Will we see a flood of damages litigation in the EU?

Multinationals might soon find themselves caught in the middle of more U.S.-EU trade tensions as the EU prepares to block the extraterritorial effects of the sanctions that the United States has reimposed on Iran following the U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA). This could lead to a high degree of legal uncertainty and risk for both EU and U.S. companies doing business in the EU and to an increase in damages litigation.

Background

The JCPOA is a milestone agreement concluded in June 2015 following intense negotiations between China, France, Russia, the United Kingdom, the United States, Germany, the European Union, and Iran. Under the JCPOA Iran had agreed to stop its nuclear program and submit to supervision and controls by the United Nations. In January 2016, the International Atomic Energy Agency confirmed that Iran had fulfilled its nuclear-related commitments under the JCPOA, and, in response, the United Nations, the EU, and the United States eased their economic sanctions on Iran.

On 8 May 2018, the U.S. administration announced its unilateral withdrawal from the JCPOA and the reimposition of the U.S. primary and secondary sanctions on Iran. In response to the unilateral U.S. withdrawal from the agreement, the other signatories made strong declarations that they would continue to abide by the agreement. Certain countries not party to the JCPOA, such as Australia, Japan, and Turkey, also regretted President Trump's decision. Others, like Israel, Saudi Arabia, and Bahrain, welcomed the U.S. administration's steps.

In addition to expressing its disagreement, the EU announced the passing of a modification of an old existing law ("Blocking Statute") that would prohibit EU companies under threat of sanctions from complying with the reimposed U.S. Iran sanctions. The modifications of the Blocking Statute are scheduled to enter into force in early August.

The U.S. actions

In a National Security Presidential Memorandum, the U.S. president directed the secretary of state and the secretary of the treasury to begin immediately taking steps to reinstate U.S. sanctions lifted or waived in connection with the JCPOA. In addition, President Trump indicated that the United States will issue further sanctions against Iran beyond the reinstated sanctions.

According to guidance from the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC), general and specific licenses issued in connection with the JCPOA will be revoked (or possibly amended) "as soon as is administratively feasible." OFAC will provide authorizations to wind down transactions that were authorized under JCPOA-related general or specific licenses. Depending on the type of transaction, as described below, the wind-down period will be either 90 days (4 August 2018) or 180 days (4 November 2018). Any activities subject to the reinstated sanctions should be completed by the relevant date below:

90-day Wind-down Period (6 August 2018) – The following sanctions will be reinstated effective 6 August 2018:

Secondary sanctions (affecting non-U.S. persons who access the U.S. market)

  • Sanctions on the purchase or acquisition of U.S. dollar banknotes by the government of Iran;
  • Sanctions on Iran's trade in gold or precious metals;
  • Sanctions on the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;
  • Sanctions on significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
  • Sanctions on the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
  • Sanctions on Iran's automotive sector.

Primary sanctions (affecting U.S. persons, U.S.-owned or -controlled foreign entities, and persons or property within the United States)

  • The importation into the United States of Iranian-origin carpets and foodstuffs and certain related financial transactions pursuant to general licenses under the Iranian Transactions and Sanctions Regulations;
  • Activities undertaken pursuant to specific licenses issued in connection with the "Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services" (JCPOA SLP) (Note that OFAC anticipates revoking specific licenses issued under the JCPOA SLP.); and
  • Activities undertaken pursuant to General License I relating to contingent contracts for activities eligible for authorization under the JCPOA SLP.

180-day Wind-down Period (4 November 2018) – The following sanctions will be reinstated effective 4 November 2018:

Secondary sanctions on:

  • Activities previously authorized by General License H (which authorized U.S.-owned or -controlled foreign entities to engage in transactions with Iran under certain conditions);
  • Iran's port operators, and shipping and shipbuilding sectors, including the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, or their affiliates;
  • Petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
  • Transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA);
  • The provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions described in Section 104(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010 (CISADA);
  • The provision of underwriting services, insurance, or reinsurance; and
  • Iran's energy sector.

Additional Notes

Not later than 5 November 2018, OFAC will redesignate as Specially Designated Nationals any individuals and entities removed from the SDN List in connection with JCPOA. This will result in the redesignation of over 400 persons and entities that were listed in Attachment 3 of Annex 2 to the JCPOA.

The provisions of Executive Orders 13574, 13590, 13622, 13628, and 13645, which were revoked by Executive Order 13716, have not yet been reinstated as of 8 May 2018, but OFAC expects that these provisions will be reinstated within either the 90- or 180-day period, depending on the activity involved (see the list above).

OFAC's Iran Sanctions website states that "the State Department issued the necessary statutory sanctions waivers to provide for a wind-down period and plans to take appropriate action to keep such waivers in place for the duration of the relevant wind-down periods."

We expect the relevant departments and agencies to issue additional guidance and formal regulations as the United States implements its withdrawal from the JCPOA, and we will provide timely updates on these matters as they develop.

Response from the European Union – Diplomatic efforts and revival of the Blocking Statute

Diplomatic efforts

Shortly after the U.S. administration's announcement of its withdrawal from the JCPOA, the other signatory countries made statements declaring their continued commitment to the agreement. The EU in particular called upon the international community to preserve the Iran nuclear deal. The president of the European Commission, Jean-Claude Juncker, said that "as long as the Iranians respect their commitments, the EU will of course stick to the agreement," and France, Germany, and the United Kingdom also expressed disappointment about the U.S. withdrawal and their commitment to uphold the deal.

