BEIJING (Reuters) - Some Chinese state-owned entities, backed by the key government agency that oversees major state industrial companies, have adopted a controversial defense when they face U.S. lawsuits: You can’t touch us because we enjoy sovereign immunity.

A model of Y-20 military transporter aircraft is displayed at Aviation Industry Corporation of China (AVIC)'s booth at the Aviation Expo China 2015, in Beijing, China, September 16, 2015. REUTERS/Jason Lee/File Photo

Aviation Industry Corporation of China (AVIC), China’s biggest state-owned aerospace and defense company, has used the strategy twice, while state-owned China National Building Materials Group Co (CNBM), a state-owned building products company, successfully used it in a case involving allegations that Chinese-made drywall led to health problems for U.S. homeowners.

China’s Foreign Ministry in October complained to the U.S. government over attempts by plaintiff lawyers to serve the drywall lawsuit on the State-owned Assets Supervision and Administration Commission (SASAC), which is responsible for 106 government-owned enterprises with 4.7 trillion yuan ($722 billion) in assets, including CNBM and AVIC. The ministry argued in a diplomatic note that U.S. courts have no jurisdiction over suits against a country’s “state-owned properties.”

The legal argument concerns whether companies controlled by the Chinese government can be protected under the U.S. Foreign Sovereign Immunities Act (FSIA), which was passed by Congress in 1976, even when their U.S. subsidiaries are involved in commercial disputes.

The use of sovereign immunity by Chinese state-owned conglomerates is a reflection of how China’s state capitalism and legal regime is increasingly running into conflict with Western regulation and jurisprudence, particularly as the country’s overseas investment rapidly grows.

Some legal experts say the sovereign immunity defense, intended under international law to shield governments from legal rulings made by a foreign power, isn’t a new or unexplored area of the law, but that it typically does not apply to commercial cases.

AVIC did not respond to a request for comment. A CNBM spokesman said case had been decided according to U.S. law but declined further comment. SASAC did not respond to a request for comment.

Foreign Ministry spokesman Lu Kang told reporters at a regular briefing on Wednesday: “We demand that the host country earnestly respect and safeguard Chinese companies’ legal interests abroad.”

Lu said he was unclear about specific cases.

BEHIND BIG WALLS

In March, AVIC challenged a more than $70 million arbitration judgment against it in a U.S. federal district court in Dallas, arguing that it may enjoy sovereign immunity as a Chinese state-owned enterprise. That case is still to be resolved.

The Sixth Circuit of the U.S. Court of Appeals ruled in December in AVIC’s favor in a separate case, by ordering a Michigan federal district court to re-examine its decision not to dismiss a lawsuit brought by Global Technology Inc (GTI) in a breach of contract case.

The more senior court said that the lower court should have more thoroughly weighed AVIC’s sovereignty immunity arguments. The case is now back with the lower court, where the parties have agreed to a court-supervised mediation. Clashes between the U.S. and Chinese legal systems have emerged in other arenas.

“I think there is a mentality in China that, hey, we are behind these big walls and nobody can touch us,” said Bill Perry a Seattle-based trade litigator with law firm Harris Moure.

Chinese audit firms also have withheld working papers of Chinese firms listed on U.S. stock markets during investigations by U.S. regulators, stating that Chinese state secrecy law prohibited them from doing so.

A U.S. judge held Bank of China Ltd in contempt in November for refusing to surrender account records on customers accused of selling counterfeit luxury goods.

The bank argued that providing the records would violate Chinese laws, but complied with the order in January after the judge imposed a daily fine of $50,000.

‘ALARMING AND DISTURBING’

The ongoing AVIC arbitration judgment concerns a case led by Tang Energy Group, a Dallas-based clean energy company. In December, it got a multiparty arbitration award against AVIC and its offshore subsidiaries for breach of contract.

The arbitration panel from the International Centre for Dispute Resolution in Dallas found that AVIC had failed to fulfill its commitments to help fund a West Texas wind farm and develop a global wind energy business as part of a joint venture agreement.

AVIC, in its March filing, asked the U.S District Court in Dallas to vacate the judgment, arguing that the panel was unfairly constituted and that it exceeded the scope of its mandate by naming AVIC’s offshore entities in its judgment. It also claimed sovereign immunity in the dispute.

The claim of sovereign immunity is “alarming and disturbing,” said Greg Levesque, a senior adviser to Tang. “Anyone working with AVIC or its subsidiaries has to wonder if a dispute arises whether they’re going to claim immunity or act responsibly.”

‘THAT’S U.S. LAW’

In the drywall case, China’s Foreign Ministry called SASAC’s inclusion in the lawsuit “extremely ridiculous”.

“The U.S. court’s acceptance of the lawsuit and the attempt to serve on SASAC through various channels has seriously infringed on the national sovereignty and interests of China,” its diplomatic note said.

In March, the judge in the case dismissed CNBM from the suit, reasoning that plaintiffs had not proven the company conducted any commercial activity related to drywall in the United States.

James Stengel, a partner of the New York office of law firm Orrick - which represented CNBM in the suit, said the sovereignty doctrine “is highly relevant” for Chinese state-owned companies.

“You can make the argument that a different economic and political system gives Chinese companies an advantage in some ways. But that’s U.S. law, and the U.S. government has made a clear decision that we will recognize the sovereign immunity of appropriately structured enterprises,” Stengel said.