Bank Melli Iran v. Telekom Deutschland GmbH.

On December 21, 2020, the Court of Justice of the European Union (CJEU), delivered its first judgment in Bank Melli Iran v. Telekom Deutschland (Ruling).¹ The Ruling focused on the interpretation and application of Council Regulation (EC) No. 2271/96 of November 22, 1996, which protects European Union (EU) businesses against the effects of the extraterritorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom (hereinafter Blocking Regulation).² The Blocking Regulation's Ruling is a long-awaited pronouncement because it marks the CJEU's position about unilateral sanctions with extraterritorial application that have been imposed by the United States (U.S.) (or “secondary sanctions”). This is the first time that the CJEU has considered the Blocking Regulation.

Like international sanctions, blocking statutes have prominent political significance and purposes. The EU Blocking Regulation was a direct response to the promulgation of U.S. extraterritorial sanctions against Cuba, Iran, and Libya under the Helms-Burton Act³ and the Kennedy-D'Amato Act.⁴ These measures restricted trade and investment not only between U.S. economic operators and the sanctioned countries but also between non-U.S. persons, such as EU companies and financial institutions, and the sanctioned countries. Companies that disregard U.S. secondary sanctions face major fines and/or criminal charges in the United States, or even exclusion from the U.S. market.⁵ The Blocking Regulation is meant to neutralize the effects of these measures in the EU. Thus, it primarily aims to limit the expansion of U.S. jurisdiction through the adoption of economic sanctions with extraterritorial effects. In this sense, a blocking statute is a specific expression of the “state interest” to protect domestic legal order, and its provisions are designed to override the impact of foreign economic sanctions. By virtue of the application of the EU Blocking Regulation, EU operators are placed at the heart of the conflict between European and non-European rules: if they comply with U.S. law they are exposed to EU enforcement action, and if they comply with the EU legislation they are exposed to U.S. enforcement action. Their commercial practices suggest that they have not so far been too bothered by that dilemma: in general, they simply prefer to comply with the U.S. law, even at the cost of paying million dollar fines in Europe.⁶

While the Ruling offers important guidance on the interpretation of key provisions of the Blocking Regulation, it ultimately leaves national courts the decision of whether EU economic operators may be prevented from terminating a contract with a person sanctioned by the United States under a primary sanctions regime in order to comply with U.S. secondary sanctions. The Ruling reinforces the purpose and effects of nullifying the extraterritorial scope of a foreign law that extends the enforcement jurisdiction of that state beyond any recognized title or jurisdiction under the general rules of public international law.

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Although the Blocking Regulation was adopted in 1996 in response to the “secondary sanctions” against Cuba, Iran, and Libya, it was not judicialized for a while because the EU and the United States reached an understanding to freeze the application of these measures. Yet in May 2018, following the decision of the Trump administration to withdraw from the 2015 Joint Comprehensive Plan of Action (JCPOA) aimed at controlling Iran's nuclear program, the United States decided to reimpose the full range of its sanctions against Iran, including secondary sanctions affecting EU operators.⁷ In response, the EU Commission adopted a delegated act to update the annex to Regulation 2271/96 and expand its application to these newly reenacted sanctions.⁸

Article 5 of the Blocking Regulation establishes the basic principle that EU economic operators (defined according to quite broad criteria listed in Article 11) shall not comply with the listed U.S. extraterritorial legislation, or any decision, ruling, or award based thereon, given that the EU does not recognize its applicability or effects toward the EU economic operators. In practice, this means that no decision, whether administrative, judicial, arbitral, or of any other nature, taken by a third country and based on the laws, regulations, or other legislative instruments listed in the Annex to the Blocking Statute, or on acts which develop or implement their provisions, shall be recognized in the EU. By the same token, no decision requiring, for instance, seizure or enforcement of any economic penalty against an EU operator based on those acts shall be executed in the EU. Essentially, the effect of this provision is to shield EU economic operators from the extraterritorial application of U.S. secondary sanctions in the territory of the EU. Nonetheless, paragraph 2 of the same Article adds that legal and natural persons may be authorized to comply fully or partially with the U.S. sanction order to the extent that non-compliance would seriously damage their interests or those of the EU. The criteria for the application of this provision shall be established in accordance with the procedure set out in Article 8. Accordingly, the EU Commission shall submit to the committee referred to in the same provision a draft of the appropriate measures to be taken under the terms of the Regulation.

