Introduction
In December 2021, the Court of Justice of the European Union (the CJEU) published a judgment interpreting the European Union's Blocking Regulation.
The CJEU specifically concluded that:
- the Blocking Regulation prohibits EU Operators from complying with the requirements or prohibitions set forth in relevant U.S. sanctions, regardless of whether a U.S. administrative or judicial agency has issued an order directing compliance with such sanctions;
- EU Operators may terminate a contract with a person targeted by U.S. sanctions without providing reasons for that termination. However, if the sanctioned party makes a prima facie showing in civil litigation that the EU Operator terminated the parties' agreement in order to comply with U.S. sanctions, then the EU Operator will be required to establish that its conduct was not intended to comply with U.S. sanctions; and
- when a court determines that an EU Operator terminated an agreement with a U.S. sanctioned person in contravention of the Blocking Regulation, the court may annul the termination of the contract so long as specific performance does not entail disproportionate effects on the EU Operator.
The CJEU judgment—which is legally binding on EU member state courts—addresses and clarifies several key issues regarding the interpretation of the Blocking Regulation. However, the judgment also leaves unresolved several key issues regarding the scope and application of this law.
Legal Background
In May 2018, President Trump announced the United States' withdrawal from the Joint Comprehensive Plan of Action (JCPOA). In August and November 2018, the United States re-imposed a series of nuclear-related Iranian sanctions that had been suspended while the United States was a participant in the JCPOA. Through these changes, the United States: 1) tightened its primary sanctions regime; and 2) reinstated various secondary sanctions (e.g., blocking sanctions, correspondent account and payable-through account sanctions, etc.) related to Iran, which can be imposed on foreign persons who might not otherwise be subject to OFAC's jurisdiction.
The EU responded by expanding Council Regulation (EC) No. 2271/96 (the "Blocking Regulation") to include certain U.S. sanctions directed at Iran. The Blocking Regulation is designed to protect EU Operators that engage in business activities with Cuba and Iran that are permitted under EU law. The Blocking Regulation applies to EU nationals, non-EU nationals who are resident in an EU member state, and corporate entities organized under the laws of an EU member state (collectively, "EU Operators"). The 2018 amendments to the Blocking Regulation include U.S. statutes and regulations that: 1) set forth the United States' primary sanctions targeting Iran, and 2) authorize the U.S. President to impose secondary sanctions on individuals and entities that do business with Iran (collectively, the "Iran Legislation").1
The revised Blocking Regulation became effective on August 6, 2018 and:
- prohibits EU Operators from complying with any "requirement or prohibition" in the Iran Legislation;
- mandates that EU member states not recognize or enforce any court order or administrative agency decision resulting from the Iran Legislation; and
- imposes an affirmative reporting obligation on EU Operators when their "economic and/or financial interests … are affected, directly or indirectly," by the Iran Legislation.
Factual Background
A. Deutsche Telekom's Dealings with Bank Melli Iran
Prior to 2018, Telekom Deutschland GmbH (TD), a subsidiary of Deutsche Telekom, entered into a framework contract with Bank Melli Iran. Pursuant to the parties' agreement, Bank Melli Iran ordered from TD various services related to internal and external communication structures, which TD subsequently provided. TD invoiced Bank Melli Iran approximately €2,000 per month for these services.
In January 2016, the United States removed Bank Melli Iran from the Office of Foreign Assets Control's (OFAC) Specially Designated Nationals and Blocked Persons List (the SDN List) and lifted various secondary sanctions related to Iran. On November 5, 2018, the United States added Bank Melli Iran back to the SDN List and re-imposed secondary sanction programs. Following these actions, non-U.S. companies that participated in certain transactions with Bank Melli Iran potentially faced U.S. secondary sanctions.
On November 16, 2018, TD notified Bank Melli Iran that it was terminating the parties' contract with immediate effect. Bank Melli Iran subsequently initiated litigation against TD in Germany, asserting that TD had violated the Blocking Regulation by terminating the parties' agreement. Following an initial decision by a German trial court and TD's subsequent appeal, a German appellate court stayed the matter and referred three specific questions to the CJEU regarding the interpretation of the Blocking Regulation.
B. The CJEU's Judgment
In June 2021, the CJEU's Advocate General published an advisory opinion regarding these questions. On December 21, 2021, the CJEU issued a judgment that definitively answered each question. The CJEU specifically held that:
- The Blocking Regulation prohibits EU Operators from complying with the "requirements or prohibitions" set forth in Iran Legislation, "even in the absence of an order directing compliance issued by the administrative or judicial authorities of the" United States.
- EU member states may adopt laws allowing EU Operators to terminate a contract with a person included on OFAC's SDN List "without providing reasons for that termination." However, in subsequent civil litigation, if a national court determines that "all the evidence available … tends to indicate prima facie" that the EU Operator terminated the agreement without authorization from the European Commission in order to comply with the Iran Legislation, the EU Operator then will be required to establish that its conduct was not intended to comply with the Iran Legislation.
- When a court determines that an EU Operator terminated an agreement with a person included on OFAC's SDN List in contravention of the Blocking Regulation, the court may annul the termination of the contract provided that "annulment does not entail disproportionate effects for that [EU Operator]." When assessing proportionality, a court must consider: i) the objectives of the Blocking Regulation that would be served by annulling the termination, and ii) "the probability that the [EU Operator] may be exposed to economic loss, as well as the extent of that loss" if the EU Operator is required to perform under the relevant contract.
