Supreme Court Ends Saga Over Which Venezuelan Government Could Be Sued in International Investment Dispute

At a Glance

• The U.S. Supreme Court denied certiorari in a long-running dispute to collect judgments stemming from international arbitration awards against Venezuela. 
• The denial leaves in place a Third Circuit decision rejecting claims of sovereign immunity by Venezuela’s state-owned oil company.
• The Third Circuit declined to distinguish between which dueling government controlled Venezuela’s instrumentalities, opting instead for a straightforward analysis under the Foreign Sovereign Immunities Act. 
• The courts’ rulings should give foreign investors confidence that international arbitration awards will be honored regardless of which regime claims power.

Background

In 2018, several foreign investors obtained international arbitration awards against the Venezuelan government, which nationalized various industries under then-President Hugo Chávez. After confirming their awards in U.S. courts, the foreign investors moved for writs of attachment against PDV Holding Inc., a U.S. subsidiary of Venezuelan state oil company PDVSA, and the indirect parent of the major oil company Citgo.

The investors’ efforts to obtain and enforce a judgment were complicated, however, by the dispute over dueling governments in Venezuela — with one led by the current President Nicolás Maduro and the other by Juan Guaidó, whom the U.S. recognized as Venezuela’s interim president. In 2019, Guaidó took control of the shares of PDVH and appointed an ad hoc board of directors of PDVSA to manage the U.S. subsidiaries. Following these appointments, PDVSA sought to intervene in the investors’ cases and argued that it was immune from suit under the Foreign Sovereign Immunities Act (FSIA).

The Third Circuit’s Decision

The Delaware district court denied PDVSA’s sovereign immunity claim because the court concluded that PDVSA was Venezuela’s alter ego, notwithstanding the purported change in government representing the state-owned entity. Venezuela appealed to the Third Circuit.

In OI European Group B.V. v. Bolivarian Republic of Venezuela, the parties’ argument focused on the timing of determining which regime was in control. PDVSA and Venezuela argued that the relevant FSIA inquiry should begin the moment of the filing of the motion for a writ of attachment, while the investors urged that the focus should be on the time of the injury. But the Third Circuit took a different approach, holding that the relevant inquiry under FSIA was not which regime is presently in power but rather which foreign state took the action — i.e., the country or nation. In reaching its conclusion, the court stressed the “importance of the representative-sovereign distinction” under FSIA and explained that, “while the government controls the state, the state is more than its government.”

Following its conclusion that the identity of the regime in power of the Venezuelan government was not determinative under FSIA, the court of appeals proceeded to analyze whether PDVSA was Venezuela’s alter ego. The court applied the well-established factors articulated in First National City Bank v. Banco Para El Comercio Exterior de Cuba (known as Bancec) to that analysis — namely: (1) the level of economic control by the government; (2) whether the entity’s profits go to the government; (3) the degree to which government officials manage the entity or otherwise have a hand in its daily affairs; (4) whether the government is the real beneficiary of the entity’s conduct; and (5) whether adherence to separate identities would entitle the foreign state to benefits in U.S. courts while avoiding its obligations. 

The Third Circuit explained that Venezuela exerts significant economic control over PDVSA and all profits ultimately run to the Venezuelan government. Additionally, Venezuelan officials are vital to management of PDVSA and maintain a strong presence in its daily affairs. Indeed, PDVSA exists to benefit Venezuela. Finally, as a matter of equity, the court observed that “the state owes on judgments but denies we have jurisdiction to allow remedies aimed at PDVSA. All while PDVSA, and by extension Venezuela, derives significant benefits from the U.S. judicial system.” For these reasons, the court held that “PDVSA remains the alter ego of Venezuela and lacks sovereign immunity.” The Court also observed that PDVSA would qualify as Venezuela’s alter ego under either the Guaidó or Maduro governments.

Implications for Investor-State Arbitration

By denying certiorari, the Supreme Court allowed the Third Circuit’s decision in OI European Group to stand, reinforcing international investors’ right to bring claims against host states, rather than host governments. This should give parties confidence that U.S. courts will continue to enforce international arbitration awards even after a change in a foreign state’s government. Indeed, OI European Group is consistent with a recent D.C. Circuit court decision that refused to allow the Guaidó government to disturb another international arbitration award. See Valores Mundiales, S.L. v. Bolivarian Republic of Venezuela. 

The Third Circuit’s decision to go beyond its state versus regime holding and conduct a separate analysis of the outcome of Venezuela’s FSIA claim under both the Guaidó and Maduro governments might invite future litigants to attempt, on different facts, to argue that a change in government does affect the FSIA analysis. 

The Third Circuit’s decision also confirms that the five Bancec factors are disjunctive. As the Third Circuit explained: “that all of the Bancec factors weigh towards finding an alter-ego relationship does not control our inquiry, but it is more than mere coincidence.” This should make it easier for foreign investors to pierce the corporate veil of a foreign state and reach the assets of its instrumentalities. In turn, foreign governments need to pay careful attention to the way they structure ownership of assets in the United States for purposes of FSIA.