Top EU Court Rules on the EU Blocking Regulation Against US Sanctions for the First Time
On December 21, 2021, the Court of Justice of the European Union (CJEU), sitting as a “Grand Chamber” (a formation used, among others, in particularly complex or important cases), issued the first-ever judgment1 on the EU Blocking Regulation.2 The CJEU clarified the scope and content of this statute. Notably:
- The CJEU interpreted the EU Blocking Regulation broadly, to potentially cover any action taken to comply with a foreign sanctions law that the European Union has deemed to apply extraterritorially—not just actions taken in response to orders from foreign courts. For instance, to the extent dollar clearing activities are prohibited under the US sanctions laws listed in the EU Blocking Regulation, EU operators engaging in such activities without authorization would be breaching the EU Blocking Regulation. In effect, this will force EU operators (whether EU or foreign nationals)3 in many situations to decide whether to comply with foreign sanctions laws or the EU Blocking Regulation, as compliance with both significantly raises regulatory risk for them.
- The prohibition to comply with the US sanctions laws in question may be relied on in civil proceedings. Accordingly, any action that a company takes to comply with foreign sanctions covered by the EU Blocking Regulation, such as termination of a contract with an entity that is sanctioned under US law, could be challenged in civil court proceedings within the European Union. This is without prejudice to any other penalties that may be imposed under the national law of EU Member States for breach of the EU Blocking Regulation, or to the possibility of recovering damages (for more details on these possible penalties and types of recovery, see our previous client alert).
- It is for the EU operator that terminates a contract to demonstrate and prove that its conduct did not seek to comply with US sanctions laws but was engaged in for other appropriate reasons. That is, a company whose actions may appear to comply with US sanctions laws will bear the burden of proving that this is not in fact the case.
- A breach of the prohibition to comply with the US sanctions laws specified in the EU Blocking Regulation may lead to an annulment of a contract termination, if that is provided by national law, and as long as the annulment does not entail disproportionate effects, including economic loss, for the EU operator concerned. The “disproportionate effects” legal standard is vague and will likely be interpreted in future judicial decisions.
This ruling therefore increases the risk that EU operators will be caught between the US sanctions regime on the one hand and the EU Blocking Regulation on the other. EU operators should be prepared for the possibility that their commercial decisions (e.g., termination of contracts or ending of business relationships with entities subject to the US sanctions laws in question) may be challenged before national courts, and that these challenges, if successful, might even lead to the annulment of the contract termination. In that context, EU operators may be required to prove, under certain circumstances, that their business decisions were taken for other (purely economic, commercial, ethical, etc.) reasons and not in order to comply with the US sanctions laws at issue.
The EU Blocking Regulation
In 2018, the United States withdrew from the Iran nuclear deal (the Joint Comprehensive Plan of Action, or JCPOA), which had been signed in July 2015, with the aim of controlling Iran’s nuclear program and lifting economic sanctions against Iran.4 Consequently, the United States reimposed a range of sanctions, including secondary sanctions, against Iran, with effect from November 5, 2018.
These secondary sanctions could be triggered based on activity engaged in by non-US persons with certain Iranians on the Specially Designated Nationals and Blocked Persons List (the SDN list) maintained by the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury. Under these sanctions, any non-US person that engages in certain commercial relations with US-sanctioned persons that trigger secondary sanctions can have their access to US financial and commercial markets terminated.
In response to the US withdrawal from the JCPOA, the European Union reactivated the EU Blocking Regulation on June 6, 2018. This is a 1996 trade defense statute protecting against the effects of the extraterritorial application of certain foreign sanctions laws (discussed in more detail in our previous client alert).
Pursuant to Art. 5(1) of the EU Blocking Regulation, EU operators are prohibited from complying “with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly” from a set of foreign sanctions laws deemed to apply extraterritorially by the European Union, “or from actions based thereon or resulting therefrom.” The laws in question are listed in the Regulation’s Annex; currently, all are US statutes. Art. 5(2) provides that the European Commission (the Commission) may, upon request, authorize EU operators to comply fully or partially with these laws, to the extent that noncompliance would seriously damage their interests or those of the European Union.
In 2018, the Commission updated the Annex of the EU Blocking Regulation to include the (reimposed) US secondary sanctions against Iran.5 It also adopted an Implementing Regulation6 laying down the criteria that would be taken into account for the granting of compliance authorizations, and issued a Guidance Note on the application of the reactivated EU Blocking Regulation.7
The Bank Melli case
Bank Melli Iran (BMI), an Iranian state-owned bank with a German branch, concluded with the German-based subsidiary of the Deutsche Telekom group (DT) (which derives approximately half of its turnover from business in the United States) several contracts for the provision of telecommunication services in Germany.
Following the US withdrawal from the JCPOA and the reimposition of secondary sanctions against Iran, BMI was included once again on the SDN list. Shortly afterward, DT terminated all contracts with BMI without providing any reasons for that termination.
BMI contested the termination before the German courts, alleging that the sole reason for it was DT’s wish to comply with the US secondary sanctions, in infringement of Art. 5 of the EU Blocking Regulation. The court of first instance initially upheld the termination of the contracts by DT; BMI appealed. On appeal, the Hamburg Higher Regional Court requested clarification from the CJEU on the scope of Art. 5 of the EU Blocking Regulation and its effects.
The CJEU’s key findings
In its Grand Chamber judgment, the CJEU made the following key findings:
- Scope of the Art. 5(1) Prohibition: Application Even in the Absence of a Compliance Order: The Art. 5(1) prohibition specifically references “requests of foreign courts” based on foreign sanctions laws deemed to apply extraterritorially. However, the CJEU found that the Art. 5(1) prohibition applies broadly, even in the absence of an order or instruction issued by a foreign administrative or judicial authority, directing compliance with the US sanctions laws listed in the Annex of the EU Blocking Regulation.8 In other words, it appears from the CJEU’s ruling that any action an EU operator has taken to comply with foreign sanctions laws, even if such action is a product of its own risk management decisions, could potentially be subject to the EU Blocking Regulation.
