By Dr. Markus Lieberknecht


In November 2018, the telephone line at the Hamburg branch of Bank Melli went dead. Their phone provider, Telekom, had terminated their contract, effective immediately. This had nothing to do with unpaid bills. Things were much more complicated than that. In fact, Melli’s phone line in Hamburg had fallen victim to a political conflict.

U.S. Trade Sanctions on Iran

Bank Melli’s full name, one might add, is Bank Melli Iran, and the timing of the termination was conspicuous for anyone who followed Iran-related matters. Just one week earlier, a barrage of U.S. trade sanctions had hit Iran. In case anybody doubted that the long arm of U.S. law had compelled Telekom, the U.S. ambassador to Germany at the time, Richard Grenell, responded by tweeting “#sanctionsareworking #thankyouDeutscheTelekom”.

Melli, being all but forced to cease its business operations in Germany, did not accept that U.S. law would ambush a contract in Germany. The bank started a legal battle to force Telekom back into the contract, relying on the EU’s so-called Blocking Statute, a regulation specifically intended to neutralize the effects of U.S. sanctions on business transactions in Europe.

Secondary Sanctions

The U.S. has gained notoriety for its use of extraterritorial sanctions which may run afoul of international law because they do not only impose restrictions on transactions with the U.S. or its nationals. So-called secondary sanctions prohibit nationals of third countries from trading with America’s adversaries, effectively banning German or Chinese companies from entering certain transactions with sanctioned countries such as Iran.

While states often have legitimate reasons to regulate behavior outside of their borders, international law does require a ‘genuine link’, i.e., a meaningful connection between the enacting state and the subject-matter of the legislation. Even without a hard-and-fast rule, some U.S. trade sanctions venture to the far end of the continuum, where one is hard-pressed to spot any genuine link to the U.S. other than the desire to enforce its political agenda on a global scale.

The Siberian Pipeline Crisis

For the first time, Europeans and Americans butted heads over this issue in an episode dubbed the “Siberian Pipeline crisis” when European countries, over fierce opposition by the U.S., decided to import natural gas from the Soviet Union in 1982. To forestall this plan, the U.S. sanctioned the European companies building the pipeline. President Reagan eventually yielded to diplomatic pleas, retracted the sanctions and decreed that “they can have their damned pipeline.” Even so, the crisis ranks among the most serious Western infights of the Cold War.

The next dispute over U.S. sanctions unfolded in 1996, when the Cuban air force shot down two private American planes operated by Cuban exiles in the Florida Straits, killing four people. The U.S. promptly reacted by enacting the Helms-Burton-Act, which added a new set of sweeping sanctions to the decades-old embargo against Cuba. Most strikingly, Title III of the Act extended the prohibition to do business with Cuba to companies from outside the U.S.

The European Blocking Statute

The EU decided to counter this American attempt to restrict European trade with Cuba. It enacted the so-called Blocking Statute (Council Regulation 2271/96), which has the sole purpose of neutralizing U.S. laws which the EU viewed as illegitimate meddling in its affairs. The Blocking Statute was promoted as a device to shield European companies from the reach of U.S. trade sanctions when they pursue transactions that are unrelated to the U.S.

In order to achieve this effect, the Blocking Statute prohibits Europeans from complying with certain U.S. trade sanctions. The provision is remarkably broad, ordering that no EU-based entity “shall comply … actively or by deliberate omission, with any requirement or prohibition … based on or resulting, directly or indirectly from” the listed secondary sanctions. In other words, the law required European companies to act like the U.S. embargo did not exist.

Companies and individuals who breach the prohibition face fines and, in some EU countries, even prison sentences. To be sure, the EU legislators realized that breaching U.S. sanctions can have grave repercussions – some European companies have paid billions of dollars in fines and settlements for violations. Therefore, the Blocking Statute provides that the EU Commission can grant an exemption from the prohibition in cases of severe hardship.

While bringing the Blocking Statute under way, the EU also intensified its diplomatic efforts and the US eventually agreed to shelve Title III of the Helms-Burton Act. As a result of this compromise, the Blocking Statute had virtually no area of application when it entered into force in 1996. This abruptly changed when the law gained a new lease on life two decades later.

Iran Nuclear Deal

In 2015, The US, along with the EU and other major countries had negotiated a deal with Iran, the so-called JCPOA. Under the agreement, western countries removed most of their trade sanctions against Iran in exchange for international oversight over Iran’s nuclear program. When President Trump terminated the American participation in the JCPOA in 2018, the U.S. reinstated and expanded their sanctions against Iran. European companies who continued business with Iran once again faced severe fines and denial of access to the US market.

In an attempt to save what remained of the JCPOA, the EU revived the Blocking Statute and amended it to cover the reactivated U.S. sanctions against Iran. This put European companies between a stick and a stone: maintaining their business ties with Iran had suddenly become illegal under U.S. law, whereas severing these ties would be illegal under European law. The timing was particularly delicate for Telekom because it was pursuing a multi-billion-dollar merger between its U.S. subsidiary T‑Com and Sprint. Clearly, this was not the time to risk the wrath of U.S. authorities over a commercially insignificant retail contract in Hamburg.

While many European businesses quietly backed out of Iran-related contracts that had turned from business opportunities into liabilities, Bank Melli filed suit in a Hamburg court in 2018. It invoked the Blocking Statute’s prohibition to comply with the U.S. sanctions, asking the court to render Telekom’s termination of contract null and void. When Melli’s dispute with Telekom reached the appellate level in 2020, the Upper Regional Court of Hamburg decided to refer the matter to the European Court of Justice (ECJ) for a preliminary ruling.

The ECJ’s Ruling on the Blocking Statute

The ECJ recently ruled on these matters of interpretation and confirmed that the ‘catch 22’ resulting from the prohibition to comply with US sanctions, as heavy as it may weigh on some companies, is precisely what the Blocking Statute is designed to achieve: it’s not a bug, it’s a feature. This means that, in principle, European parties cannot lawfully terminate contracts if their underlying motivation is to comply with certain U.S. sanctions against Iran.

From a policy perspective, this is rather unsatisfying. Gerard Hogan, the ECJ’s general attorney, voiced his irritation with unusual candor: “In conclusion, I cannot avoid observing that it gives me no particular pleasure to arrive at this particular result. … This Court is nevertheless simply a court of law and our duty is to give effect to the language of the duly enacted legislation.”

Having – albeit somewhat grudgingly – clarified the basic feature of the Blocking Statute, the court remanded the case, and it seems likely that the Hamburg appellate court will reinstate the contract with Melli and order Telekom to perform its obligations. While the ECJ’s reading of the Blocking Statute is legally sound, the ongoing collision course between American and European law appears unsustainable and calls for a political, rather than a legal, solution.

Crushing Sanctions on Russia

Of course, trade sanctions are currently in the limelight not with regard to Iran but because both the U.S. and the EU are imposing crushing sanctions on Russia for its attack on Ukraine. As the conflict unfolded and Germany tiptoed around the question which consequence an invasion would have for Nord Stream 2, a prime target for U.S. sanctions, the stage almost seemed set for a remake of the Siberian Pipeline Crisis.

Thankfully, the EU and the U.S. are closely coordinating their economic sanctions instead. However, should these policies ever diverge, as they did in the case of Iran, this could cause much greater dismay in the future than any of the transatlantic squabbles over economic sanctions we have seen in the past.


About the Author:

Dr. Markus Lieberknecht is an LLM candidate and research assistant at Harvard Law School.

Responsible Editor:

Isabel Cagala, TLB Co-Editor-in-Chief

Read all articles by Markus Lieberknecht:

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