Between a Rock and a Hard Place – European Businesses Must Seemingly Choose Between U.S. Sanctions or Penalties Under the European Union’s Blocking Statute

Gary E Davidson

Partner, Diaz Reus

On May 12, 2021, an Advocate General (“AG”) of the European Union (“EU”), Jan Mazak, released an opinion (the “Opinion”) stating that Telekom Deutschland GmbH (“Telekom Deutschland”), an EU company, could not sever its relationship with Bank Melli Iran, an Iran-based financial institution, if the severance was undertaken solely to comply with United States (“U.S.”) sanctions. Telekom Deutschland is a subsidiary of Deutsche Telekom, an international telecommunications company that generates over 50% of its revenue from the U.S. Bank Melli Iran is the largest bank in the Middle East and a crucial artery for Iranian commerce and banking flows.

The Opinion was rendered by Mazak in C‑124/20 Bank Melli Iran, Aktiengesellschaft nach iranischem Recht v Telekom Deutschland GmbH, a case referred to the Court of Justice of the European Union (“CJEU”) by the Hamburg Regional Court of Germany. The principal question presented to the CJEU was whether Bank Melli Iran could prevent the termination of the contract at issue based on the EU’s Council Regulation (CE) No. 2271/96 (“EU Blocking Statute”). This statute prohibits compliance by EU nationals and residents (“EU Persons”) with any requirements or prohibitions stemming from certain foreign laws, including U.S. sanctions on Iran. The EU Blocking Statute has been on the books since 1996, when it was enacted to mitigate the extraterritorial effects of U.S. sanctions on Cuba, but it has largely been a paper tiger for the reasons noted in the Opinion.

            As further explained below, the Opinion is significant and European companies conducting business in U.S. territory, with U.S. persons, or using U.S. goods or services, should take great care to understand its scope and consequences.

Background

Effective November 5, 2018, the U.S. reimposed nuclear-related sanctions on Iran that had been lifted when the U.S., Iran and other countries entered into the Joint Comprehensive Plan of Action (“JCPOA”).  These reimposed sanctions  prohibit U.S. persons or foreigners conducting business in U.S. territory, with U.S. persons, or using U.S.  goods or services, from engaging in transactions involving the Iranian government and a multitude of government-related and non-related industrial, banking, and trading companies, entities, and individuals (including those on the SDN List). 

Individuals and entities who violate U.S. sanctions on Iran, whether U.S. or foreign, will be exposed to significant civil and criminal penalties.  They may themselves be added to the SDN List, and all of their property and interests in property, within or transiting U.S. jurisdiction or in the possession or control of U.S. persons, may be entirely blocked through the enforcement of secondary sanctions. Critically, the U.S. Government may target foreign persons who assist or provide material support, including goods and services, to the sanctioned persons or activities. 

Immediately following the reimposition of U.S. sanctions on the country, major international companies pulled away from transactions connected with Iran. For instance, on November 5, 2018, Belgium-based SWIFT financial messaging service cut off Iranian banks, including Bank Melli Iran. Another company that cut ties was Telekom Deutschland, which terminated its telecommunication services contract with a German subsidiary of Bank Melli Iran on November 16, 2018.

 Seeking to prevent the Telekom Deutschland contract termination from taking effect, Bank Melli Iran filed an action in the Hamburg Regional Court, a German court of first instance. Rather than permitting the immediate termination of the contract, the court ordered Telekom Deutschland to continue its performance until the end of the notice period for termination of the contract, as provided by the German Civil Code.  The court concluded that the termination of such a contract was valid and did not conflict with Article 5 of the EU Blocking Statute.  Bank Melli Iran appealed the decision to the Hanseatic Higher Regional Court.

The Hanseatic Regional Court noted that the termination of the contract between Telekom Deutschland and Bank Melli Iran was not precipitated by a decision from a U.S. court or government agency. However, it took the position that a U.S. decision was not required for Bank Melli Iran to sue Telekom Deutschland under the EU Blocking Statute.  The fact that Telekom Deutschland terminated its business relationship with Bank Melli Iran to prevent U.S. secondary sanctions, created a right of action for the Bank, explained the court.   

