In Rogers v. Petróleo Brasileiro, the U.S. Court of Appeals for the Second Circuit held that the commercial activities exception of the Foreign Sovereign Immunities Act (FSIA) did not provide subject matter jurisdiction over a claim against a Brazilian state-owned oil company based on the company’s failure to convert bearer bonds into preferred shares. The Second Circuit’s holding strengthens FSIA protection for foreign state-owned enterprises operating in the United States, while enhancing the incentive for purchasers of foreign state-issued bonds to seek contractual rights to control the location of payment.
Two U.S. citizens, as bondholders, brought suit against Petróleo Brasileiro, S.A. (Petrobras) in the Southern District of New York, claiming breach of contract. The suit was filed after a representative from the company’s New York office notified the individuals via email that the bonds were no longer convertible into company shares because the conversion period had expired. The bondholders alleged that the email notification from the New York office was the act constituting the breach of contract. The District Court held that the FSIA provided the Court with subject matter jurisdiction under the second and third clauses of the commercial exception provision, which provide jurisdiction over cases based on commercial acts occurring within the United States, or commercial acts occurring outside of the United States that cause a direct effect within the country, respectively.
The Second Circuit reversed the District Court’s assertion of subject matter jurisdiction, concluding that the commercial activity exception of the FSIA did not strip Petrobras of its sovereign immunity under the statute. The Second Circuit first addressed the second clause of the commercial activity provision, which provides jurisdiction over actions based “upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere.” The Court determined that the second clause did not cover Petrobras’ actions because the threshold requirement of an act performed in the United States was not met. The court held that a decision by a foreign sovereign not to perform is an act that occurs within the foreign state. Thus, the Court concluded that Petrobras’ denial of conversion was an act performed in Brazil, and the email notification sent from the New York office to the bondholders was simply notice of the alleged breach of contract.
The Second Circuit then turned to the third clause of FSIA’s commercial activity exception, which grants subject matter jurisdiction over actions based “upon an act outside of the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.” The Court noted that in cases involving default of a foreign state on its commercial obligations, an act has an effect in the United States if the defaulting party is contractually obligated to make payment in the United States or if the payee has the right to choose the location of payment. The Second Circuit reasoned that the foreign act of Petrobras had no direct effect in the United States because the terms of the bonds neither imposed a requirement of payment in the United States nor gave the holder the right to designate the location of payment. Moreover, the Court rejected the argument that the failure to convert the bonds produced a direct effect in the United States by frustrating the reasonable expectations of United States’ citizens, reasoning that the terms of the bonds provided no support for an expectation that payment would occur anywhere outside of Brazil, where the bonds were issued.
The Second Circuit’s holding that sovereign omission is an act occurring in the territory of the foreign state is consistent with decisions by other courts that have addressed the issue. In addition, the Rogers decision further solidifies the immunity protections that the FSIA provides to foreign state-owned companies with operations in the United States. By looking at the terms of the bond obligations to determine whether such an omission has a direct effect in the United States under the commercial activity exception, the Second Circuit’s decision further encourages purchasers of sovereign bonds to seek contractual rights regarding the location of payment.
 See 28 U.S.C. § 1605(a)(2) (2006).
 28 U.S.C. § 1605(a)(2) (2006).
 Rogers v. Petroleo Brasileiro, S.A., No. 10-4047-cv(L), 2012 WL 806812, at *6-7 (2d Cir. Mar. 13, 2012).
 28 U.S.C. § 1605(a)(2) (2006).
 Rogers, 2012 WL 806812, at *8.
 Id.at *8-9.