Case of the Day: Diag Human v. Czech Ministry of Health

The case of the day is Diag Human S.E. v. Czech Republic Ministry of Health (D.D.C. 2014). Diag Human was a Liechtenstein corporation. Its business, in the late twentieth century, was helping “currency-deficient Eastern Bloc states … acquire modern blood plasma technology.” After the fall of the Berlin Wall, Diag Human began to do business in the Czech Republic. One of Diag Human’s most important commercial partners was Novo Nordisk. The claim was that the Czech minister of health sent a letter to Novo Nordisk “intended to dissuade Novo Nordisk from continuing to do business with Diag.” The letter, according to Diag Human, “contained statements expressing concerns about Diag Human’s business ethics and credibility.” As a result, Novo Nordisk stopped doing business with Diag Human, leading, according to Diag Human, to “the collapse of its business in the Czech Republic.”

Diag Human sued the Ministry of Health for defamation and unfair competition in the Prague Commercial Court in 1996. The parties agreed to submit their dispute to arbitration. In 2008, the tribunal issued an award in favor of Diag Human for approximatley $650 million. Diag sought to confirm the award in Washington.

The court dismissed the claim sua sponte for lack of subject matter jurisdiction. Judge Jackson found that the award did not fall under the New York Convention. Under 9 USC § 202, an award “arising out of a legal relationship, whether contractual or not, which is considered as commercial” falls under the Convention. Diag Human argued that the dispute was clearly a commercial dispute, and that the basis for the damages award was the claim of unfair competition—the panel had applied the Czech Commercial Code to resolve the dispute. But the judge disagreed. She argued: “Before entering into the Arbitration Agreement, plaintiff and defendant did not have any legal relationship, let alone a commercial one.”

It strikes me that the judge has taken a pretty narrow understanding of what “relationship” means in this context. Don’t competitors stand in a commercial relationship to one another? The judge’s reading would make it difficult to see how parties could agree, for example, to arbitrate claims of patent infringement, antitrust claims, claims of tortious interference in contractual relations, and the like, at least where one party is a foreign state (if both parties are private parties, then a federal court might have jurisdiction to confirm an award on other grounds, such as diversity of citizenship, though the United States would not be bound by treaty to confirm such awards). So even granting the judge’s point that it’s the nature of the relationship between the parties and not the commercial nature of the claim that matters, I wonder whether the judge is right. An appeal is warranted on this point.

Anyway, on to the jurisdictional issue. As we saw last week, an award that does not fall under the Convention still may be confirmed in the federal courts, if there is an independent basis for jurisdiction. Here, the court’s jurisdiction seems to rest on 28 U.S.C. § 1330, which provides:

The district courts shall have original jurisdiction without regard to amount in controversy of any nonjury civil action against a foreign state as defined in section 1603 (a) of this title as to any claim for relief in personam with respect to which the foreign state is not entitled to immunity either under sections 1605–1607 of this title or under any applicable international agreement.

So the question is whether the Ministry is immune from jurisdiction under the FSIA (there was no question that the Ministry counted as a “foreign state” for these purposes). First, did the Ministry waive its immunity, and second, if not, did a statutory exception to immunity apply?

The mere fact that the Ministry had agreed to arbitrate did not constitute a waiver of sovereign immunity, because the seat of the arbitration was in the Czech Republic. Under DC Circuit precedent, an agreement to arbitrate is an implied waiver of sovereign immunity when the agreement is for “arbitration in another country.” This seems fair enough.

The judge also found that the Ministry’s failure to raise sovereign immunity in its motion to dismiss for failure to state a claim did not waive immunity. Again, this seems right: there is precedent for the view that failure to raise immunity in a motion to dismiss, which is not a pleading, is not enough.

So the judge moved on to consider whether an exception to sovereign immunity applied. The relevant exception is the exception where “the agreement or award is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.” See 28 U.S.C. § 1605(a)(6)(B). The judge’s decision on the inapplicability of the Convention dictated the result here, though I wonder what to make of the statutory phrase “is or may be.

About Ted Folkman

Ted Folkman is a shareholder with Murphy & King, a Boston law firm, where he has a complex business litigation practice. He is the author of International Judicial Assistance (MCLE 2d ed. 2016), a nuts-and-bolts guide to international judicial assistance issues, and of the chapter on service of process in the ABA's forthcoming treatise on International Aspects of US Litigation, and he is the publisher of Letters Blogatory, the Web's first blog devoted to international judicial assistance, which the ABA recognized as one of the best 100 legal blogs in 2012, 2014, and 2015.

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