Kelly Smith for The 2004 Moffatt Prize in Economics

            The purpose of this paper is to examine how the FSIA exception allowing civil action against designated state sponsors of terrorism fits into a traditional economic model of torts. How might the model be adapted to 1) fit the unique phenomenon of terrorism and 2) work on the international level? How does the existing law provide an incentive to states to take an efficient level of care towards preventing terrorism or provide incentive for them to use alternative means of foreign policy? What amendments to the law could produce a more efficient outcome? In order to meet this objective I start with a traditional economic model of U.S. tort law. Then, with the use of journal articles and cases, I apply the model to the FSIA exception to see how the two coincide and how the model adapts to work with state-sponsored terrorism. Finally, I examine the potential inefficiencies and unenforceability of the law in order to observe how the U.S. does and can adapt the law to be more efficient.

The Traditional Tort Model

            Torts law arises out of failures of parties to make contracts with one another due to high bargaining costs. The purpose of tort law is to induce both parties to take an efficient level of care to avoid accidents. In the case of intentional torts, the purpose may be to provide incentives for a party to choose an alternative means of action—buying a car rather than stealing it for example.

            The economic purpose of tort liability is to induce injurers to internalize these [external] costs. Tort law internalizes these costs by making the injurer compensate the victim. When potential wrongdoers internalize the costs of the harm that they cause, they have incentives to invest in safety at the efficient level.[4]

In addition, the purpose of payment of damages to the injured party is to put that party back on their original utility curve so that they are indifferent between injury (with damage payment) or non-injury.

            In any tort case there is an injurer (A) and injured (B). Each party takes some care to prevent an injury from happening to B. Care by A (X_A) is preventative: driving safely, lighting a parking lot, or cleaning up spills on a grocery store floor. Care by B (X_B) is avoidance: wearing a seatbelt, avoiding walking alone at night, or watching one’s step. In the event that injury does occur there is a cost associated with that harm. The damage (D) is a function of how much care each party takes to minimize the damage D(X_A, X_B). The damage increases the total social cost (TSC). However, when either party takes care to prevent the injury, the total social cost decreases. Taking care is costly to both parties ((TC)( X_A) and (TC)( X_B)) and the cost of such care also increases the total social cost. So, the total social cost is a function of the damage costs as they are reduced by the level of care each party takes and the total cost of taking care.

TSC = D_A(X_A, X_B)  +  (TC)( X_A)     and    TSC = D_B(X_A, X_B)  +  (TC)( X_B)

By taking the derivative of both functions we can determine what the marginal damage reduction is as a function of the care A and B take and what the marginal cost of taking that care is. Then, we can find the cost minimizing point by setting the derivate equal to zero and finding where the marginal damage reduction equals the marginal cost of care.

D’_A(X_A, X_B)  = MC_A     and     D’_B(X_A, X_B)  = MC_B

Solving these two equations simultaneously we can determine the optimal level of care by both parties to minimize costs and maximize efficient injury prevention (X*_A, X*_B).

            Assuming that both parties can take care, a strict negligence regime for the payment of damages should induce both parties to take the efficient level of care. Setting the damages to equal the loss of total social cost, the injurer A faces the choice of paying the damages and the total cost of doing some level of X_A or doing the optimum level X*_A and not paying any damages—he only pays the cost of doing X_A. The injurer will not do any more than X*_A because he would incur a cost higher than that required by the law. The injured B would see the level of care taken by A and respond by taking the optimum level of care herself, where the marginal cost of taking care is equal to the marginal damage reduction given that X*_A is fixed.

The tort model stipulates that three requirements must be satisfied in order for a complaint to qualify as a tort and to justify the collection of damages.

1.      the plaintiff must have suffered harm

2.      the defendant’s act or failure to act must cause the harm; and

3.      the defendant’s act or failure to act must constitute the breach of a duty owed to the plaintiff by the defendant.[5]

I intend to show in the next section how the FSIA exception for state-sponsored terrorism has requirements that correspond to the traditional requirements for torts. Furthermore, there are modifications to the tort model that include punitive damages and the principle of respondeat superior which I will consider shortly.

