On November 22, 1996, the European Union (EU) adopted Council Regulation (EC) No 2271/96, a blocking statute to protect “against the effects of the extra-territorial application of legislation adopted by a third country.” The statute was founded on the principle that certain forms of extraterritorial jurisdiction violate international law. Article 1 states, “[t]his Regulation provides protection against and counteracts the effects of the extra-territorial application of the laws specified in the Annex of this Regulations, . . . and of actions based thereon or resulting therefrom, where such application affects the interests of [any natural and legal EU] persons.” Under European law, regulations are directly enforceable within the EU.

The EU law targets three acts and one set of regulations enacted by the United States, namely, the Cuban Democracy Act of 1992, the Cuban Liberty Democratic Solidarity Act of 1996, the Iran and Libya Sanctions Act of 1996, and the Cuban Assets Control Regulations. The EU’s blocking statute was initially intended to counter the extraterritorial effects of U.S. trade and economic sanctions against Cuba, Iran, and Libya, while signaling that these sanctions violate international trade law.  The blocking statute provides protection from and affirmatively prohibits compliance with such U.S. laws and regulations, “whether directly or through a subsidiary or other intermediary person, actively or by deliberate omission” as recited in its Article 5. The statute provides an exception when noncompliance would “seriously damage” the interests of any EU person or the EU itself.

Since July 2015, the United States had been a party to a multilateral modus vivendi with Iran to prevent it from developing nuclear weapons (the Joint Comprehensive Plan of Action, or JCPOA).  In October 2017, the Trump Administration, which had been critical of nearly all Obama Administration policies, announced that it would discontinue cooperation with the JCPOA and re-implemented sanctions on Iran. The EU reacted by amending Regulation 2271/96 on June 6, 2018. The amended statute now includes an express denouncement in its preamble directed at the United States, stating that “[U.S.] measures have extra-territorial application and cause adverse effects on the interests of the Union and the interests of natural and legal persons [in the EU].” 

The United States has long been an outlier in using extraterritorial sanctions, as seen in its exercise of control over foreign entities “owned or controlled” by U.S. companies in both the Iran and Cuban sanctions regimes.  

On December 21, 2021, the Court of Justice of the European Union (CJEU) issued its judgment in Bank Melli Iran v Telekom Deutschland GmBH (Case C-124/20), as a matter of first impression with regard to the blocking statute.  Telekom Deutschland had unilaterally terminated the service contracts with Bank Melli Iran after the United States withdrew from the JCPOA and reimposed economic sanctions on the Iranian bank.  Telekom did not seek preauthorization on the grounds of a “serious damage” risk before terminating all service contracts with the local branch, nor did it explain the reason for the termination. The central issue in the case was whether a German law that permits the termination of a contract without stating a reason complies with the EU blocking regulation.

CJEU held that the blocking regulation does not obligate EU states to adopt a law requiring companies to state their reasons for terminating a contract. However, it also held that, when a plaintiff makes out a prima facie case that foreign extraterritorial sanctions motivated the termination, the burden shifts to the defendant to show that the termination was not a result of complying with the foreign sanctions. Thus, it remains technically possible for an EU state to allow its companies to comply with both U.S. extraterritorial sanctions and the EU blocking regulation, but a risk remains that an EU company’s silent refusal to do business with a U.S.-sanctioned person might result in penalties, if the EU company cannot convincingly explain the refusal on grounds other than compliance with U.S. extraterritorial sanctions.