Published: 09 February 2021 Author: Stefan Talmon
On 5 October 1929, the three Jewish-owned Frankfurt-based art dealer firms of J.&S. Goldschmidt, I. Rosenbaum, and Z.M. Hackenbroch formed a consortium to purchase a unique collection of 82 medieval relics and devotional objects known as the Welfenschatz, or Guelph treasure, from the Duke of Brunswick-Lüneburg. The treasure of the German Guelph dynasty dates back to the early days of the Holy Roman Empire and occupies a unique position in German history and culture. The consortium intended to resell the Welfenschatz for a profit. However, several weeks after the consortium had bought the treasure, the U.S. stock market crashed leading to a worldwide economic depression which, in turn, caused a fall in art prices. Giving up its initial hope of selling the collection as a whole, the consortium began to sell off pieces to individual collectors. By 1931, about half the treasure had been sold to museums and individuals in Europe and the United States. The rest of the Welfenschatz was stored in Amsterdam. In 1934, about a year after the Nazi party rose to power in Germany, the Dresdner Bank approached the consortium with an offer for the remaining pieces on behalf of the German state of Prussia, which was headed by Nazi leader Hermann Göring – Adolf Hitler’s designated successor. The consortium and the bank negotiated for over a year before agreeing on 14 June 1935 on a price of 4,250,000 Reichsmark, about halfway between the two sides’ initial offers.
At the end of the Second World War, the United States took possession of the Welfenschatz, eventually turning the collection over to the German State. The treasure was maintained by the Stiftung Preußischer Kulturbesitz (SPK) – the Prussian Cultural Heritage Foundation. The SPK, an umbrella organization of German museums, archives, institutes, and libraries, exhibited the Welfenschatz in the Museum of Decorative Arts which is part of the National Museums in Berlin. In 2008, three heirs of the owners of the art dealer firms having formed the consortium approached the SPK, claiming restitution of the Welfesnschatz. The heirs argued that the sale of the treasure had been forced because the owners were German Jews, and the Nazi party had come to power in 1933. SPK conducted an extensive investigation into the circumstances of the sale and concluded that the transaction occurred at a fair market price without coercion.
In 2014, the two sides agreed to submit the claim to the German Advisory Commission for the Return of Cultural Property Seized as a Result of Nazi Persecution, Especially Jewish Property – the Limbach Commission. Germany had established the Commission in 2003 under the Washington Conference Principles on Nazi-Confiscated Art, an initiative spearheaded by the U.S. Government to encourage the development of new mechanisms for resolving Nazi-era claims. After hearing expert witnesses and reviewing documentary evidence, the highly respected Commission, including a former Federal President, a former President of the Federal Parliament, and a former President of the Federal Constitutional Court, concluded that the “sale of the Welfenschatz was not a compulsory sale due to persecution.” It found:
“Although the Commission is aware of the difficult fate of the art dealers and of their persecution during the Nazi period, there is no indication in the case under consideration by the Advisory Commission that points to the art dealers and their business partners having been pressured during negotiations, for instance by Göring. Furthermore, the effects of the world economic crisis were still being felt in 1934/1935. In the end, both sides agreed on a purchase price that was below the 1929 purchase price, but which reflected the situation on the art market after the world economic crisis. The art dealers used the proceeds primarily to repay the financial contributions of their domestic and foreign business partners. Moreover, there is no evidence to suggest that the art dealers and their business partners were not free to dispose of the proceeds.”
Disappointed by the result rendered by the Limbach Commission, the three heirs – Alan Philipp, Gerald G. Stiebel, and Jed R. Leiber – filed suit against the Federal Republic of Germany and the SPK in the U.S. District Court for the District of Columbia on 23 February 2015, alleging that the SPK was in wrongful possession of the Welfenschatz because the 1935 sale was coerced as part of the Nazi persecution of the Jewish sellers and seeking U.S.$250 million in compensation. On 29 October 2015, Germany and the SPK moved to dismiss the claim, arguing that the Federal Republic of Germany was “a sovereign nation” and that the SPK was its “instrumentality”. As such, they enjoyed immunity under the 1976 U.S. Foreign Sovereign Immunities Act (FSIA) from any claim brought against them in the United States, unless the plaintiffs could establish an exception to immunity for that claim under the FSIA. The plaintiffs argued that their claims fell within the “commercial activity exception” and the “expropriation exception” of the FSIA. Section 1605 of the FSIA provides in the relevant parts:
“(a) A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case—
(2) in which the action is based upon a commercial activity carried on in the United States by the foreign state; or upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or upon an act outside 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;
(3) in which rights in property taken in violation of international law are in issue and that property or any property exchanged for such property is present in the United States in connection with a commercial activity carried on in the United States by the foreign state; or that property or any property exchanged for such property is owned or operated by an agency or instrumentality of the foreign state and that agency or instrumentality is engaged in a commercial activity in the United States”.