The FSIA Exception

            The FSIA exception allows U.S. citizens to sue states designated by the State Department as sponsors of terrorism. There are currently seven states that are designated as sponsors: Cuba, Iran, Libya, North Korea, Syria, and Sudan.[6] In order to be an official sponsor of terrorism the Secretary of State must determine that “The government of the country has repeatedly provided support for acts of international terrorism.”[7] Sponsoring terrorism can include funding terrorist organizations, providing them with weapons and training, or encouraging acts of terrorism by employees of the state. There are four specific requirements of the FSIA exception; I will examine three[8] in the context of the tort requirements: harm, cause, and breach of duty.[9]

1. The state is officially designated by the State Department as a state sponsor of terrorism at the time of the incident or as a result of the incident.

            Requiring that the state be an official sponsor of terrorism may serve as a way to judge the level of care that the foreign state takes in preventing acts of terrorism—whether or not there was a breach of duty.[10] If the state has shown that it is willing to devote resources or encourage acts of terrorism by its agents, then there is evidence that the state is not taking an adequate level of care to prevent acts of terrorism, which. There is also a question of why the state must be designated officially by the State Department. I suspect that we can view this requirement as an efficient measure to take the burden of investigation off of the courts. The State Department has access to more information and resources than the court. The Department can acquire information about the terrorist activities of a state at a lower cost than the courts.

1. “An official, employee, or agent of such foreign state while acting within the scope of his or her office, employment, or agency” commits the act or provides material support to an individual or entity which commits the act.

            This requirement fits well with the tort requirement of cause. It places a burden of proof on the plaintiff to prove that the state, even if already designated as a state that sponsors terrorism, had some connection to the incident. Cause is neither limited to direct actors in this case, nor is it in traditional tort law. The principle of respondeat superior (“let the master answer”) allows an employer to be held liable for the actions of an employee or a parent for the actions for the child.

            The rule creates an incentive for the employer to take care in selecting employees, in assigning them various tasks, and in deciding with which tools to equip them. This is efficient if it is the case—as it generally would seem to be—that employers are better placed than employees to make these decisions.[11]

In terms of terrorism, it is likely that the state is in a better position to make decisions regarding actions of international magnitude. Furthermore, one of the advantages of holding states liable for supporting terrorism is that it encourages the state to turn to other means of foreign policy—specifically, conventional diplomacy. The individuals who may be directly responsible for supporting or carrying out acts of terrorism are not in a position to influence the foreign policy of a state. Thus holding the state liable is the only way to create the appropriate incentives.

1. The act involves torture, extrajudicial killing, aircraft sabotage, or hostage taking.

            This requirement corresponds with the tort requirement of proof of harm. The best reason I can give for the list being limited to specific acts of terrorism is that the FSIA exception is limited to acts of terrorism. Other instances of international crime are perhaps better regulated by different U.S. and international laws. Furthermore, limiting the possible actions to obvious acts of terrorism requires further proof of cause—there must be correspondence between the state being a sponsor of terrorism and the act involving terrorism.[12]

Case Study: Cicippio v. Islamic Republic of Iran

            The United States District Court for the District of Columbia found the Islamic Republic of Iran liable for damages resulting from the “kidnapping, imprisonment, and torture” of Cicippio and two other U.S. civilian citizens by the terrorist group Hizballah. The three men were abducted in Beirut, Lebanon by agents of Hizballah and held captive between the years 1985 and 1991 in Beirut.[13]

            Based on evidence presented by the defendants, the court found that that Iran could be tried under the FSIA exception according to evidence presented by the defendants. The evidence, according to the court, satisfied the requirements of the exception.

            To summarize, the plaintiffs have proved to the Court’s satisfaction: (1) that they were injured by acts of torture and hostage-taking; (2) that the acts were perpetrated by a group receiving material support from Iran; (3) that the provision of material supports was engaged in by Iranian officials, employees, or agents acting within the scope of their office, employment, or agency (4) that at the time of the acts, Iran was designated as a state sponsor of terrorism ... (5) that the claimants or victims were U.S. nationals as the time the acts occurred; and (7) that similar acts conducted by officials, employees, or agents of the U.S. while acting within the scope of his or her office, employment, or agency, would also be actionable.[14]

The court awarded the plaintiffs substantial compensatory and punitive damages. I will discuss the awarding of punitive damages in FSIA exception cases shortly as well as the enforceability of such a finding.

