By: Jonathan Hilliard & Timothy Day

On March 27, 2018, the Fourth Circuit published an opinion in BAE Systems Technology v. Republic of Korea’s Defense. The Court affirmed the district court’s grant of BAE’s declaratory judgment and its refusal to issue a permanent anti-suit injunction.

I. Facts and Procedural History

This dispute arose out of a Foreign Military Sale (“FMS”) transaction between the United States and the Republic of Korea (“Korea”). The Executive Branch has the authority to conduct FMS transactions via The Arms Export Control Act, 22 U.S.C. §§ 2751 et seq. Under a FMS transaction, a foreign sovereign may contact the U.S. government seeking to purchase military goods or services. The U.S. government then locates a U.S. contractor that supplies the requested goods and enters into a direct contractual relationship with the contractor. The contractor, however, has no direct contractual relationship with the foreign government, which prevents the foreign government from directly suing the U.S. contractor.  See Sec’y of State for Defence v. Trimble Nav. Ltd., 484 F.3d 700, 707 (4th Cir. 2007).

FMS transactions give significant control to the U.S. government to negotiate the contract and control its price. The foreign government must pay the transaction cost even if it is above initial estimates. A foreign government may elect to procure goods and services through FMS or to purchase directly from a U.S. contractor.  But if the U.S. government deems a military sale particularly sensitive, it may require a FMS transaction.

However, even when a FMS transaction is used, the foreign sovereign may contact a favored U.S. contractor to determine estimated prices and to urge the U.S. government to utilize that particular contractor.

Here, Korea wanted to upgrade its fighter planes, and the U.S. government required Korea to pursue a FMS transaction because of the sensitive nature of the military technology.  Korea solicited bids from various U.S. contractors, including BAE Systems Technology Solutions & Services, Inc. (“BAE”), to prepare for the FMS transaction. On August 1, 2012, Korea and BAE memorialized their understanding in a Memorandum of Agreement. That BAE-Korea agreement authorized Korea to demand payment of the $43.25 million promised in BAE’s Letters of Guarantee if (1) BAE failed to use its “best efforts” to secure the terms specified in the BAE-Korea agreement in the separate agreement between the U.S. and Korean governments, and (2) BAE’s failure to use its “best efforts” delayed conclusion of the government-to-government negotiations. The BAE-Korea agreement also contained a forum selection clause granting jurisdiction to Seoul Central Court. Finally, the BAE-Korea agreement contained a provision that would terminate the agreement upon the execution of an FMS agreement between the U.S. and Korean governments.

Unfortunately, during BAE’s discussions with the U.S. government, the U.S government increased the estimated price of the contract. Thus, Korea demanded the $43.25 million pursuant to its agreement with BAE. Subsequently, BAE filed its claim in district court seeking a declaration that it had not breached any obligations to Korea, and Korea initiated proceeding in Korea to litigate the same issues. Ultimately, the district court granted BAE’s declaratory judgment but refused to enjoin the litigation in Korea. Both parties appealed the district courts rulings.

II. Reasoning and Holdings

Generally, valid mandatory forum selection clauses modify the traditional forum non conveniens framework and have controlling weight except in extreme circumstances. Conversely, permissive forum selection clauses are assessed under the traditional forum non conveniens analysis. The primary difference is that mandatory forum selection clauses only permit a suit to be brought in one location, while permissive forum selection clauses allow a suit to be brought in multiple locations.

Here, the Circuit found that the forum selection clause was permissive because it did not include any excusatory language. As a result, the Circuit assessed the clause under the traditional forum non conveniens analysis and affirmed the district court’s decision that the permissive forum selection clause provided no basis for dismissing the action.

Additionally, Korea argued that the district court erred by not granting it sovereign immunity. However, because Korea submitted a responsive pleading without raising the defense, the Circuit held that Korea waived its sovereign immunity claim. See Foreign Sovereign Immunities Act, 28 U.S.C. §§ 1602 et seq.

Also, Korea challenged the merits of the district court’s grant of summary judgment for BAE. The Circuit reviewed the grant de novo. The Circuit determined that enforcing the contract would undermine the FMS structure in two ways. First, it would undermine the dispute settlement provisions that prohibit suits from being brought between nations or by a foreign sovereign against a U.S. contractor. Second, enforcement of the BAE-Korea agreement would undermine the control the U.S. government retains in all FMS transactions over price. As a result, the Circuit held that the agreement was unenforceable.

Finally, BAE claimed that the Korean litigation threatened the district court’s jurisdiction, because it created the potential for inconsistent judgments. However, the Circuit reasoned that international comity was sufficient since an injunction would “impinge on the sovereignty of the Korean courts (to hear the case) and the Korean government (to litigate it).” As a result, the Circuit held that the district court did not abuse its discretion, and the Circuit upheld the district court’s denial of a permanent anti-suit injection.