On December 21, 2021, the Court of Justice adopted its judgment in Case C-124/20, Bank Melli Iran,1 and, for the first time since its adoption in November 1996, interpreted the so-called “Blocking Statute,” which seeks to protect operators in the European Union (“EU”) against the effects of the extra-territorial application of certain sanctions adopted by the United States of America (“US”).2
The Blocking Statute was adopted in response to the extra-territorial application of US sanctions against Cuba, Iran and Libya, notably under the Helms-Burton and D’Amato acts, which the EU considered contrary to international law. In particular, Article 5 of the Blocking Statute prohibits EU operators from complying with any requirement or prohibition resulting from certain laws, as listed in an annex (“Extra-Territorial Laws”), or from actions based thereon or resulting therefrom, unless they are authorized to do so by the European Commission (“Commission”).3
In parallel to the adoption of the Blocking Statute, the EU challenged the Helms-Burton Act before the World Trade Organization (“WTO”) in 1996 and entered into negotiations with the US.4 These negotiations resulted in an understanding, reached in 1998, according to which the application of the Helms-Burton and D’Amato Acts would in part be waived against the EU.5 As a result, the EU suspended its WTO challenge and the Blocking Statute remained essentially a dead-letter.
However, the Blocking Statute came back into the spotlight when the US decided to withdraw from the so-called “Iran nuclear deal,” i.e., the Joint Comprehensive Plan of Action (“JCPOA”), and to unilaterally reintroduce far-reaching sanctions against Iran as from May 8, 2018, including so-called “secondary sanctions” with extra-territorial effects. In turn, the Commission re-activated the Blocking Statute on June 6, 2018, by updating the annex of Extra-Territorial Laws to cover the reintroduced US extra-territorial sanctions against Iran.6 To signal its willingness to more thoroughly enforce the Blocking Statute, the Commission also adopted a regulation laying down the criteria which would be considered when granting authorizations to comply with Extra-Territorial Laws and published a guidance note on the Blocking Statute.7
EU operators with activities in the US have widely been reported to be caught between a rock and a hard place, squeezed between the risks of US sanctions enforcement and the prohibition to comply with such US sanctions as a result of the Blocking Statute. While there has been little or no enforcement reported by the competent authorities of the member states, private individuals and entities have increasingly sought to rely on the Blocking Statute in the framework of domestic proceedings. In a report to the European Parliament and the Council of September 3, 2021, the Commission referred to 10 legal proceedings that made reference to the Blocking Statute before courts of EU member states. Examples that were reported involve, among others, challenges against contract terminations or refusals to proceed with certain transactions, allegedly based on US Extra-Territorial Laws and therefore contrary to the Blocking Statute.8
The judgment of the Court of Justice in Case C-124/20 relates to this proceeding and offered the opportunity for the Court of Justice to clarify, for the first time, the scope of application of the Blocking Statute.
1. Facts of the dispute before the Court of Justice
The judgment follows a reference for a preliminary ruling by the Higher Regional Court of Hamburg (Hanseatisches Oberlandesgericht Hamburg) in a dispute opposing the German branch of Bank Melli Iran (“Melli”) to Telekom Deutschland GmbH (“Telekom”).
Following the reintroduction of US sanctions against Iran, Melli was added back to the US specially designated nationals and blocked persons list (“SDN List”) with effect from November 5, 2018. Correspondingly, natural and legal persons located outside the US and dealing with Melli were exposed to US secondary sanctions as from that date.
On November 16, 2018, Telekom notified the immediate termination of contracts for the provision of telecommunication services to Bank Melli, as well as four other entities with links to Iran and listed on the SDN List. Following summary proceedings which requested Telekom to pursue the execution of the contracts with Bank Melli until their term, Telekom again notified Bank Melli of the termination of the contracts on December 11, 2018.
Bank Melli challenged Telekom’s decision before the German courts, by arguing inter alia that Telekom’s decision was solely motivated by Telekom’s willingness to comply with US secondary sanctions in breach of the Blocking Statute.