Case Study: Alejandre v. The Republic of Cuba; The Cuban Air Force

            The plaintiff Alejandre as a representative of her husband’s estate and representatives of two others brought action against The Republic of Cuba and The Cuban Air Force after three U.S. citizens flying civilian airplanes were shot down by Cuban fighter planes over international waters. The court found that the plaintiffs provided sufficient evidence that the Air Force and Cuba could be considered liable under the FSIA exception. The plaintiffs provided transcripts as proof of cause, showing that the Cuban Air Force authorized the attack and congratulated the Cuban pilots after it was successful. Cuba does appear on the Department of States’ list of state sponsors of terrorism. Proof of harm is evident in that the pilots and passengers shot down were all killed. Attacks on airplanes outside of Cuban territory constitute terrorist activity under the statute.[15] The court found both the Cuban Air Force and The Republic of Cuba, under the theory of respondeat superior, liable for damages. The court awarded substantial compensatory and punitive damages to all plaintiffs. However, the theory of respondeat superior only allows the state to be liable for compensatory damages and not punitive damages.[16]

Effectiveness and Efficiency

            There are a number of difficulties that arise out of creating a federal law that apply to foreign states, particularly foreign states that are notorious international pariahs. It is unlikely that a state would willingly pay the damages assessed in cases found to satisfy the FSIA exception. If the damages are not assessed the tort law becomes functionless. The incentive for the potential injurer to take an efficient level of care comes from the assessment of damages in instances where the injurer is found to be negligent. Furthermore, if the injurer is not taking efficient care the injured is more likely to take excessive care, which, due to diminishing marginal returns to care, is costly for the injured party and reduces overall social welfare. There is no incentive for the foreign state to stop supporting terrorism if the U.S. cannot effectively assess damages. There are several ways that the United States does and can make the FSIA more enforceable and therefore more likely to produce an efficient level of care by both parties.

            * Punitive Damages

            Punitive damages might enter into a traditional tort model in two particular instances, among others: First, when the injury is unobservable in some cases; and second, when the tort is intentional and causes an externality[17]—harm greater than that which is done to the injured party[18]. Because it is very difficult to actually collect damages, we might see that punitive damages are a way to respond to the low probability of collection. High punitive damages could shift the expected value of damages to a state to the efficient level. Punitive damage awards in FSIA exception cases tend to be quite substantial. Furthermore, punitive damages that raise the cost of supporting terrorism beyond just compensating the damage could have the effect of making the state and its actors more averse than indifferent to choosing terrorism over conventional foreign policy.

            * Coercive Collection

            In most instances the court is unable to induce the defendant to pay the damages and often the duty of collecting falls to the United States Congress or the President. The Congress itself has paid a large sum of damages to plaintiffs and in 2000 enacted the Justice for Victims of Terrorism Act (JVTA) that pays compensatory claims for some plaintiffs who seek damages from Cuba and Iran. It would seem that the United States taking on the liability of foreign states is grossly inefficient—creating absolutely no incentive for state supporting terrorism to change their behavior. However, it may actually serve the purpose of efficiency more than letting the debts go unpaid. When an individual is owed several million dollars from Iran there is little that the individual can do to collect. When the United States is owed a substantial sum of money it has much better methods of coercing payment.

            The JVTA requires normalization of relations with Iran to be preceded by negotiation over Iran’s repayment of judgments. The law explicitly blocks return of Iranian assets until agreement on such reimbursement is made “to the satisfaction of the United States.”[19]

The United States also has access to assets of the foreign country within the United States and can confiscate these assets as payment for judgment debts. “The property of a foreign state used for commercial activity in the United States is the easiest to secure.”[20] Goldsmith and Goodman also suggest other options for collecting without the compliance of the liable state including “[taking] rental proceeds accrued from a foreign state’s diplomatic and consular property” and “the garnishment of private entities’ debs owed to a foreign state or its instrumentalities”.[21]

            * Other Measures

            There are other ways that the U.S. might amend the FSIA exception to make it more a more effective law for reducing international terrorism as it is sponsored by states. The law could extend punitive damages to states found liable under respondeat superior; the principle of unenforceability applies to the state and lowers the expected payout below the efficient level. Additionally, the United States wants the ensure that the state is not indifferent between terrorism and conventional foreign policy—punitive damages could have that effect if applied to the states as well as direct actors.  The United States could also expand the definition sponsoring terrorism to ignoring terrorism. For example, if the police force of a foreign state does little to prevent terrorists from working from within the boarders, does not prosecute known terrorists, or otherwise does not take preventative action then the state could be held liable. Finally, the United States could encourage some refinements in international law to facilitate the collection of damages against foreign states found liable under the FSIA exception.

