My apologies for the title, I just finished watching Creed. Yesterday, the Honorable Reggie B. Walton of the United States District Court for the District of Columbia issued a Memorandum Opinion granting the defendant, The United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), motion for summary judgment against Epsilon Electronics, whom OFAC had issued a $4,073,000 civil penalty against in July 2014 for illegal exports of car and audio equipment to Iran without a license from OFAC. I have written about this case a number of times, so if you are interested in the factual background and some of the major issues, please click here and here.

As has most always been the case when a court is reviewing an OFAC action under the Administrative Procedure Act (“APA”), the Court in Epsilon found that a review of a decision made by OFAC is “extremely deferential” because OFAC operates “in an area at the intersection of national security, foreign policy, and administrative law.” Islamic Am. Relief Agency v. Gonzales, 477 F.3d 728, 734 (D.C. Cir. 2007). In other words, it takes a near miracle to overturn OFAC’s decisions. With that in mind, we now turn to some of the highlights of the opinion.

Part of Epsilon’s arguments concerned OFAC’s alleged arbitrary and capricious action in failing to apply the “Inventory Exception” to the transactions at issue in Epsilon’s case. Epsilon contends that OFAC’s 2002 Guidance on Transshipments to Iran creates an exception to the Iranian Transactions and Sanctions Regulations’ prohibition on reexports of U.S. origin goods to Iran. This is an issue that I have written extensively on, and one that many sanctions practitioners have been tuned into, as this “Inventory Exception” is a purported rule of construction that OFAC lawyers have been advising exists for years.  While many were hoping to get a definitive ruling on whether or not such an exception exists, the Court did not specifically say whether it believed that the 2002 OFAC Guidance created an “Inventory Exception.” Rather, the Court said that there was ample evidence in the record to demonstrate that Epsilon should have known that the part in Dubai to whom they were selling were distributing either exclusively or predominately to Iran. Thus, their reliance on the 2002 OFAC Guidance was misplaced.

Epsilon further argued that OFAC’s determination as to certain transactions being egregious in nature was arbitrary and capricious as those transactions were of a low dollar value.  The Court also rejected this argument, and noted that the volume of the transactions may be considered under General Factor D of OFAC’s Enforcement Guidelines’ General Factors Affecting Administrative Action, however, the Guidelines provide for particular emphasis to be given to General Factors A (willful/reckless violations) and B (awareness of conduct).  This coupled with substantial deference being provided to an agency’s interpretation of its own regulations, led the Court to rule that OFAC’s determination as to egregiousness was neither arbitrary or capricious, nor did it lack a rational basis.

Epsilon further argued that their Fifth Amendment Due Process rights had been violated, in part, due to OFAC’s failure to provide Epsilon with an adequate opportunity to respond to the agency’s Penalty Notice. The Court also rejected this argument by pointing out that Epsilon had an opportunity to respond to OFAC’s various subpoenas seeking information about their conduct, and by responding to OFAC’s Pre-Penalty Notice. Thus, the Court found that procedural due process requires nothing more than what Epsilon was provided, and cited to Holy Land Found. for Relief and Dev. v. Ashcroft, 333 F.3d 156 (D.C. Cir. 2003) for the principal that notice and opportunity to make written submissions to OFAC satisfies due process.  In doing so, the Court extended this jurisprudence to OFAC enforcement cases, where as it had previously only been applied in cases involving designated parties seeking unblocking by OFAC.

Finally, Epsilon argued, as part of an Eighth Amendment excessive fines allegation, that there was no harm done to the Iran sanctions regime because the items reexported to Iran were non-sensitive goods under the Export Administration Regulations (“EAR”).  The Court found that the items’ designation under the EAR was irrelevant to the gravity of Epsilon’s offense, and given that Epsilon’s penalty was far under what was authorized by statute, there was no violation of the Eighth Amendment.

In short, this is the opinion that many of us following this case expected. That said, kudos to Epsilon for at least trying. One of the main problems in the sanctions practice area is that the regulations and OFAC’s guidance can be difficult to understand, and there are often numerous varying interpretations of the same regulations by different practitioners.  Its one of the things that makes the practice of U.S. economic sanctions both interesting and incredibly challenging. Unfortunately, few parties want to challenge OFAC actions because its nearly impossible to beat them given the deference they receive. However, when the rare OFAC challenge does come along, practitioners can benefit from gaining additional insight into how certain regulations or guidance is applied or viewed. Whether this changes anyone’s view on the Inventory Exception remains to be seen.

The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrariassociatespc.com