Prohibiting Compliance With Certain U.S. Sanctions—Advocate-General Grapples With EU Blocking Statute Catch-22

Introduction

On 12 May 2021, Advocate-General Hogan delivered his Opinion in Case C‑124/20 Bank Melli Iran v Telekom Deutschland GmbH. This case is expected to provide important clarifications on certain aspects of Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extraterritorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom ("EU Blocking Statute"). 

The EU Blocking Statute prohibits EU operators from adhering to certain U.S. sanctions that the EU deems as extraterritorial, as listed in the Annex to the EU Blocking Statute ("blocked sanctions"). Specifically, the EU Blocking Statute (Article 5) provides that no EU operator "shall comply, whether directly or through a subsidiary or other intermediary person, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from the …[blocked sanctions] … or from actions based thereon or resulting therefrom."

The Advocate-General's Opinion stresses the "impossible—and quite unfair—dilemmas brought about by the application of two different and directly opposing legal regimes." He nevertheless strictly interprets the EU Blocking Statute, holding that the ECJ's duty is to apply the terms of duly enacted legislation. Still, he specifies that the EU legislature "might with advantage review the manner in which that statute presently operates."

While the EU legislature has yet to take concrete action, it appears that the European Commission's current inclination may be to reinforce the EU Blocking Statute's obligations, rather than address the predicament that these raise. The European Commission recently emphasized (Communication of 19 January 2021) its determination to strengthen existing tools to counter the extra-territorial application of third country sanctions. In this context, it anticipated a possible amendment of the EU Blocking Statute, "to further deter and counteract the unlawful extra-territorial application of unilateral sanctions by third countries to EU operators."

Advocate-General opinions set forth a proposed, non-binding legal solution to cases before the ECJ. Some ECJ judgments have diverged significantly from the Advocate-General's opinion. Nevertheless, these opinions can provide useful insights since, in the large majority of cases, the ECJ will align with the Advocate-General's opinion. 

Facts of Case C-124/20: EU Operator Terminates Contractual Relationship With Bank Melli Iran Shortly After the Latter's Designation on the SDN List 

Case C‑124/20 concerns Telekom Deutschland GmbH's termination of its contractual relationship with Bank Melli Iran. Telekom Deutschland GmbH is a subsidiary of Deutsche Telekom, a leading German telecommunication service provider. Bank Melli Iran is an Iranian bank, in the form of a public limited company incorporated under Iranian law. It has a branch in Hamburg, Germany, and its core business is to settle foreign trade transactions with Iran. The Deutsche Telekom group has more than 270,000 employees worldwide, including 50,000 in the U.S., where it generates approximately 50% of its turnover. The contract with Bank Melli Iran generated turnover of just over EUR 2,000/month. 

In 2018, Bank Melli Iran was (again) designated on the U.S. Department of the Treasury, Office of Foreign Assets Control's ("OFAC") Specially Designated Nationals and Blocked Persons ("SDN") List. This followed the United State's withdrawal from the Joint Comprehensive Plan of Action in May 2018. 

Shortly after Bank Melli Iran re-appeared on the SDN List, Telekom Deutschland GmbH terminated its contract with the bank on 16 November 2018. Bank Melli Iran opposed this termination, maintaining that Telekom Deutschland infringed the EU Blocking Statute. Faced with this dispute, the German court requested the ECJ to clarify certain aspects of the EU Blocking Statute.

Notably, the Advocate-General explained that the U.S. regime "prohibits any non-U.S. company from trading with a person subject to primary sanctions." In fact, however, OFAC's primary sanctions do not per se prohibit a non-U.S. company which is not a subsidiary of a U.S. company from dealing with an entity on the SDN List such as Bank Melli Iran. However, under the secondary sanctions, non-U.S. persons (whether or not owned by a U.S. company) may face full blocking or menu-based sanctions for engaging in certain dealings with entities on the SDN List, depending on the program under which the person was put on such List. It is unclear, however, if such distinction would have led the Advocate-General to decide differently on certain aspects of the case. In general, the EU Blocking Statute does not refer to the distinction under U.S. law between primary sanctions (i.e., generally aimed at the activities of U.S. persons and, in some instances, non-U.S. subsidiaries of U.S. persons) and secondary sanctions (i.e., generally aimed at the activities of non-U.S. persons).

Advocate-General's Findings

The Advocate-General's views are particularly important as concerns the burden of proof in case of an EU operator's termination of a contractual relationship or a decision not to engage in certain business. Specifically, he explains that it is first up to the claimant challenging the EU operator's decisions to provide prima facie evidence that (i) the EU operator, with whom such claimant wishes to enter into or remain in a business relationship, may feel concerned by the blocked sanctions; and (ii) the claimant fulfilled the expected conditions for becoming or remaining a customer of that undertaking. If such prima facie evidence is provided, the burden of proof turns to the EU operator. In such cases, the EU operator must justify its business decision to terminate the contract at issue or to refuse that claimant as a customer. The Advocate-General emphasized the need to provide reasons for the decision, as well as to justify those reasons. 

Such an approach implies the significant importance for companies, when making business decisions involving Cuba or Iran, to keep records and maintain evidence of the reasons underlying those decisions, to be able to demonstrate that these decisions were not taken in violation of the EU Blocking Statute.

The Advocate-General provides one example of a possible justification. Specifically, he acknowledges that many companies and individuals may have ethical qualms and reservations about doing business with countries such as the Islamic Republic of Iran, and he recognizes the right of a business to decline doing business with certain regimes, in accordance with its own ethical sense of business values. The Advocate-General adds, however, that in order to demonstrate the sincerity of such justification, an EU operator must "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." 

Another important conclusion of the Advocate-General concerns the way in which national courts shall deal with a contractual relationship terminated in violation of the EU Blocking Statute. He explains that national courts must order the EU operator to maintain such contractual relationship, or face periodic penalty payments or other appropriate sanctions. 

This issue also raises the question of how OFAC would address a situation whereby a court orders an EU operator to continue a contractual relationship, despite giving rise to consequences under U.S. sanctions. 

Furthermore, violating the EU Blocking Statute would not only nullify an EU operator's termination notice, but also bring potential criminal or administrative penalties. Such EU operators could also face possible claims for damages.

The Advocate-General further found that the EU Blocking Statute's prohibitions on adhering to certain U.S. sanctions under Article 5 are not contrary to the freedom to conduct business protected under the Charter of Fundamental Rights of the European Union (Article 16). However, he warns that the European Commission, when adding legislation to the list of blocked sanctions in Annex to the EU Blocking Statute, must exercise due care. Specifically, such inclusion of legislation in the Annex must serve the objectives of the EU Blocking Statute and the consequences arising from such inclusion must be justified and proportionate to the effects produced by the EU Blocking Statute. The Advocate-General did not opine on whether the current list of blocked sanctions meets this standard.

The Advocate-General also recognizes a right of action by third-country undertakings directly targeted by U.S. measures, like Bank Melli Iran, under the EU Blocking Statute, even though the EU Blocking Statute does not aim at protecting those undertakings.

The Advocate-General further held, unsurprisingly, that the EU Blocking Statute's prohibition on complying with certain U.S. sanctions is not limited to situations where a U.S. administrative or judicial authority has directly or indirectly instructed an EU operator.