Conclusion

            State sponsored terrorism is only a very small part of the phenomenon of terrorism. The FSIA exception is one of the ways that the United States works to deter terrorism. The FSIA exception also fits the model of traditional tort law and strays from the conventional economic analysis because of the unenforceability of findings under the law. If the judgments of U.S. courts under the exception were enforceable, the law would effectively increase the level of care taken by foreign states to prevent terrorism and provide incentive for states to choose alternative means of foreign policy. Relying on substantial punitive damages and coercive collection are two ways to make the judgments more enforceable. There may also be some value in using international law and international courts such as The Hague to extend the reach of the law.

[1] Jack Goldsmith and Ryan Goodman, “U.S. Civil Litigation and International Terrorism,” Chicago Public Law and Legal Theory Working Paper No. 26 (Chicago: The University of Chicago Law School, 2002), 16.

[2] 28 U.S.C.S. § 1605.

[3] There is an additional part of the statute that allows a plaintiff to bring suit against any state, designated or not, for noncommercial torts committed within the United States. However, I will not examine that portion of the law in this paper.

[4] Robert Cooter and Thomas Ulen, Law and Economics, Third Edition (Reading, Massachusetts: Addison Wesley Longman, 2000), 290.

[5] Ibid, 291.

[6] United States Embassy, Tokyo, Japan, “State Department Report Cites Seven State-Sponsors of Terrorism: Overview of State-Sponsored Terrorism”, accessed at http://usembasy.state.gov/ on 15 December 2002.

[7] 50 U.S.C.S. Appx. § 2405 (6)(j).

[8] The fourth requirement is that the act of terrorism result in the injury or death of a United States citizen and serves to establish U.S. jurisdiction over the case.

[9] The conditions, listed in bold, are directly taken from the Goldsmith and Goodman article, “U.S. Civil Litigation and International Terrorism”, page 17. Any quotation marks within the bolded conditions are the authors’ use of the FSIA statute 28 U.S.C.S. § 1605 (a)(7).

[10] The requirement of proof of breech of duty is an indication that the tort model applied in the FSIA exception operates under a negligence regime. Negligence regimes only impose damages when the injurer does not meet a standard of care, as opposed to strict liability in all instances of injury. An interesting implication of the FSIA exception applying a negligence standard is the understanding that the injured party had some level of care he could have taken to prevent the action.

[11] Cooter and Ulen, 338.

[12] All of these requirements also have an important impact on the burden of proof in FSIA exception cases. The defendants rarely show up to defend themselves and most cases are decided on default. However, the plaintiff does not automatically win the case. The plaintiff is required to show proof that the case does constitute an exception to the FSIA and does so by satisfying the four requirements. There is still a minimum standard of negligence that the plaintiff must meet in order for their claim to succeed.

[13]Cicippio v. Islamic Republic of Iran, 18 F. Supp. 2^nd 63, 1998 U.S. Dist. LEXIS 13462, 63-64.

[14] Ibid, 68, numbering error included in text.

[15]Alejandre v. The Republic of Cuba and The Cuban Air Force, 996 F. Supp. 1239; 1997 U.S. Dist. LEXIS 22722, 1248.

[16] Ibid, 1249. See discussion of punitive damages in following section.

[17] Assume that the probability an injurer who takes insufficient care will be held liable in court is α. Then expected payout by the plaintiff will be α times what it is when there is perfect observability. By setting

α( D+ Punitive) equal to the damages that would be assessed with perfect observability we obtain an efficient level of punitive damages and care by the injurer. However, these damages should not be awarded to the injured unless they are intended to provide extra incentive to file tort cases.

[18] Richard Posner writes: “Moreover, because we want to channel resource allocation through the market as much as possible, we want to make sure that I am not allowed to be indifferent between stealing and buying my neighbor’s care. We can do this by making the damages award greater than the value of the car so that I do not consider conversion an acceptable substitute for purchase. Punitive damages are one way of doing this.” Richard Posner, Economic Analysis of Law, Fifth Edition (New York: Aspen Law & Business, 1998), 227.

[19] Goldsmith and Goodman, 21.

[20] Ibid.

[21] Ibid, 32.