Germany and the SPK, on the other hand, argued:
“The commercial activity exception does not apply to the plaintiffs’ claims because their claims are based on sovereign activity, not commercial activity, and the alleged acts undergirding their claims did not cause any direct effect in the U.S. The expropriation exception does not apply either, because it does not permit claims arising from a state’s alleged expropriation of the property of its own nationals, as opposed to foreign nationals.”
With regard to the expropriation exception, the two defendants argued:
“It is well established that a state does not violate international law when it expropriates property from its own nationals. International law is implicated only when a state expropriates property from foreign nationals. This rule of international law, which existed long before the FSIA, is regularly invoked by courts assessing the expropriation exception. Here, the plaintiffs allege that Germany expropriated the Welfenschatz from a German consortium made up of German art dealerships owned by German nationals. The allegations cannot support the expropriation exception.”
The plaintiffs countered that the sale of the Welfenschatz qualified as a taking of property “in violation of international law”, not because it was an illegal expropriation but because it was “part of genocide”, and genocide perpetrated by a State even against its own nationals was a violation of international law.
On 31 March 2017, the District Court – Judge Colleen Kollar-Kotelly – rejected the defendants’ argument that they were immune from suit and ruled that it had subject matter jurisdiction over the plaintiffs’ property related claims pursuant to the expropriation exception of the FSIA. The Court found that:
“Plaintiffs sufficiently pled the taking of the Welfenschatz was part of the genocide of the Jewish people during the Holocaust and, accordingly, violated international law. […]
The Court finds that […] the taking of the Welfenschatz as alleged in the complaint bears a sufficient connection to genocide such that the alleged coerced sale may amount to a taking in violation of international law. Plaintiffs sufficiently pled that they were targeted because they were Jewish sellers in possession of property that was of particular interest to the Nazi regime. The complaint further includes sufficient allegations that the taking of this property was in furtherance of the genocide of the Jewish people during the Holocaust.”
On 21 April 2017, the defendants gave notice of their intention to appeal to the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit). At the same time, they requested the District Court to stay the proceedings while the interlocutory appeal was pending before the D.C. Circuit – a request that was granted on 18 May 2017.
On 30 May 2017, Germany and the SPK filed the interlocutory appeal before the D.C. Circuit Court of Appeals with respect to the question of whether the claims in the case fell within the expropriation exception to the FSIA. Following its case-law on the expropriation exception, the Appeals Court – Circuit Judges Tatel, Griffith, and Wilkins – held on 10 July 2018 that:
“although an ‘intrastate taking’ – a foreign sovereign’s taking of its own citizens’ property – does not violate the international law of takings, an intrastate taking can nonetheless subject a foreign sovereign and its instrumentalities to jurisdiction in the United States where the taking ‘amounted to the commission of genocide’”.
The Court ruled that “seizures of art may constitute ‘takings of property that are themselves genocide.’” It then stated:
“In this case, moreover, the Welfenschatz was more than just art. As Germany acknowledges, ‘the Consortium bought [the Welfenschatz] not for pleasure or display, but as business inventory, to re-sell for profit.’ By seizing businesses’ inventory – like the other economic pressures alleged in the complaint, such as the ‘boycott of Jewish-owned businesses,’, and ‘exclu[sion]’ of Jews from certain professions, – the Nazis ‘dr[ove] Jews out of their ability to make a living,’ and thereby, in the words of the Genocide Convention, ‘inflict[ed] . . . conditions of life calculated to bring about [a group’s] physical destruction in whole or’ – at the very least – ‘in part,’ Genocide.”