In that context, the Higher Regional Court of Hamburg referred the matter to the Court of Justice, as the sole competent jurisdiction to legally interpret the Blocking Statute.
2. Findings of the Court of Justice
2.1 The prohibition to comply with Extra-Territorial Laws under the Blocking Statute applies in case an EU operator merely intends to comply with such laws without having received a specific order or instruction from the US authorities.
The Court of Justice emphasized that the prohibition to comply with Extra-Territorial Laws had to be interpreted in light of its wording but also its context and the objectives of the legislation of which it forms part.
On that basis, the Court of Justice found that not only the wording, but also the context and objectives of the Blocking Statute, require that the prohibition on compliance with Extra-Territorial Laws should apply even in the absence of a specific order or instruction from the US authorities. Such an interpretation is deemed necessary to counteract the effects of Extra-Territorial Laws, which can arise from the mere threat of secondary sanctions.
Therefore, based on the Court of Justice’s interpretation, an EU operator may act in breach of the Blocking Statute if it decides on its own to comply with Extra-Territorial Laws or with actions based thereon or resulting therefrom.
2.2 The Blocking Statute can be invoked in disputes between private persons before the courts of the EU member states.
The Court of Justice confirmed that the Blocking Statute can be relied on in civil proceedings, given that (i) national courts must ensure the full effect of EU law and (ii) regulations, such as the Blocking Statute, are directly applicable in all member states.
In that regard, the Court of Justice stressed that, insofar as the Blocking Statute includes a clear, precise and unconditional prohibition, and to the extent EU operators may, in the course of their activities, give effect to the Extra-Territorial Laws that the Blocking Statute seeks to counteract, it must be possible to invoke the Blocking Statute, in the framework of civil proceedings, against the EU operators to whom that prohibition is addressed.
The Court of Justice also clarified that this is without prejudice to the possibility for member states to impose effective, proportional and dissuasive sanctions for breaches of the Blocking Statute. In other words, public and private enforcements of the Blocking Statute are complementary rather than mutually exclusive.
2.3 The Blocking Statute does not require an EU operator to demonstrate that a decision to terminate a contract complies with the Blocking Statute at the time the contract is terminated, but the burden of proof in civil proceedings may be reversed in case of prima facie concerns.
As a first step, the Court of Justice confirmed that nothing in the Blocking Statute requires an EU operator, at the time it terminates a contract, to provide a justification that such termination is compliant with the Blocking Statute, even if that EU operator does not hold an authorization. Thus, to the extent domestic laws do not require to justify that termination, no such requirement would arise from the Blocking Statute.
Nevertheless, the Court of Justice also noted that, in the case at issue and pursuant to German laws:
- The termination of a contract in breach of a statutory prohibition, such as the prohibition to comply with Extra-Territorial Laws under the Blocking Statute, would be null and void; and
- It would be for the party which claims such breach of a statutory prohibition to prove it to the required legal standard, i.e., it would be for the claimant to demonstrate that the contract was terminated in breach of the Blocking Statute.
In that scenario, the Court of Justice considered that proving a violation of the Blocking Statute would be impossible or extremely difficult, since the evidence at issue will generally not be accessible, thereby undermining the effectiveness of the prohibition to comply with Extra-Territorial Laws.
Thus, the Court of Justice ruled that where, in the context of civil proceedings, prima facie evidence is provided that an EU operator has, without benefitting from an authorization, terminated a contract in breach of the Blocking Statute, it is for that EU operator to establish to the required legal standard that its conduct did not seek to comply with Extra-Territorial Laws.
2.4 The principle of freedom to conduct a business and the risk of disproportionate losses must be considered when determining whether the termination of a contract in breach of the Blocking Statute should be considered as null and void.