The EU and its member states have been resorting to diplomacy to delay and minimize as much as possible the effects of the U.S. withdrawal from the JCPOA. On 4 June 2018, the foreign and economic affairs ministers of France, Germany, and the United Kingdom and the high representative of the EU addressed a joint letter to the U.S. treasury secretary and the secretary of state asking for the extraterritorial effects of the U.S. secondary sanctions not to be enforced against EU persons The letter also requests exemptions that would allow EU companies to maintain economic relationships in sectors such as energy, automotive, civil aviation, infrastructure, and banking and financing channels with Iran.

Legal response – revival of the Blocking Statute

In addition, the EU also took legal measures to counteract the effect of the U.S. sanctions on EU persons. On 6 June 2018, the EU adopted a delegated act amending Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom (the Blocking Statute) in order to counteract the extraterritorial application of certain U.S. sanctions in the EU.

To minimize the damaging extraterritorial effects of certain U.S. sanctions, the Blocking Statute essentially prohibits EU companies from complying (directly or indirectly via subsidiaries or intermediary persons) with the laws listed in its Annex. Compliance with those U.S. sanctions is subject to a notification and approval process involving the Commission and the national authorities of the member states.

The Blocking Statute was first introduced in 1996 to counteract the U.S.'s sanctions against Cuba, Iran, and Libya at that time. With the June 2018 proposal, the following (additional) U.S. laws will be included in the Annex to Regulation 2271/96:

  • Iran Sanctions Act of 1996 (ISA);
  • Iran Freedom and Counter-Proliferation Act of 2012 (IFCA);
  • National Defense Authorization Act for Fiscal Year 2012 (NDAA);
  • Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA); and
  • Iranian Transactions and Sanctions Regulations (ITSR).

The Blocking Statue also prohibits the recognition and enforcement of foreign court judgments and administrative decisions giving effect to the U.S. Iran sanctions listed in the Annex.

Natural and legal persons will also be able to claim damages caused by the application of the Iran sanctions in the Annex to the Blocking Statute. Recovery may be obtained from the natural or legal person or any other entity causing the damages or from any person acting on its behalf or intermediary. Recovery could take the form of the seizure and sale of assets held by those persons, entities, persons acting on their behalf, or intermediaries within the Community, including shares held in a legal person incorporated within the Community.

The revised Blocking Statute is expected to enter into force by 6 August if neither the Council nor the Parliament opposes it within a two-month period or even earlier if these institutions notify the Commission of their consent.

Effectiveness of the Blocking Statute

While noncompliance with the Blocking Statute can be a criminal offence in some member states, it has mostly been considered a toothless tool until now. This has been the case in part because it had only limited application. This would be different this time around, though, as it targets a major U.S. sanctions program.

Contrary to the latter, however, the Blocking Statute does not contain a direct enforcement and sanction mechanism. These are with the member states. Would member states sanction their national champions for complying with U.S. laws in order to avoid high fines from the U.S. administration and courts?

In fact, should the Commission and member states begin to enforce the Blocking Statute rigorously, many companies will have no choice but to be in violation of either EU or U.S. law. As the United States has a history of strict sanctions enforcement, many companies will most likely – at least initially – consider potential EU fines the lesser worry.

The European Commission and EU member states could find themselves trapped in a situation where they either accept the "supremacy" of U.S. law – a defeat unpleasant to swallow, considering the present transatlantic trade tensions – or opt for strict enforcement of the Blocking Statute. However, the latter depends on member states' cooperation, which is not a given, as (multinational) companies might start heavy lobbying against enforcement of the Blocking Statute. After all, blocking statutes in the EU lack the legal strength (and acceptance) which for instance anti-boycott rules have in the United States.

However, what could give the situation an interesting twist is if "enforcement" initiatives come from private parties, that is, if business partners of companies that abide by the U.S. Iran sanctions were to start damages actions across the EU. Imagine a service or parts provider that has entered into a contract with a multinational concerning an oil and gas business project in Iran. Assume further the multinational now pulls out of the Iran project because of the U.S. sanctions and voids the contract with the service or parts provider. Under the Blocking Statute the latter could claim damages against the multinational. Similarly, banks could be subject to damages actions in the EU, for example, if they refuse to do business in the EU with (legal) persons that are denied parties under the U.S. Iran sanctions but not under the EU's sanctions regime. In particular, EU subsidiaries of U.S. companies may be the target of such damages actions.

Summary

By 6 August, the first set of U.S. (secondary) Iran sanctions will reenter into force. EU companies active in the targeted sectors in Iran must carefully assess the risks. It might be safest to pull out of any Iran business before the U.S. Iran sanctions are reimposed or the revisions to the Blocking Statute enter into force.

Once the Blocking Statute modifications have entered into force, EU companies must be aware of potential consequences, including fines, criminal sanctions, and damages claims by business partners. The Blocking Statute has been a toothless tool until now. However, going forward, it could become a saber-toothed tiger if the Commission and the member states show the political commitment to apply it strictly. For economic operators, the Blocking Statute will most likely bring – at least initially – legal uncertainty rather than protection from the long arm of the United States. Nevertheless, the EU's response to the U.S. reimposition of the Iran sanctions is a sign of political change that international business players will have to adapt to in the medium to long term.