The request to the CJEU for a preliminary ruling under Article 267 of the Treaty on the Functioning of the European Union (TFEU) was made by the Hanseatisches Oberlandesgericht Hamburg (Higher Regional Court, Hamburg, Germany) in proceedings between Bank Melli Iran and Telekom Deutschland GmbH concerning the validity of the termination of contracts concluded between those two companies. In particular, Bank Iran Melli, a public limited company under Iranian law, and Telekom Deutschland, a subsidiary of Deutsche Telekom, entered into a framework contract, under which Bank Iran Melli ordered different services that formed the exclusive basis of its communication structures in Germany. The services provided by Deutsche Telekom were indispensable to Bank Iran Melli's business activities. Despite complying with its contractual obligations, in 2018 Bank Melli was included in the list of persons (the Specially Designated Nationals and Blocked Persons List (SDN list)) covered by a sanctions regime maintained by the U.S. Office of Foreign Assets Control (OFAC).

Soon after these primary sanctions came into effect, anticipating that it could become the target of secondary sanctions by the United States, Deutsche Telekom terminated its telephone and internet services contracts with several companies with connections to Iran, including Bank Melli. Without Deutsche Telekom services, Bank Melli was unable to conduct business through its German branch. Therefore, Bank Melli started a proceeding against Deutsche Telekom before the Regional Court of Hamburg claiming infringement of the Blocking Statute to keep the services in place. In an interim decision, the Regional Court of Hamburg ordered Deutsche Telekom, by a judgment of November 28, 2018, to perform the contracts until the end of the periods of notice for ordinary termination.

Shortly after this decision, Deutsche Telekom notified BMI again of the termination of all contracts as of the earliest possible date. Bank Melli applied once more to the Regional Court of Hamburg, which considered the ordinary termination of the contracts by Telekom to be consistent with Article 5 of the Blocking Regulation and, hence, valid. Bank Melli appealed this decision to the Hanseatic Higher Regional Court in Hamburg, while also claiming that the notice of ordinary termination infringed Article 5.1 of the Blocking Statute. On March 5, 2020, this court decided to stay the proceedings and refer four questions to the CJEU for a preliminary ruling.

The first question that the CJEU considered was whether, for Article 5(1) of the Blocking Regulation to apply, an official order issued by a U.S. authority was required. The CJEU deliberated that the prohibition in Article 5 of the Blocking Regulation must be interpreted as prohibiting the persons referred to in the following Article 11 from complying with the requirements or prohibitions laid down in the laws specified in the Annex, “even in the absence of an order directing compliance issued by the administrative or judicial authorities of the third countries which adopted those laws” (para. 51). Therefore, the Court confirmed the conclusion advanced by Advocate General G. Hogan in its Conclusions of May 12, 2021.⁹

The second question was whether the party giving notice to terminate was required to provide a reason, demonstrating that the termination was not motivated by the intention to comply with the U.S. sanction regime. The CJEU observed that several EU member states’ legal systems (including German contract law) generally allow traders to terminate contractual relations with any other economic operators without giving reasons for that decision.¹⁰ The CJEU also observed that there is no textual element in the Blocking Regulation to support the view that this statute imposes an obligation to give reasons justifying the termination of a commercial relationship with a person subject to primary sanctions. Still, in the CJEU's reading, the first paragraph of Article 5 of the Blocking Regulation must be interpreted as not precluding an operator, who does not have an authorization within the meaning of the second paragraph of Article 5, “from terminating contracts concluded with a person on the SDN list without providing reasons for that termination” (para. 68). The implication of this is that, unless the decision to terminate Bank Melli Iran's contractual relationship can be justified in some way by Telekom Deutschland, the referring court cannot ascertain whether that company terminated those relations for a reason that does not infringe the EU Blocking Statute. Here, the CJEU interpretation departed from the Advocate General's. According to the latter, an obligation to justify the termination of a contract must be inferred from the objectives pursued by the Blocking Regulation. If it were otherwise, “an entity could quietly decide to give effect to the US sanctions legislation and, by maintaining an obscuring silence, impenetrable as to its reasons and (effectively) unreviewable as to its methods, the major policy objectives [enunciated in the recitals and the first paragraph of Article 5] of the EU blocking statute would be compromised and set at naught.”¹¹ By contrast, the CJEU held that it is possible to terminate a commercial contract otherwise valid, concluded with a person included in the SDN list, without providing reasons for that termination. Yet, to ensure the full effectiveness of Article 5.1, the CJEU made clear: where, in civil proceedings relating to the alleged infringement of the requirements laid down in that provision, all the evidence available to a national court suggests prima facie that the terminating party complied with the blocked U.S. sanctions, it shifts on that party the burden of proving to the requisite legal standard that their conduct did not seek to comply with the U.S. sanctioning law switches (para. 67).

