Advisories May 5, 2014

International Trade & Regulatory Advisory: U.S. Court of Federal Claims Enjoins Air Force and Defense Contractor from Dealing with Entities Affiliated with Russian SDN

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Alston & Bird LLP

On April 30, 2014, the United States Court of Federal Claims granted Space Exploration Technologies Corp.’s (“SpaceX”) motion for a preliminary injunction prohibiting the United States Air Force and United Launch Services, LLC (ULS), a joint venture between The Boeing Company and Lockheed Martin Corporation, and their affiliates, from making any purchases from or payment to the Russian company NPO Energomash, or any other entity subject to the “control” of Russian Deputy Prime Minister Dmitry Rogozin, unless the court receives the opinion of the U.S. Departments of the Treasury, Commerce and State that such purchases or payments will not directly or indirectly contravene U.S. sanctions. The court’s application of a “control” test differs from the 50 percent or greater “ownership” test that the Office of Foreign Assets Control (OFAC) uses to extend Specially Designated Nationals (SDN) status to affiliates of SDNs by operation of law. It therefore sets up potential confusion as to which test applies.

The injunction stems from SpaceX’s complaint that the Air Force and ULS are purchasing RD-180 rocket engines manufactured by NPO Energomash for use in the Air Force’s Evolved Expendable Launch Vehicle (EELV) Program. SpaceX’s complaint alleges that NPO Energomash is owned and controlled by the Russian government, and that it is thus controlled by Russia’s Deputy Prime Minister Dmitry Rogozin, the head of the Russian defense industry and the Russian space program. Rogozin was designated as an SDN on March 16, 2014, pursuant to Executive Order No. 13661, which declares that:

All property and interests in property [of Deputy Prime Minister Rogozin] that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person (including any foreign branch) . . . are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in[.]

While Executive Order No. 13661 does not explicitly prohibit the activities described above, the Court of Federal Claims found that “the public interest and national defense and security concerns that underlie Executive Order No. 13661 warrant issuance of a preliminary injunction in this case…” (emphasis added). This injunction may have a significant impact on the EELV Program and other defense projects that utilize Russian components, but otherwise the implications of the ruling are limited. The Court of Federal Claims is a court of limited, specialized jurisdiction, and this injunction only applies to Air Force and ULS dealings with entities controlled by Deputy Prime Minister Rogozin. It is clear that the Court of Federal Claims understands that primary authority to interpret and apply U.S. sanctions falls outside the judiciary, as the injunction will be lifted if and when Treasury, Commerce and State opine that transactions covered by the injunction do not contravene Executive Order No. 13661.

At the end of the day, OFAC is the implementing and enforcing agency that matters, and OFAC has made a point of issuing narrow, targeted sanctions against Russia. Unless OFAC announces otherwise, OFAC’s position remains unchanged and the 50 percent or greater “ownership” test—not a “control” test—applies. It remains to be seen how long it will take for OFAC, Commerce and State to weigh in on this particular case, but companies whose activities are unrelated to U.S. government procurement of Russian goods, while needing to remain abreast of OFAC’s evolving approach to sanctions, should not be affected by this ruling.

This advisory is published by Alston & Bird LLP’s International Trade & Regulatory practice area to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under court rules of certain jurisdictions.

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