Key Takeaways
A. The Blocking Regulation Contains a Private Right of Action
The CJEU concluded that private parties may bring claims against EU Operators under the Blocking Regulation, including persons targeted by U.S. sanctions that are based outside of the European Union. The CJEU's ruling on this issue is significant because EU member states have rarely brought enforcement actions against EU Operators for violating the Blocking Regulation. Impacted sanctioned persons may be more willing to initiate civil legal proceedings against EU Operators who allegedly violate the Blocking Regulation.
B. The CJEU's Judgment Establishes a Legal Framework That May Be Challenging for EU Operators
If a sanctioned person makes a prima facie showing in litigation that an EU Operator terminated the parties' contract to comply with the Iran Legislation, EU Operators will be required to show that their conduct was driven by other factors. If EU Operators fail to do so, national courts in certain circumstances may annul the termination and require the EU Operator to perform under the parties' contract. Considering this standard, EU Operators may not be confident that their attempted terminations of existing contracts with sanctioned persons will withstand judicial scrutiny, especially given the discretion that national courts have in making these assessments.
C. The CJEU's Balancing Test May Be Difficult for National Courts to Implement
The CJEU set forth a balancing test for national courts to apply when determining whether to annul the termination of a contract between an EU Operator and a sanctioned person. National courts will be required to assess whether an EU Operator will face "economic loss," and if so, the extent of such loss. To answer these questions, national courts will be required to analyze the EU Operator's conduct under U.S. law, which may not be straightforward. In addition, courts will need to grapple with the meaning of "economic loss" and determine whether this term solely refers to civil monetary penalties and criminal enforcement actions or also encompasses potential economic harm associated with an EU Operator facing secondary sanctions or incurring reputational damage by transacting with a person targeted by U.S. sanctions.
D. The CJEU Deemed European Commission Guidance to Be Irrelevant When Interpreting the Blocking Regulation
In 2018, the European Commission published a guidance note that set forth a series of questions and answers regarding the Blocking Regulation. Notably, a question in the guidance asked whether "the Blocking Regulation oblige[s] EU operators to do business with Iran or Cuba?" The answer explained that EU Operators "are free to choose whether to start working, continue, or cease business operations in Iran … and whether to engage or not in an economic sector on the basis of their assessment of the economic situation." TD pointed to this guidance to support its position that it could terminate its agreement with Bank Melli Iran without violating the Blocking Regulation.
In its judgment, the CJEU disregarded the guidance note because it did "not establish binding rules or legal interpretations." The CJEU explained that only it has the authority to provide definitive interpretations of the Blocking Regulation. For this reason, EU Operators that have relied on the guidance note to inform their interpretation of the Blocking Regulation may be well-served to revisit their analysis based on the CJEU's judgment.
E. The CJEU Judgment Illustrates Difficulties That European Courts May Have in Understanding and Applying U.S. Law
The Blocking Regulation is unusual because it is an EU law that prohibits EU Operators from complying with certain U.S. sanctions. Given this structure, EU courts—as well as EU Operators—must have a detailed understanding of both EU and U.S. law. The CJEU's judgment and the Advocate General's opinion suggest that European courts may encounter challenges in analyzing and applying U.S. law.
In his opinion, the Advocate General explained that the "Iran Transactions and Sanctions Regulations … were revived" following the United States' withdrawal from the JCPOA in 2018. In reality, the Iranian Transactions and Sanctions Regulations remained in effect throughout the duration of the JCPOA. Somewhat similarly, the CJEU noted in its judgment that U.S. "secondary sanctions" against Iran "prohibit[] .… any person to trade, outside the territory of the United States, with any person or entity included on the SDN List." However, U.S. secondary sanctions do not prohibit non-U.S. persons outside of OFAC's jurisdiction from doing business with sanctioned persons, but rather require or authorize the U.S. government to impose certain sanctions on non-U.S. persons that choose to engage in such activities. The advisory opinion and CJEU judgment illustrate the difficulties that national courts may have in interpreting and applying U.S. law in the context of the Blocking Regulation.
F. The CJEU's Judgment Addressed Some Key Issues, but Leaves Other Important Questions Unanswered
The CJEU's judgment answered three questions that clarify how the Blocking Regulation will operate in practice. However, several other significant issues remain unclear. For instance, the CJEU does not expressly address whether U.S. secondary sanctions programs are covered by the Blocking Regulation. Unlike U.S. primary sanctions, the secondary sanctions programs do not contain "any requirement or prohibition" that apply to EU Operators, which calls into question the applicability of those laws in the context of the Blocking Regulations. In addition, the CJEU judgment does not specify whether the Blocking Regulation covers the ITSR in its entirety or simply the ITSR provisions summarized in the law's annex. The CJEU may opine on these issues in a later judgment.
Alternatively, the European Commission may proactively address these issues by amending the Blocking Regulation. The European Commission recently completed a public consultation soliciting feedback on the Blocking Regulation and plans to publish a proposed amendment to the Blocking Regulation in 2022.
Conclusion
The CJEU's judgment answers important questions regarding the interpretation of the Blocking Regulation. Although the CJEU's position on these issues clarifies some ambiguities, it also creates practical challenges for EU Operators.
[1] The Iran Legislation listed in the Blocking Regulation Annex is: the Iran Sanctions Act of 1996, the Iran Freedom and Counter-Proliferation Act of 2012, the National Defense Authorization Act for Fiscal Year 2012, the Iran Threat Reduction and Syria Human Rights Act of 2012, and the Iranian Transactions and Sanctions Regulations.
