with the district court that BPA, WAPA, and BC Hydro were all immune from suit, and it instructed the district court to dismiss BPA and WAPA from the suit. The court also upheld the district court’s holding that Powerex was not an “organ of a foreign state” under the FSIA and therefore was not entitled to removal. Powerex filed a petition for certiorari seeking review of the Ninth Circuit’s ruling. The Court granted the petition on January 19 and asked the parties to brief an additional question – viz., whether the Ninth Circuit had jurisdiction to review the remand order notwithstanding Section 1447(d).

In its brief to the Court, Powerex argues that it should be considered an “organ of a foreign state” under the FSIA and complains that the Ninth Circuit’s inflexible, checklist-approach to the issue failed to properly consider that Powerex performs public functions for the goal of maximizing the value of public resources to British Columbia. Generally, courts have determined that an entity has “organ” status when the entity engages in activity serving “a national interest” or “public purpose” and does so on behalf of a foreign government. Powerex argues that, while courts review several factors in determining organ status, the courts and Congress have established that the analysis should be flexible, considering factors such as the manner of the entity’s creation, its purpose, whether the government supervises or financially supports it, its employment practices, and its obligations and privileges under the foreign law. In addition to describing its governmental origins and public functions, Powerex notes that it has no private profits, is supervised and regulated by the government, and receives significant benefits from the government that other private entities do not receive.

Powerex criticizes the Ninth Circuit’s reliance on Powerex’s lack of immunity to suit under its domestic law. Powerex argues that organ status under the FSIA was intended to encompass entities that could sue or be sued in their own name; while a government’s decision to grant immunity might be probative of an entity’s organ status, the lack of such a grant should carry little or no weight. Powerex emphasizes that the Ninth Circuit’s ruling could have very negative political and economic consequences.

Regarding the jurisdictional issue, Powerex argues that Section 1447(d) does not apply in this case – and, therefore, the remand order is properly appealable – because the case was properly removed and the court had subject-matter jurisdiction. If there is no defect in the removal procedure and the court has subject-matter jurisdiction, Section 1447(c) does not authorize a remand. Therefore, Powerex argues, Section 1447(d) cannot apply here because the remand order could not have issued pursuant to Section 1447(c), as the district court had subject-matter jurisdiction. Powerex focuses on the fact that the district court acknowledged that the case was properly removed and never explicitly stated that it was remanding the case under Section 1447(c) or for lack of subject-matter jurisdiction. Powerex acknowledges that the district court had discretion to decline jurisdiction after ruling on the sovereign immunity defenses, but it explains that a discretionary remand order is not based on lack of subject-matter jurisdiction. Further, Powerex argues that Congress could not have intended Section 1447(d) to be applied in the FSIA context, as it would “confer on a single federal district judge unreviewable authority to deny a foreign sovereign its right under the FSIA to a bench trial in federal court and to relegate that sovereign, instead, to a jury trial in state court.”

The Ratepayers’ brief reverses the sequence of the two issues presented by Powerex, putting heavy emphasis on the jurisdiction question. They argue that Section 1447(d), by its plain language, bars appellate review of the district court’s remand order. Congress expressed a strong policy, recognized by the Court in various cases, to avoid the delays caused by federal appellate review of these decisions. (In this case, two years elapsed from the initial removal and remand in 2002 to the Ninth Circuit’s order of affirmance in 2004, an order that is still under attack three years later.) The Ratepayers assert that the trial court’s remand order purports to remand the case based on jurisdictional grounds, the key factor identified in both Thermtron and Kircher for determining whether the Section 1447(d) bar applies. A court need not have cited to Section 1447(c) for the decision to rest on jurisdictional grounds and thus be subject to the bar.

The Ratepayers next address whether the removal to state court conferred subject-matter jurisdiction on the district court. They assert that the district court correctly determined that it lacked subject-matter jurisdiction over BPA and WAPA on two grounds: (1) because the claims against these entities are preempted by the Federal Tort Claims Act, under the doctrine of derivative jurisdiction the state court lacked jurisdiction and removal could not create jurisdiction in the district court; and (2) because BPA and WAPA are domestic sovereign entities, the district court lacked jurisdiction to hear the claims against them. This latter argument also precludes predicating jurisdiction in the district court on the presence of BC Hydro, an immune foreign sovereign. Nor can Powerex invoke the doctrine of supplemental jurisdiction, because there was no original jurisdiction in the state court over the sovereign entities who properly removed the case.

