Neil McDougall, a Canadian resident, accepted a job offer from Aramco Services Company, a Houston-based subsidiary of Saudi Aramco, to work as a Planning and Analysis Specialist in Saudi Arabia. After McDougall was unable to return to Saudi Arabia due to pandemic border closures and was subsequently terminated, he won a wrongful termination judgment in Saudi court for lost salary. McDougall then filed a federal lawsuit in Texas alleging fraud, fraud by nondisclosure, and constructive fraud against Saudi Aramco. He claimed that Saudi Aramco fraudulently withheld employment documents in Saudi Arabia, which he needed to prove a claim for lost benefits, including medical, retirement, and life insurance, totaling approximately $250,000. The district court dismissed the case for lack of subject-matter jurisdiction, ruling that the Foreign Sovereign Immunities Act granted Saudi Aramco immunity and that neither the commercial-activity nor expropriation exceptions applied. McDougall appealed, arguing that the subsidiary's U.S. recruitment activities created a sufficient nexus to the United States.
The Fifth Circuit applied the burden-shifting framework of the Foreign Sovereign Immunities Act. First, the court confirmed that Saudi Aramco is a foreign state and entitled to a presumption of immunity. The burden then shifted to McDougall to demonstrate that an exception to immunity applied. McDougall relied on the commercial-activity exception, which requires that the action be based upon commercial activity carried on in the United States by the foreign state. The court analyzed whether the commercial activity in the United States was carried on by Saudi Aramco itself or by its subsidiary, Aramco Services Company (ASC). While ASC performed recruitment and other commercial activities in Houston, the court found that ASC did not qualify as an agency or instrumentality of Saudi Arabia under the FSIA. The statute requires that an agency or instrumentality be either majority-owned by the foreign state or an organ of the state. The court noted that ASC was not majority-owned by Saudi Arabia directly, but by Saudi Aramco. Furthermore, McDougall failed to plead facts showing that ASC was an organ of the state, as he did not demonstrate that Saudi Arabia created ASC for a national purpose, actively supervised it, or treated it as a public entity. Because ASC was not an agency or instrumentality of the foreign state, its U.S. activities could not be attributed to Saudi Aramco for the purpose of satisfying the commercial-activity exception. The court also rejected McDougall's argument that the district court improperly applied a minimum-contacts analysis, clarifying that the Supreme Court's decision in CC/Devas addressed personal jurisdiction, not subject-matter jurisdiction, and that the district court correctly followed Supreme Court precedent in identifying the gravamen of the suit.
The decision reinforces the strict requirements for piercing foreign sovereign immunity through subsidiary activities. Plaintiffs cannot rely on the commercial activities of a subsidiary to establish jurisdiction over a foreign state unless that subsidiary is itself an agency or instrumentality of the state. McDougall's federal case is dismissed, but the dismissal is without prejudice, meaning he may attempt to litigate his claim for lost benefits in Saudi courts or other jurisdictions where the foreign state may be subject to suit. The ruling clarifies that the commercial-activity exception requires a direct nexus between the foreign state and the U.S. conduct, not merely the presence of a subsidiary.
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