Court: Supreme Court of the United States; June 15, 1982; Federal Supreme Court; Federal Appellate Court
Sumitomo Shoji America, Inc., a New York corporation and subsidiary of a Japanese trading company, faced a class action lawsuit from its female secretarial employees, alleging that the company's practice of hiring only male Japanese citizens for executive, managerial, and sales roles violated Title VII of the Civil Rights Act of 1964. Sumitomo sought to dismiss the case, arguing that its hiring practices were protected under Article VIII(1) of the Friendship, Commerce and Navigation Treaty between the U.S. and Japan, which allows companies from either country to engage specialized personnel of their choice. The District Court denied the dismissal, asserting that Sumitomo, being incorporated in the U.S., did not qualify for protection under the Treaty. The case was certified for interlocutory appeal, and the Court of Appeals ruled that while Article VIII(1) could cover locally incorporated subsidiaries, it did not exempt Sumitomo's employment practices from Title VII scrutiny. The Supreme Court held that Sumitomo is classified as a U.S. company under Article XXII(3) and therefore cannot invoke rights under Article VIII(1), which are reserved for Japanese companies in the U.S. and vice versa. The ruling emphasized adherence to the Treaty’s language and purpose, which aims to ensure legal status for corporations of both signatories in each other's territories.
Respondents requested injunctive relief and damages related to alleged discriminatory practices. Sumitomo, without admitting to the discrimination, filed a motion to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing that discrimination based on Japanese citizenship does not violate Title VII or Section 1981 and claiming protection under Article VIII(1) of the Friendship, Commerce and Navigation Treaty between the United States and Japan. The District Court dismissed the Section 1981 claim, ruling that neither sex nor national origin discrimination is actionable under that section, but allowed the Title VII claims to proceed, determining that Sumitomo, being incorporated in the U.S., was not covered by the Treaty. The court certified for interlocutory appeal whether the Treaty exempted Sumitomo from Title VII. The Court of Appeals partially reversed, concluding that Article VIII(1) intended to cover locally incorporated subsidiaries of foreign firms like Sumitomo but did not exempt them from Title VII scrutiny. The court noted that Japanese citizenship could sometimes be a bona fide occupational qualification for high-level positions, leading to a potential statutory exception to Title VII, and remanded the case for further proceedings. The Supreme Court granted certiorari, emphasized that the Treaty’s language must be the starting point for interpretation, and clarified that Article VIII(1) applies only to companies from one Party operating in the other. It determined that Sumitomo, incorporated under New York law, is a U.S. company and therefore cannot claim rights under Article VIII(1), which are reserved for Japanese companies operating in the U.S.
The Governments of Japan and the United States agree that a U.S. corporation, even if wholly owned by a Japanese entity, is not considered a company of Japan under the Treaty and thus is not protected by Article VIII(1). The Japanese Ministry of Foreign Affairs clarified to the U.S. Embassy that Article VIII(1) applies only to companies formed under the laws of either country. Therefore, a subsidiary of a Japanese company incorporated in New York does not qualify for Article VIII(1) protections in the U.S. The U.S. Department of State supports this view, asserting that Article VIII(1) does not extend to locally incorporated subsidiaries.
While the interpretation of treaty provisions by the negotiating and enforcing agencies holds significant weight, it is paramount to reflect the intent of the treaty parties. When both parties concur on the interpretation, deference should be given unless compelling evidence suggests otherwise. Sumitomo contends that the Treaty’s language should be interpreted to include subsidiaries regardless of incorporation location, a position that is rejected here.
The Friendship, Commerce and Navigation Treaty primarily serves to grant corporations legal status in the other party's territory and to ensure they can operate on equal footing with domestic firms. Historically, earlier commercial treaties focused on individual trade rights, but as corporate participation in international trade grew, new treaties were needed to recognize corporate rights abroad. The post-war Treaties aimed to ensure that foreign corporations do not receive more rights than domestic ones, providing "national treatment" and recognizing locally incorporated subsidiaries as companies of the host country, thus granting them equivalent rights and responsibilities as domestic corporations.
Treating Japanese subsidiaries as domestic companies fulfills the Treaty’s goal of allowing corporations from one Treaty party to conduct business in the other party's territory without facing discrimination as foreign entities. The Court of Appeals' concern that such treatment would result in unequal rights between branches of Japanese companies and their locally incorporated subsidiaries is unfounded. Subsidiaries, classified as U.S. companies, possess the same legal rights as domestic entities, including protection from unlawful actions and the ability to engage in business activities such as property transactions and international trade. The only significant advantage branches have over subsidiaries derives from Article VIII(1) of the Treaty. Given the plain language of Article XXII(3), it is concluded that Sumitomo qualifies as a U.S. company and is therefore not subject to Article VIII(1). The Court of Appeals' judgment is vacated, and the case is remanded for further proceedings. Additionally, the excerpt notes that prior to the lawsuit, respondents filed complaints with the EEOC, which issued "right to sue" letters, allowing them to file their suit within the statutory period. Sumitomo's argument regarding discrimination based on national citizenship versus national origin was not addressed because it was not included in the certified questions for review.