The Ratepayers then turn to whether there should be an exception to Section 1447(d) for FSIA cases. In their view, there is no basis to imply such an exception, as Congress has provided express exceptions to Section 1447(d) where it has seen fit. The Court’s decision in Osborn does not afford a basis for an exception, as it allows appellate review only when the federal statute upon which removal is based affords the district court no discretion. Finally, it is irrational to suggest that Congress intended through Section 1447(d) to prohibit appellate review of legal errors about jurisdiction in remand cases while permitting appeals of discretionary errors about retaining supplemental claims.

The Ratepayers’ brief spends relatively little time addressing whether Powerex is an organ of British Columbia. Its principal argument is that to qualify as an organ, an entity must perform a specific public function under the government’s direction. This requires that the function be something that the government would typically do itself and that the supervision be active, not passive. Powerex’s purpose, which is to maximize the value of the province’s hydroelectric resources, is not one that is typically considered a characteristic government function. Indeed, Powerex has expanded its activity into trading electricity and buys power from 150-200 different sources. Powerex was not formed pursuant to an enabling statute, but was instead incorporated under British Columbia’s Company Act, highlighting its private nature. The evidence of direct supervision by the government is minimal, Powerex employees are eligible for significant bonuses not typical of civil servants, and Powerex deals at arm’s length with BC Hydro and had to compete with private companies, including Enron, to obtain the assignment of British Columbia’s treaty rights to hydroelectric power. While supporting the district court’s ruling may not sit well with certain foreign governments, their concerns should be directed to Congress and not the courts.

In its reply brief, Powerex contends that the Ratepayers advocate the use of a restrictive two-part test to determine whether Powerex is an “organ” of British Columbia within the meaning of the FSIA: (1) whether Powerex performs a “characteristically” governmental function, and (2) whether it is subject to active government supervision. Powerex argues that such a test lacks support in the text and purpose of the FSIA and that the proper inquiry is whether the entity serves a public purpose.

Powerex’s reply also attempts to clarify the jurisdictional issue. Powerex argues that the issue of sovereign immunity is not jurisdictional. Rather, under the federal officer removal statute and the FSIA removal provision, the initial threshold inquiry to determine subject-matter jurisdiction is whether the removing defendant qualifies as a foreign state or federal officer or agency. If the removing defendant so qualifies, the district court has subject-matter jurisdiction, and the court may properly decide substantive questions, such as the validity of the defense of sovereign immunity. However, determining the validity of the sovereign immunity defense will not affect the fact that subject-matter jurisdiction has been established and removal was proper. Thus, Powerex argues, the remand is reviewable because it was not authorized under Section 1447(c), as that section only authorizes removal when the district court lacks subject-matter jurisdiction at the time of removal. Powerex further argues that Thermtron and Cohill establish that discretionary remand orders do not fall within Section 1447(d) and are therefore reviewable. In response to the law professors’ amicus brief asking the Court to overrule Thermtron, Powerex argues that stare decisis and Congress’s failure to respond to Thermtron militate against such a ruling.

Amicus briefs were filed by the United States, Canada, British Columbia, and a group of law professors. Canada urges the Court to heed the principles of comity in deciding whether an entity is an “organ” under the FSIA and to defer to a government’s chosen manner of conducting governmental activities through its agents. British Columbia also touches upon the potential political repercussions of the Court’s decision regarding whether Powerex is an “organ” of British Columbia. Unlike Canada, however, it addresses the jurisdictional question, arguing that applying Section 1447(d) in FSIA cases would undermine the primary purpose of the FSIA’s removal provision – to establish uniform treatment of foreign states that insulates them from prejudice.

The amicus brief submitted by the group of law professors – led by Arthur Miller – argues strenuously that the Court should follow the plain meaning of Section 1447(d) and end the cycle of appellate courts circumventing the statute’s bar. The professors cite statistics from a 2005 Westlaw search demonstrating that in the majority of cases in which courts of appeal construed Section 1447(d) during the previous ten years, the courts allowed review. They invite the Court to reverse its ruling in Thermtron or limit it to its facts: absent an express statutory exception to Section 1447(d), only a plain statement by the district court predicating remand on an overloaded docket would permit appellate review.