In the 1992 case Puerto Rico Aqueduct and Sewer Authority v. Metcalf & Eddy, Inc., the U.S. Supreme Court ruled that state entities have sovereign immunity in federal courts under the Eleventh Amendment, even when they are acting as plaintiffs. The case began when a Massachusetts-based engineering firm, Metcalf & Eddy Inc., was sued by Puerto Rico's water authority for alleged breach of contract and negligence related to environmental cleanup work it performed on behalf of the authority. When Metcalfe & Eddy sought to move proceedings from local court to federal court due to diversity jurisdiction (the parties being from different states), PRASA objected claiming its status as an arm of the Commonwealth government made it immune from such removals under Eleventh Amendment protections against suits in federal court without consent. The Supreme Court agreed with PRASA’s argument, ruling that while Congress could abrogate state sovereign immunity through legislation if it chose so clearly and unequivocally; absent such action by Congress or voluntary waiver by a State itself, States retained their traditional protection against suits in federal courts.

In the dissenting opinion for Puerto Rico Aqueduct and Sewer Authority v. Metcalf & Eddy, Inc., Justice Scalia disagreed with the majority's interpretation of sovereign immunity. He argued that the Federal Arbitration Act (FAA) should apply to all domestic entities, including those in U.S territories like Puerto Rico. The FAA was designed to ensure enforcement of arbitration agreements without discrimination or exception; thus, it should not be interpreted as granting an exemption to state entities from its provisions unless explicitly stated by Congress. Furthermore, he contended that a broad reading of "foreign country" under Foreign Sovereign Immunities Act (FSIA) would lead to absurd results such as treating American Samoa as a foreign country despite being a U.S territory. Therefore, he believed that FSIA did not grant immunity from federal jurisdiction over commercial activities carried out in United States territories.