At the outset, the Court of Justice stated that the Blocking Statute must be interpreted in light of the Charter of Fundamental Rights of the European Union (“Charter”), including Articles 16 and 52 thereof, which deal, respectively, with the principle of freedom to conduct a business and the potential limitation to the exercise of the rights and freedoms recognized by the Charter.
The Court of Justice went on to note that:
- In the case at hand, and pursuant to German laws, should it be considered that Telekom’s decision to terminate the contract intended to comply with Extra-Territorial Laws, such decision, absent an authorization from the Commission, would violate the Blocking Statute;
- This violation of the Blocking Statute implies that the termination of the contract would, under German laws, be considered null and void; but
- Such an annulment would be liable to entail a limitation of the freedom to conduct a business, contrary to Article 16 of the Charter.
The Court of Justice, based on settled case law, explained that the freedom to conduct a business is not unlimited and may be restricted in accordance with Article 52(1) of the Charter. In particular, limitations to that freedom must (i) be provided for by law, (ii) respect the essence of that freedom, (iii) be necessary and genuinely meet objectives of general interest recognized by the EU or the need to protect the rights and freedoms of others and (iv) abide by the principle of proportionality.
The Court of Justice found that, with regard to the annulment of the termination of a contract in breach of the Blocking Statute, the conditions detailed in points (i) to (iii) above would be met. Notably, the Court of Justice concluded that any limitation of the freedom to conduct a business would only limit, but not deprive Telekom from asserting its interests generally in the context of a contractual relationship, while such limitation is consistent with the objective of the Blocking Statute to counteract the effects of Extra-Territorial Laws.
A “way out” is nonetheless recognized for EU operators, if they can demonstrate that the limitation to their freedom to conduct a business would not be proportionate in light of the objectives of the Blocking Statute. In that respect, the Court of Justice considered that:
- It is for national courts to establish whether such a limitation would indeed be proportionate;
- In carrying out that assessment, national courts must balance:
(i) the pursuit objectives of the Blocking Statute; and
(ii) the probability that the EU operator would be exposed to economic losses and the extent of those losses if it were unable to terminate its commercial relationship; and
- In carrying out that assessment, national court must also consider whether an EU operator has requested an authorization in order to avoid any limitation to its freedom to conduct a business.
2.5 The Guidance Note does not have binding legal effects.
The Court of Justice confirmed that the Guidance Note of the European Commission does not have binding legal effects, contrary to the judgments of the Court of Justice.
The Guidance Note, nonetheless, should remain an important interpretative tool for EU operators. In particular, FAQ 5 of the Guidance Note clarifies when a decision to terminate a relationship would not breach the Blocking Statute, as follows:
“EU operators are free to conduct their business as they see fit in accordance with EU law and national applicable laws. This means that they are free to choose whether to start working, continue, or cease business operations in Iran or Cuba, and whether to engage or not in an economic sector on the basis of their assessment of the economic situation. The purpose of the Blocking Statute is exactly to ensure that that such business decisions remain free, i.e., are not forced upon EU operators by the listed extra-territorial legislation, which the Union law does not recognise as applicable to them.”
This position is not contradicted by the judgment of the Court of Justice in Case C-124/20.
The judgment of the Court of Justice has important ramifications and should further encourage civil proceedings relating to the application of the Blocking Statute. At the same time, the Court of Justice adopted a pragmatic approach by confirming that the risk of disproportionate losses could be considered as part of a proportionality test when determining which remedy should apply against a decision taken in breach of the Blocking Statute.
Nonetheless, EU operators are likely to continue being caught between a rock and a hard place and face difficulties navigating conflicting sanctions laws in the US, EU and other jurisdictions.