In Spiess v. C. Itoh. Co., the Fifth Circuit's majority found that a locally incorporated subsidiary of a Japanese corporation is protected under Article VIII(1) of the Treaty, aligning with the Second Circuit's ruling regarding coverage but diverging on the impact of the Treaty on Title VII, concluding that the Treaty shields the subsidiary from Title VII liability. Dissenting Judge Reavley argued that the Treaty’s language should classify locally incorporated subsidiaries as domestic corporations, thereby excluding them from Article VIII(1) protections. Similar provisions exist in Friendship, Commerce, and Navigation Treaties with other nations, such as Greece, Israel, and Germany, which were included at the insistence of the United States despite objections from other countries, including Japan. These provisions aim to prevent strict employment limitations and ultranationalistic policies regarding essential personnel, as articulated by Herman Walker, a key State Department adviser during treaty negotiations. The significance of these treaty provisions is underscored by the employment data indicating over 1.6 million U.S. workers were employed by affiliates of foreign corporations by 1979. Additionally, Article XVI(2) supports national treatment for products from companies controlled by nationals of either party, reinforcing the concept of inter-company control across borders.
Determining a company's nationality based on the nationality of its controlling entity, as proposed by Sumitomo, undermines the rationale of existing treaty provisions that distinguish between companies based on incorporation. Articles VII(1), VII(4), and XVI(2) treat companies or enterprises controlled by either party differently, which would be unnecessary if subsidiaries were regarded as companies of their parent country. The Japanese government maintains that a subsidiary of a Japanese company incorporated in New York does not fall under Article VIII, paragraph 1 of the U.S.-Japan Treaty of Friendship, Commerce and Navigation (FCN Treaty) when operating in the U.S. The U.S. State Department has clarified that the intent of the treaty negotiators was not to include locally incorporated subsidiaries, aligning with the current interpretation that U.S. subsidiaries of Japanese corporations are not covered by this provision. Previous interpretations by State Department officials, while differing, do not reflect the original intent of the negotiators. The place-of-incorporation rule is favored for its clarity, whereas a control test could create disputes regarding nationality. The document also notes that interpretations of other treaties may differ based on their unique negotiating histories.
Provisions from various treaties are compared in a 1953 hearing regarding treaties of friendship, commerce, and navigation with multiple countries. Significant treaties mentioned include those with France, Great Britain, Sweden, Norway, the Netherlands, Belgium, Italy, Spain, Germany, and China, among others, spanning from 1778 to 1938. These treaties generally provided limited rights to corporations. For instance, the 1911 Treaty with Japan allowed corporations to operate in each other's territories but maintained that such operations were subject to local laws. The post-World War II treaties marked a notable advancement by granting corporations similar rights to individuals in areas such as non-discriminatory business operations, taxation, property acquisition, and local subsidiary formation. This shift reflected the increasing prevalence of corporate entities in economic activities and aimed to offer more robust protections against discriminatory practices in foreign jurisdictions. The hearings emphasized the evolution of treaty rights to better accommodate contemporary business structures.
"National treatment," as defined in Article XXII(1) of the Treaty, mandates that a Party must treat foreign entities no less favorably than it treats its own nationals, companies, or products in similar situations. This principle ensures equal treatment for corporations, representing the highest level of protection in commercial treaties. In some areas, Parties may opt for "most-favored-nation treatment," offering conditions no less favorable than those granted to third-country nationals or companies, as outlined in Article XXII(2). This can result in a status of disadvantage for aliens rather than preferential treatment. National treatment is typically prioritized in contemporary contexts.
Regarding Sumitomo, there is no determination on whether Japanese citizenship is a legitimate occupational qualification for specific roles or if a business necessity defense applies. The Court of Appeals deemed the evidence insufficient to conclude if Japanese citizenship constituted a bona fide occupational qualification for positions under Article VIII(1). The court also did not address the bona fide occupational qualification exception concerning the sex discrimination claim or the business necessity defense. The ability of Sumitomo to substantiate its claims regarding bona fide occupational qualifications or a business necessity defense remains unresolved. Additionally, no opinion is expressed on Sumitomo's Article VIII(1) rights associated with its parent company.
