In May 2018 the United States announced the reinstitution of sanctions against Iran that had previously been lifted pursuant to the Joint Comprehensive Plan Action (“JCPOA”).[1]
The U.S. sanctions on Iran that were revived by the U.S. action in 2018 include many that apply extraterritorially. Moreover, U.S. law allows the government to impose sanctions on non-U.S. persons (such as European companies) if the U.S. Treasury Department makes a finding that the non-U.S. person has provided goods or services in support of a Specially Designated National of Iran (such as Bank Melli Iran).
In November 2018 the German branch of Bank Melli Iran was notified by Telekom Deutschland GmbH that it was terminating its contract for telecommunication services to the Bank. Bank Melli responded to the termination by filing a lawsuit in Germany, Bank Melli Iran v Telekom Deutschland GmbH (EU Case no. C-124/20), asserting that Telekom Deutschland’s termination violated the EU Blocking Statute[2], which is designed to protect European companies and individuals against the extraterritorial effects of third-country legislation.
Article 5 of the Blocking Statute provides that no EU person “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 laws specified in the Annex or from actions based thereon or resulting therefrom”. The Annex to the Regulation, as most recently amended[3], lists inter alia the Iran Sanctions Act of 1996 and the Iranian Transactions and Sanctions Regulations, which are two of the underlying bases of the U.S. sanctions against Iran reinstituted in 2018.
The Bank Melli case raises a number of important and previously untested issues of interpretation under the EU Blocking Statute.
Bank Melli has asserted before the German Court that the notice of ordinary termination given by Telekom with respect to their contracts for telecommunication services, which came shortly after the Trump administration re-imposed sanctions on Iran, is invalid because it was motivated by Telekom Deutschland’s desire to comply with the U.S. sanctions. Telekom Deutschland has responded that it had the right to terminate the contract without disclosing its reasons and that German law did not require it to give any reasons.
Faced with this dispute about what it means to “comply with” extraterritorial sanctions in violation of the Blocking Statute, the Hanseatisches Oberlandesgericht Hamburg (Hanseatic Higher Regional Court, Hamburg, Germany) asked the European Court of Justice (“ECJ”) to clarify the scope of the EU Blocking Statute.
The Advocate General’s Opinion
On 12 May 2021, Advocate General Gerard Hogan delivered his Opinion in the case. It provides significant, albeit non-binding, guidance to the ECJ on how to answer the questions of interpretation posed by the German court. Four noteworthy points made in the Advocate General’s Opinion are:
- The prohibition on compliance with specified third-country legislation imposing extraterritorial sanctions applies even where the actions constituting such compliance occur without having been compelled by a foreign administrative or judicial agency. Article 5 is applicable, therefore, even though Telekom Deutschland had not been ordered by a foreign administrative or judicial agency to terminate the Bank Melli contract.
- An EU undertaking seeking to terminate an otherwise valid contract with an Iranian entity subject to U.S. sanctions must be able to demonstrate to a court that such termination is for reasons unrelated to compliance with U.S. sanctions. In this regard, the Advocate General found that the EU Blocking Statute overrides the German law that permits termination without reasons. Moreover, according to the Advocate General, once the terminated party has made a prima facie showing that it was fulfilling its contractual obligations and that the termination appears to have resulted from the U.S. sanctions, the burden of proof must shift to the terminating party to justify the termination as unrelated to compliance with U.S. sanctions. In support of this conclusion, the Advocate General argues that, if it were otherwise, an entity could quietly decide to give effect to U.S. sanctions regulations by maintaining an “obscuring silence”, which would thus undermine the raison d’être of the Blocking Statute.
Interestingly, the Advocate General’s opinion acknowledges that “ethical qualms and reservations” about doing business with countries such as the Islamic Republic of Iran could be sufficient reason to justify the termination of a contract in compliance with EU law. To establish this reason, however, the terminating party would need to “demonstrate that it is actively engaged in a coherent and systematic corporate social responsibility policy (CSR)” by showing, for example, that it declined to deal generally with companies linked with Iranian regime.
- If a national court finds that an EU company has violated Article 5 of the Blocking Statute, the national court is required to order that the EU company maintain the contractual relationship in dispute. This remedy should be applied in addition to any other fines or penalties that may be imposed for the violation. The remedies and penalties imposed should be effective, proportional and sufficient to deter future violations. Here the Advocate General acknowledges that EU companies face an inherent dilemma when confronted by two mutually conflicting legal regimes such as those of the U.S. and EU, a dilemma we have commented on in this blog post.
- Finally, the Advocate General indicates that the termination prohibition is not contrary to the freedom of enterprise guaranteed by Articles 16 and 52 of the Charter of the fundamental rights of the European Union because under the Blocking Statute economic operators may seek authorisation from the Commission to derogate from the application of Article 5 with respect to specific transactions.
Implications
Negotiations concerning the fate of the JCPOA are continuing, and there have been reports, such as this recent article, suggesting that the U.S. sanctions against Iran may soon become less of a burden to EU companies. The answers given by the Advocate General in Bank Melli Iran v Telekom Deutschland GmbH, however, shed significant new light on the EU Blocking Statute and warrant careful, prospective attention from EU companies to improve their compliance processes. In our experience there are many situations in which companies can successfully navigate these treacherous waters between the competing EU and U.S. legal prohibitions in a manner that avoids violating either one. Doing so, however, is no easy matter.
We will continuously monitor the activity in this case and provide ongoing updates at our blog here.
* Richard Masquelier is an intern at Sheppard Mullin.
FOOTNOTES
[1] We covered the reinstitution of U.S. sanctions here and here.
[2] Council Regulation (EC) No 2271/96 of 22 November 1996.
[3] Commission Delegated Regulation (EU) 2018/1100 of 6 June 2018