These concerns were echoed by Advocate General Hogan in his opinion preceding the judgment in Case C-124/20, in which he highlighted the impossible dilemma faced by EU operators and invited the EU legislator to act:9
“the EU blocking statute is a very blunt instrument, designed as it is to sterilise the intrusive extraterritorial effects of US sanctions within the Union. This sterilisation method will inevitably bring casualties in its wake and many may think that Telekom Deutschland will be among the first to suffer, not least given its large US operations. As I have already hinted, these are matters which the EU legislature may well wish to ponder and consider. This Court is nevertheless simply a court of law and our duty is to give effect to the language of the duly enacted legislation. For the reasons that I have given, I consider that the first paragraph of Article 5 of the EU blocking statute has these far-reaching effects even if in the circumstances such legislative provisions may also be thought to override ordinary business freedoms in an unusual and intrusive manner.”
Steps are already being taken to upgrade the Blocking Statute, as announced in the Commission’s 2021 communication, “the European economic and financial system: fostering openness, strength and resilience”.10 This was followed by the publication of an inception impact assessment on August 2, 2021,11 and a public consultation on September 9, 2021,12 which ran until November 4, 2021.13
Mayer Brown has extensive experience in advising clients navigating through conflicting laws and requirements, and our lawyers remain at your disposal to ensure compliance with and anticipate changes to relevant laws.
1 Judgment of December 21, 2021, Bank Melli Iran, C-124/20, EU:C:2021:1035, available at: https://curia.europa.eu/juris/document/document.jsf?text=&docid=251507&pageIndex=0&doclang=FR&mode=req&dir=&occ=first&part=1&cid=525877.
2 Council Regulation (EC) No 2271/96 of November 22, 1996, protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, OJ L 309, 29.11.1996, p. 1 (“Blocking Statute”).
3 In addition, the Blocking Statute seeks to (i) nullify the effect in the EU of any foreign court ruling based on Extra-Territorial Laws, (ii) allow EU operators to recover damages caused by the Extra-Territorial Laws and (iii) require EU operators to inform the Commission if their economic or financial interests are affected by Extra-Territorial Laws.
4 Dispute DS38, United States — The Cuban Liberty and Democratic Solidarity Act, available at: https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds38_e.htm.
6 Commission Delegated Regulation (EU) 2018/1100 of June 6, 2018 amending the Annex to Council Regulation (EC) No 2271/96 protecting against the effects of extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, OJ L 199I, 7.8.2018, p. 1.
7 Commission Implementing Regulation (EU) 2018/1101 of August 3, 2018, laying down the criteria for the application of the second paragraph of Article 5 of Council Regulation (EC) No 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, OJ L 199I, 7.8.2018, p. 7.
Guidance Note — Questions and Answers: adoption of update of the Blocking Statute, OJ C 277I, 7.8.2018, p. 4 (“Guidance Note”), available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52018XC0807(01).
8 Report from the Commission to the European Parliament and the Council relating to Article 7(a) of Council Regulation (EC) No 2271/96 (‘Blocking Statute’), COM(2021) 535 final, 3.9.2021, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021DC0535#footnote3
9 Opinion of Advocate General Hogan of May 12, 2021, Bank Melli Iran, C-124/20, EU:C:2021:386, available at: https://curia.europa.eu/juris/document/document.jsf?text=&docid=241168&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=1004103.
10 Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions, the European economic and financial system: fostering openness, strength and resilience, COM(2021) 32 final, 19.1.2021, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52021DC0032&qid=1611728656387.
11 Inception Impact Assessment, Unlawful extra-territorial sanctions – a stronger EU response (amendment of the Blocking Statute), Ares(2021)4911405, 2.8.2021, available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13129-Unlawful-extra-territorial-sanctions-a-stronger-EU-response-amendment-of-the-Blocking-Statute-_en.
12 Public consultation, Unlawful extra-territorial sanctions – a stronger EU response (amendment of the Blocking Statute), 9.9.2021, available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13129-Unlawful-extra-territorial-sanctions-a-stronger-EU-response-amendment-of-the-Blocking-Statute-/public-consultation_en.
13 Public consultation on the review of the blocking statute (Council Regulation (EC) No. 2271/96) - summary of responses, 17.12.2021, available at: https://ec.europa.eu/info/files/2021-blocking-statute-review-summary-of-responses_en.