The Situation: A U.S. District Court vacated a $2 million penalty imposed by the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") against Exxon Mobil Corporation ("Exxon") because OFAC failed to provide fair notice of its interpretation of its sanctions regulations.
The Result: The court's opinion highlights the need for fair notice of regulatory interpretations and dovetails with a broader trend of increasing judicial scrutiny of agency action. This decision must be viewed against the backdrop of the Trump administration's recent efforts to limit the use of unofficial guidance, especially in civil administrative enforcement.
Looking Ahead: This new scrutiny of agency action coincides with a surge in government activity in the national security and trade realms. When facing unclear regulations or the threat of agency administrative enforcement, affected parties should consider all potential avenues for legal recourse.
On December 31, 2019, the U.S. District Court for the Northern District of Texas set aside a $2 million penalty after finding that OFAC had violated the Fifth Amendment's Due Process Clause by penalizing Exxon without providing fair notice that the company's conduct was prohibited under the Russia/Ukraine-related sanctions regulations issued pursuant to Executive Orders 13660 and 13661 ("Ukraine Sanctions"). Although the decision is not binding outside of the district and addresses unique facts, it is likely to have a considerable influence on how OFAC and other agencies regulate and interact with private parties.
OFAC sought to penalize Exxon's conduct in signing a series of contracts with PJSC Rosneft Oil Company ("Rosneft"). At the time of the execution of the contracts, Rosneft's president, Igor Sechin, signed on Rosneft's behalf despite the fact that he had been "individually" designated as a Specially Designated National and Blocked Person ("SDN") under Executive Order 13661. Although Rosneft was not an SDN and the Obama administration and Treasury Department made public statements indicating that Mr. Sechin was targeted in his individual capacity, OFAC maintained that Exxon had unlawfully received a prohibited "service" from Mr. Sechin when he signed on Rosneft's behalf. After OFAC's issuance of an administrative subpoena to Exxon, OFAC published Frequently Asked Questions ("FAQs") explaining that the Ukraine sanctions prohibited "enter[ing] into contracts that are signed by a blocked individual" representing a nonblocked entity.
The court ultimately agreed with Exxon's contention that OFAC had failed to provide fair notice, or "ascertainable certainty," as to the prohibition. The court first noted that the plain text of the executive order (using language found in other sanctions contexts) "fail[ed] to address what constitutes a 'receipt' of services" and whether it extended to an incidental receipt of benefit. The court found unavailing OFAC's argument that a 2013 FAQ from the Burma sanctions program warned against having SDNs sign contracts on behalf of nonsanctioned entities, noting that OFAC took pains to stress in the FAQs that prohibitions may vary between sanctions programs. The court viewed Exxon's failure to seek guidance from OFAC prior to executing the transactions as relevant, though ultimately not determinative. On balance, it concluded (quoting the D.C. Circuit's opinion in General Electric v. EPA) that "a regulated party acting in good faith would not be able to identify, with ascertainable certainty, the standards with which [OFAC] expects parties to conform," and that OFAC's penalty notice accordingly violated the Fifth Amendment's Due Process Clause.
One factor weighing against OFAC was the volume of shifting and seemingly contradictory government explanations—offered in press releases, "fact sheets," conference calls, background briefings, and FAQs—of the sanctions' goals and contours. Although such fast-paced, sometimes lightly coordinated government activity is not uncommon in a foreign policy context, the court found it unconvincing as a record of a clear prohibition communicated to regulated parties. Paradoxically, in the short term at least, the decision may prompt officials to offer less, rather than more, information to parties seeking guidance on sanctions prohibitions.
The decision's impact extends well beyond the context of companies considering dealing with a nondesignated, SDN-chaired entity. Like several other prominent agency litigation decisions, it is a shot across the bow of any agency seeking to enforce against conduct not subject to an unambiguous, preexisting, published prohibition. The Trump administration has sought to rein in such conduct, including through two recent executive orders, Department of Justice directives, judicial appointments reflecting a reformist perspective on administrative law, and other legal policy initiatives. The court's opinion makes clear that sanctions and the national security regulatory realm, where agencies have long enjoyed considerable deference (and where the Trump administration has been notably active), are not immune from this trend of growing scrutiny.
Three Key Takeaways
- Increased judicial and executive scrutiny of whether regulatory agencies, including OFAC, provide fair notice could open additional avenues for parties seeking to challenge agency actions.
- Agencies and administrative bodies such as OFAC may reconsider and implement new internal operating procedures on how to interface with the public, including through informal explanations and supplemental guidance documents.
- A reformist trend in administrative law and agency litigation is meeting a surge in activity in the trade and national security regulatory arena, with complex and consequential results.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.