The CJEU examined the third and fourth questions together.¹² Respectively, whether ordinary termination of the contract in breach of Article 5.1 of the Blocking Statute was inevitably ineffective in the context of civil proceedings, or whether instead the purpose of the Blocking Statute could also be achieved through public law penalties; and whether the compliance prohibition also applies where maintaining the business relationship with a contracting party subject to U.S. sanctions would expose the EU operator to considerable economic losses on the U.S. market. The Court preliminarily stressed that EU law, including the Blocking Regulation and its single provisions, must be interpreted in the light of fundamental rights, which, according to established case law, “form an integral part of the general principles of law whose observance the Court ensures and which are now set out in the Charter [of fundamental rights of the European Union]” (para. 70). That said, the CJEU conceded that the annulment of the commercial contract at issue entailed a limitation on the freedom to conduct business enshrined in Article 16 of the Charter (para. 77). However, that freedom, the Court continued, “does not constitute an absolute prerogative” (para. 80). Basing its findings on an analysis of its previous relevant case law, the Court argued that the freedom to conduct a business must be viewed “in relation to its function in society” and must “be weighed in the balance with other interests protected by the EU legal order . . . and the rights and freedoms of others” (id.). That freedom, the Courts concluded, may therefore “be subject to a broad range of interventions on the part of public authorities which may, in the public interest, limit the exercise of economic activity” (para. 81). According to the Court, the prohibition laid down in Article 5 of the Blocking Regulation, is necessary to counteract the effects of the U.S. secondary sanctions, thereby protecting the established legal order and the interests of the EU in general.

With regards to the freedom to conduct business as a fundamental right protected by EU law, the Court's decision reflects the reasoning of the Advocate General (para. 127, Conclusion). But when assessing, pursuant to Article 52 of the Charter of Fundamental Rights of the EU, whether Article 5.1 of the Blocking Regulation is to be regarded also as a measure proportionate to the attainment of an objective of general interest recognized by the Union, the two reasonings diverge. The Advocate General took a rather strict interpretation of the compliance prohibition of Article 5.1 of the Blocking Statute in considering it to be both suitable and necessary to achieve a fundamental public policy objective of the EU, and not to be disproportionate to the aim pursued, As to proportionality, Advocate General Hogan argued in particular that the operators can only apply to the European Commission for an exemption from the compliance prohibition, pursuant to Art. 5.2 of the Blocking Regulation. According to the CJEU, instead, the referring court—and thus any court hearing this type of contractual disputes—is allowed to assess the proportionality of the limitation on the freedom to conduct a business enjoyed by Deutsche Telekom. Therefore, the same court has to strike a balance between the pursuit of the objectives of the Blocking Regulation and the probability that Deutsche Telekom would be exposed to economic losses, as well as the extent of those losses, were it unable to terminate its commercial relationship with Bank Melli Iran (paras. 90–92).

In summary, while the Ruling provides important clarifications, it leaves to national courts the task of grappling with the vexed question of whether EU economic operators may in specific cases be prevented from terminating a contract with a U.S. sanctioned person in order to comply with U.S. sanctions regimes. In the next section, I offer some reflections of the implications of this decision for the implementation of the Blocking Regulation, as well as its relevance for the ongoing proposal to amend it and the new EU's efforts to counter foreign coercion.

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Judged against its core function of neutralizing the alleged undue extraterritorial scope of a foreign law that extends the enforcement jurisdiction of a state into the EU beyond the recognized bases for exercising jurisdiction under international law, the EU Blocking Regulation has shown its structural ineffectiveness. Yet, blocking statutes in general, and the EU Blocking Regulation in particular, have some value. The most important is that these instruments constitute not only elements of State practice but also opinio juris, in opposition to the extraterritorial application of U.S. sanction legislation considered as an internationally wrongful act.¹³ From such an angle, blocking statutes, and particularly the EU Blocking Regulation, set out milestones that crystallize a controversy over the legality of U.S. secondary sanctions, and may contribute to the formation of a rule of customary international law that prohibits States to enact economic and financial sanctions with extraterritorial application.