This interpretation was based on the broad wording of Art. 5(1) and the aims of the EU Blocking Regulation: the protection of the established legal order, the interests of the European Union, and those of natural and legal persons exercising rights under the Treaty on the Functioning of the European Union (TFEU) system, in order to achieve, to the greatest extent possible, the free movement of capital between the EU Member States and third countries.9 As the US sanctions laws specified in the Annex of the EU Blocking Regulation are capable of producing their effects inter alia by the mere threat of the legal consequences that could be incurred in the event of their breach, the EU Blocking Regulation would not be capable of counteracting the effects of those laws if the prohibition of Art. 5(1) were made subject to the adoption of compliance orders/instructions by foreign administrative or judicial authorities.10
- Possibility to Rely on Art. 5(1) in Civil Proceedings: In order to ensure the full effectiveness of the EU Blocking Regulation, Art. 5(1) of that Regulation may be relied on in civil proceedings before national courts. This is because, in the EU legal order, regulations are of general application and directly applicable in all EU Member States. The prohibition of Art. 5(1) is drafted in clear, precise and unconditional terms; the sole derogation from that prohibition is laid down in Art. 5(2), which provides for the possibility to obtain a compliance authorization from the Commission, as mentioned above.11
- Burden of Proof on EU Operators Whose Actions Appear to Comply With Foreign Sanctions Laws: EU operators terminating a commercial contract with a person included on the SDN list may do so without providing a reason for that termination, even if they do not have an authorization pursuant to Art. 5(2).12 Art. 5(1) does not preclude the termination of contracts—or the ending of business relationships, in general—for other reasons, e.g., purely economic considerations, ethical reservations about doing business with Iranian state-controlled entities, or general risk-management concerns unrelated to the extraterritorial US sanctions laws.
However, where, in civil proceedings relating to an alleged infringement of Art. 5(1), all the evidence available to a national court tends to indicate prima facie that, by terminating the contracts at issue, an EU operator complied with the sanctions laws in question without an authorization, it is for the EU operator to establish to the requisite legal standard that its conduct did not seek to comply with those laws.13 Thus, the CJEU ruling imposes on EU operators whose actions appear to be intended to comply with foreign sanctions laws covered by the EU Blocking Regulation the burden of establishing that this is in fact not the case. As a practical matter, companies whose actions are potentially covered by the EU Blocking Regulation should at least create and maintain a complete internal record of their commercial decisions in question and the reasons that led to them on each occasion.
The Effects of a Breach of Art. 5(1): Disproportionate Economic Loss? Lastly, the CJEU considered the effects of a breach of Art. 5(1), in light of the freedom to conduct a business, enshrined in Art. 16 of the Charter of Fundamental Rights of the European Union (the Charter).
The CJEU held that Art. 5 and 9 of the EU Blocking Regulation, read in light of Art. 16 and 52 of the Charter, do not preclude the annulment of the termination of a contract, provided that this annulment does not entail disproportionate effects, including economic loss, for the person concerned. It is for the national court to assess the proportionality of those effects.14 In that context, the national court must strike a balance between, on the one hand, the pursuit of the objectives of the EU Blocking Regulation served by the annulment and, on the other hand, the probability that the EU operator in question would be exposed to economic loss and the extent of such loss if it were unable to terminate its commercial relationship with a sanctioned person.15
Thus, the CJEU’s current articulation of the “disproportionate effects” standard leaves it vague as to when EU courts can annul the termination of a contract in any particular situation—creating uncertainty for companies whose actions are potentially covered by the EU Blocking Regulation.
The US position
In the United States, OFAC has specifically rejected the idea of including, in its Enforcement Guidelines, the lawfulness of the conduct in another jurisdiction as a mitigating factor. However, it has indicated that it will consider conflict-of-laws issues on a case-by-case basis. OFAC has also encouraged companies facing conflict-of-laws challenges to seek a specific license and stated that the failure to make such a request would be viewed unfavorably if the company later raises the conflict-of-laws issue.
However, in practice, the granting of such licenses by OFAC is very rare when not also supported by applicable sanctions policy objectives. More acceptable for OFAC are “no action” responses relating to secondary sanctions, i.e., indicating to EU operators that OFAC would not pursue secondary sanctions against them for proposed transactions undertaken outside the United States (and with no US nexus) that could be liable for such sanctions under existing US law.
Future developments—upcoming reform of the EU Blocking Regulation
In an effort to amend the EU Blocking Regulation, with a view to further deter and counteract the unlawful extraterritorial application of sanctions to EU operators by countries outside the European Union,16 the Commission published an inception impact assessment in August 202117 and ran a public consultation from September 9 to November 4, 2021.18
The Commission has already indicated that in order to fulfill its potential, the EU Blocking Regulation “must be part of a more comprehensive EU policy against extra-territoriality.”19 In that context, the Commission aims to create new tools and make better use of existing ones, notably through (i) clearer procedures and rules for recovery of damages, (ii) strengthened national measures to block the recognition and enforcement of foreign decisions and judgments based on the extraterritorial sanctions laws listed in the Annex of the EU Blocking Regulation, (iii) streamlined processing for authorization requests, and (iv) possible involvement in foreign proceedings to support EU companies and individuals.20
The Commission expects to publish a proposal for an amended EU Blocking Regulation in the second quarter of 2022. The BMI judgment will be taken into account in that process; it remains to be seen to what extent it will be reflected in the Commission’s proposal.