Claim by Allegedly Defrauded US Funds Arising out of Petrobras Scandal Survives Motion to Dismiss on Forum Non Conveniens Grounds

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EIG Energy Fund XIV v. Petroleo Brasileiro, US District Court for the District of Columbia, March 30, 2017

This cases arose in the wake of the bribery scandal that has engulfed Petrobras, the Brazilian state-owned petroleum company. The plaintiffs are eight related US- and Cayman Islands-based investment funds, plus their investment adviser, that provided more than USD 2 million in financing to an entity organized to pay for the construction of a large fleet of drillships that Petrobras planned to use in developing oil reserves located off the coast of Brazil. The entity collapsed after the bribery scheme was uncovered, and the plaintiffs lost their investments.

After determining that certain plaintiffs had standing to sue and that the “commercial activity” exception to the FSIA applied, the Court addressed whether the case should be dismissed on forum non conveniens grounds. It explained that the defendants bear the “heavy burden” of establishing that retention of the case would impose an unfair and disproportionate burden, and that the factors to be considered included the following:

• Does an adequate alternative forum exist? Here the Court addressed a disagreement between the parties’ experts as to whether suit in Brazil would be barred by a statute of limitations, and concluded that uncertainty about the law meant that Petrobras could not satisfy its burden to show that suit might proceed in its home country.
• Does the existence of an arbitration and forum selection clause in certain investment agreements mean that the deference typically accorded US plaintiffs in their choice of forum, and that a weighing of “private” convenience factors, should be ignored? The Court concluded that the agreements should not displace the usual forum non conveniens analysis because it would not apply to certain of the defendants and even to plaintiffs that were not signatories to contracts containing the clause. In so ruling, the Court emphasized the questions about the scope of a forum selection clause must be governed by the law chosen by the parties—here that of Brazil, which (unlike District of Columbia law) would only allow the clause to apply to signatory parties.
• The Court nevertheless concluded that the plaintiffs were entitled to less deference because their claims were based on decisions to invest outside the US, in connection with which they should have been on notice they might be required to litigate disputes in other countries. This meant that Petrobras faced a reduced burden in showing that private and public interest factors favored dismissal.
• The relevant “private interest” factors are “(1) the relative ease of access to sources of proof; (2) the availability of process for compelling unwilling witnesses; (3) the cost for obtaining attendance of willing witnesses; (4) the possibility of inspecting the premises, if appropriate; and (5) all other practical problems that make trial of a case easy, expeditious, and inexpensive.” The Court concluded that these factors favored dismissal only slightly. Although most of the relevant evidence was located in Brazil, and many Brazilian witnesses could not be compelled to testify at trial, the plaintiffs argued that they could adequately rely on other materials in the public record. Petrobras responded that it needed evidence from Brazil to defend itself. The Court was sympathetic to this argument, but noted that Petrobras had been in litigation relating to the fraud in New York for more than two years, and that the company had not identified evidence relevant to the present case that would have been outside the scope of discovery in the New York action. The Court also noted the likelihood that a US law firm would already have investigated the facts thoroughly in connection with a US criminal probe.
• The relevant “public interest” factors include “(1) administrative difficulties caused by foreign litigation congesting local court dockets; (2) local interest in having regional controversies decided at home; (3) avoiding imposing jury duty on residents of a jurisdiction having little relation to the case; and (4) avoiding unnecessary problems in choice of law and the application of foreign law.” The Court focused mainly on the second factor, noting Brazil’s strong interest in addressing the Petrobras scandal, but concluding that a substantial US interest also existed because the plaintiffs were mainly US funds that alleged misrepresentations made to them in the US, and that Petrobras had targeted the US for its fundraising activities. The Court also observed that the facts of this commercial dispute were one step removed from the underlying scandal that was at the core of Brazilian interests. As to the fourth factor, the Court concluded that District of Columbia law, not the law of Brazil, would apply to the underlying claims because the US venue had “the most significant relationship to the parties’ dispute.”
  
  Finding a balance of interests favoring dismissal only slightly, the Court denied Petrobras’s motion to dismiss on forum non conveniens grounds.

[Editor’s Note: note: The EIG Energy Fund XIV case is also discussed in the Foreign Sovereign Immunity Act (FSIA) section of this report.]

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