Against this background, the case under discussion lays down a marker as to how the CJEU interprets central elements of the Blocking Regulation, including the scope ratione materiae of the prohibition to comply with extraterritorial laws; the EU operators’ right of invoking such an instrument in civil proceedings before EU member states courts; relatedly, the issue of the possible reversal of the burden of proof in the context of those proceedings; the question whether national judges can take into account the freedom to conduct business and the risk of disproportionate losses when assessing the annulment of a termination of contract in breach of the EU Blocking Statute.

In its Ruling, the CJEU thus addressed the main legal uncertainties and practical dilemmas faced by EU companies when they deal with persons designated under U.S. sanctions regimes covered by the Blocking Regulation. The interpretations rendered by the CJEU with the Ruling do not come as a surprise as they aim at ensuring that the objectives of the Blocking Regulation are achieved. According to the preamble of that statute, its main objectives are to protect the established international legal order from foreign laws that extend the enforcement jurisdiction of a given state beyond any recognized basis for exercising jurisdiction under international law and, hence, to safeguard the interests of the Union and the interests of the EU economic operators that may be affected by the same laws, in particular by removing, neutralizing, blocking, or otherwise countering their extraterritorial effects

The Ruling demonstrates a remarkable level of reasonableness and pragmatism as it endeavors to address the unenviable predicament faced by EU operators who may find themselves “caught between the rock of the EU Blocking Statute and the hard stone of US sanctions enforcement.”¹⁴ Essentially, it does so by proving willing to grant unconditional enforcement of such EU Regulation against third states’ secondary sanctions; hence, it confirms that EU operators’ commercial decisions to avoid loss for their business may be challenged and subject to legal scrutiny in national civil proceedings. Yet, the CJEU also makes clear that EU operators are provided with the opportunity to prove that limitations to their freedom to conduct a business would be disproportionate to realize the objectives of the EU Blocking Statute, which could thereby warrant non-compliance with its prohibition.¹⁵ However, this pragmatic solution is not without problems. Granted, EU companies may seek to obtain an exemption from the European Commission. But the high threshold required for granting such an authorization to comply with sanctions imposed by a foreign State within the EU territory makes it a quite unrealistic route to follow.

The core issues addressed by the Court in Bank Melli make its pronouncement more critical than ever because of the expected amendments to the Blocking Regulation and the increasing use of unilateral coercive measures by states. Back in 2021 the EU Commission announced that it would consider amending the Blocking Statute Regulation to further deter and counteract the unlawful extraterritorial application of sanctions to EU operators by countries outside the EU. An adjustment of the Blocking Regulation was warranted not only to better protect EU private operators facing the negative effects of U.S. secondary sanctions but also because the weaponization of unilateral coercive measures¹⁶ had become a central issue on the international stage.¹⁷

The publication of the EU Commission proposal was planned for the second quarter of 2022, but the practical need of maintaining a united front among Western countries that adopted sanctions against Russia following the invasion of Ukraine has delayed its adoption.¹⁸ Instead, the Commission advanced a related proposal for an Anti-Coercion Instrument (ACI), which would enable the EU to respond to a third country's coercion of the EU and its member states,¹⁹ and thereby protect its strategic autonomy.²⁰ Importantly, the ACI, which was revealed on December 8, 2021, seeks to react to all forms of economic coercion, not only to extraterritorial sanctions regulations. Under the proposal, after determining that a third-country measure is coercive, the Commission may adopt anti-coercive measures, which may consist of restrictions on foreign direct investment or trade in services within the EU. Going forward, it remains to be seen whether the general takeaways of the CJEU's judgment in Bank Melli Iran v. Telekom Deutschland, and, especially, the lasting problems in the application of the Blocking Regulation that the Ruling has highlighted, will inform the new legal text of the blocking statute if the EU decides to reform it, and how this instrument, whether or not it will be amended, will be coordinated with the new EU's efforts to counter foreign coercion.²¹