The Court of Appeals did not actually rule that sale of the Welfenschatz amounted to genocide. According to U.S. federal procedural law, at the jurisdictional stage of the litigation the Court must accept as true the allegations of the plaintiffs. In order to establish subject matter jurisdiction, the plaintiffs only need to make a substantial and non-frivolous claim that the property was taken in violation of international law. The defendants bear the burden of proving that the allegations do not bring the case within the expropriation exception.
While the Court of Appeals affirmed the District Court’s ruling that the Welfenschatz could be considered “property taken in violation of international law”, it nevertheless ordered the District Court to dismiss the case with respect to the Federal Republic of Germany because the commercial-nexus requirement was not satisfied. In the case of foreign States, section 1604(a)(3) FSIA requires that the property in question must be present in the United States. The Welfenschatz, however, was located in Berlin. The case against the SPK, on the other hand, was allowed to continue because for an agency or instrumentality of a foreign State to lose its immunity it was sufficient that the latter owned or operated the property at issue and was “engaged in a commercial activity in the United States.” As plaintiffs had claimed that the Welfenschatz was featured in books and guidebooks produced by the SPK that were for sale in the United States, that requirement was fulfilled.
Germany and the SPK requested the D.C. Circuit to rehear the matter en banc, meaning that all judges of the Court of Appeals should consider the matter anew after the three-judge panel had ruled that the case could continue against the SPK. However, on 18 June 2019 the request was denied, and on 30 July 2019 the District Court dismissed the case with prejudice as to defendant the Federal Republic of Germany.
On 23 August 2019, Germany and the SPK filed a motion of stay of proceedings pending a writ for certiorari to the U.S. Supreme Court. The petition for certiorari was filed with the Supreme Court on 16 September 2019, and on 29 January 2020 the District Court granted the motion to stay. The U.S. Supreme Court granted certiorari on 16 July 2020, and the case was heard on 7 December 2020.
On 3 February 2021, the Supreme Court unanimously decided to vacate the judgement of the Court of Appeals for the D.C. Circuit and remand the case against the SPK to the District Court for further proceedings consistent with its opinion. In a landmark ruling, the Court upheld Germany’s plea to State immunity holding that the expropriation exception of the FSIA was limited to takings in violation of the international law of expropriation and did not extend to property taken in violation of international human rights law. In line with the jurisprudence of the International Court of Justice, the Supreme Court found that international law preserved “sovereign immunity for violations of human rights law”. The question of whether the sale of the Welfenschatz amounted to genocide was therefore of no relevance to the case. As the Court put it: “We do not look to the law of genocide to determine if we have jurisdiction over the heirs’ common law property claims. We look to the law of property.”
The Supreme Court confirmed that taking the property of a State’s own nationals was not unlawful under the international law of expropriation, thus upholding the so-called “domestic takings rule” in international law, allowing a State to expropriate the property of its own nationals. However, as the plaintiffs had also put forward the alternative argument that the sale of the Welfenschatz was not subject to the domestic takings rule because the consortium members were not German nationals at the time of the transaction, the Supreme Court held that the District Court had still to consider this argument, including whether it was adequately preserved. The case thus did not yet come to an end.
In a noteworthy aside, the U.S. Supreme Court acknowledged that the exception to immunity in the FSIA with regard to the expropriation of property of foreign nationals was “unique”, as “no other country has adopted a comparable limitation on sovereign immunity”. In effect, this exception permits the exercise of extraterritorial jurisdiction by U.S. courts over some public acts of expropriation by foreign States and thus goes beyond the restrictive theory of State immunity in international law which exempts all public acts from the jurisdiction of foreign national courts. In other words, section 1605(a)(3) FSIA constitutes a violation of the customary international law of State immunity. With its decision in the Welfenschatz case, the Supreme Court reined in this violation of international law. In this respect the decision is in line with the Supreme Court’s recent more restrictive approach to the exercise of extraterritorial jurisdiction by US courts, repeating its statement in Kiobel v. Royal Dutch Petroleum Co. that “United States law governs domestically but does not rule the world.”
Category: State immunity
DOI: 10.17176/20220627-173026-0