Noteworthy was that, at around the time of the Telekom Deutschland appeal, another German court of appeal, the Higher Regional Court, Cologne, had held in a matter involving different parties that, absent a decision from a U.S. court or government agency, Article 5 of the EU Blocking Statute was not triggered. Given the split of opinion between these two courts, the Hanseatic Court requested the CJEU for an opinion.

Against this backdrop, Advocate General Mazak released his Opinion on May 12, 2021. Under EU law, Advocates General must provide an impartial and independent opinion in any case deemed appropriate by the EU courts. Although not binding, once the opinion issues, courts are obliged to take it into consideration before rendering decisions.

The Advocate General’s Opinion

 First, the AG opined that there is a right of private enforcement under the EU Blocking Statute, even though the statute does not so provide. The AG reasoned that this interpretation was essential to promote the enforcement policies of the statute, which could only be meaningfully achieved by allowing a private right of action.  Absent that right, the enforcement of the Blocking Statute would depend heavily on the willingness of individual EU Member States to take action.

Second, the AG concluded that Article 5 of the EU Blocking Statute applies when an EU person voluntarily complies with foreign extraterritorial legislation.  Such a scenario does not require a prior administrative or judicial decision from that foreign country directed to a citizen of the EU. The AG noted that foreign sanctions regimes create a judicial risk for EU persons from the moment they are imposed by the foreign country.

Third, the AG opined that while there was no general duty under the EU Blocking Statute for EU persons to record the reasons for terminating any type of contract, companies must do so when such a contract involves a person targeted by U.S. sanctions. The Opinion recognizes that companies in the EU can choose under the EU’s right to freedom of conscience not to transact with certain businesses. Yet, an EU person should “demonstrate that it is actively engaged in a coherent and systematic corporate social-responsibility policy (CSR) which requires them, inter alia, to refuse to deal with any company having links with the Iranian regime.” As well, an EU person claiming force majeure must demonstrate that the “force majeure is unrelated to the U.S. sanctions legislation listed in the annex to [the EU Blocking Statute].”

Fourth, the Opinion concluded that an EU citizen’s decision to terminate a contractual relationship with a person subject to U.S. sanctions can be invalid under the EU Blocking Statute. Specifically, termination of such a contract should be ineffective when it can be justified only by a desire to comply with U.S. sanctions.

Between a Rock and a Hard Place

The AG’s Opinion is merely advisory to the CJEU, but it creates uncertainty for those who conduct business in U.S. territory, with U.S. persons, or use U.S. goods or services. The extraterritorial reach of American sanctions is predicated on the expansive breadth of the U.S. economy and its financial system. Notably, the U.S. generates a quarter of all global economic activity, has the highest consumer spending at $17 trillion, and at a GDP of $21 trillion, is the biggest market in the world. U.S. businesses issue about 50% of all cross-border bank loans and international debt securities. 

Effectively, the EU Blocking Statute, as interpreted by the AG in his Opinion, puts EU citizens between a rock and a hard place: fail to comply with U.S. sanctions and face potential U.S. enforcement actions, including secondary sanctions, or comply with U.S. sanctions and face potential penalties back home. Not surprisingly, the Opinion acknowledges that “the EU blocking statute is a very blunt instrument, designed as it is to sterilize the intrusive extraterritorial effects of U.S. sanctions within the Union. This sterilization method will inevitably bring casualties in its wake and many may think that Telekom Deutschland will be among the first to suffer, given its large U.S. operations. . . these are matters which the EU legislature may well wish to ponder and consider.”

                                                                                             Conclusion                

If effectively enforced by courts in the EU, the EU blocking statute will push many of its citizens to choose between enforcement actions and penalties in the U.S. or in the EU. And, as EU persons await the CJEU’s opinion in the case of Bank Melli Iran and Telekom Deutschland, they are faced with the effects of a somewhat uncomfortable reality: the U.S. is a $21 trillion carrot that everyone wants a bite of, but it is also a $21 trillion stick that no one wants to be hit by. 

Gary E. Davidson and Javier Coronado are partners at Diaz Reus

Prince-Alex Iwu is an associate attorney at Diaz Reus