Published
April 05, 2025
European policymakers have adopted a mandate to reduce overly burdensome regulation by 25% to combat economic stagnation and catalyze growth. As part of that instruction, the European Commission introduced a package of legislation (or “Omnibus”) that would, in part, revise the Corporate Sustainability Due Diligence Directive (“CS3D” or “Directive”).
The Directive requires companies with €450 million in turnover in the European Union (“EU”) to plumb the depths of their supply chains worldwide to identify potential violations of human rights and environmental standards and to take action to prevent, mitigate, and end those abuses.
The EU finalized CS3D in 2024 and instructed EU member states to begin transposing it into national laws. The Directive passed without the full support of all EU member states, and many EU countries have not initiated implementation.
Extraterritorial Overreach Creates Legal Conflicts for U.S. Companies
Consequently, European policymakers now enjoy an opportunity to further modify CS3D – and still meet some of its core objectives. The current CS3D text applies to U.S.-parented companies and all of their affiliates and business relationships that have no nexus to the EU, implicating U.S. companies in wide-ranging, extraterritorial requirements to ensure that their suppliers in the United States – and globally – are not in violation of any Directive standards.
However, on some topics, the standards incorporated into CS3D directly conflict with U.S. federal and state laws, particularly around labor practices and corporate governance. These conflicts will require U.S. companies to decide whether to comply with U.S. law or comply with EU law, inappropriately and significantly increasing their liability notwithstanding the fact that U.S. companies are already subject to robust U.S laws on those subjects.
Members of the U.S. Congress have taken notice of the impending risks of European efforts to export their laws and regulations in a way that supplants European policy preferences over U.S. sovereignty. Ironically, the EU already has safeguards in place from this exact type of behavior; in 1996, the EU adopted its Blocking Statute, which works to protect EU companies from the effects of extraterritorial application of laws from non-EU countries.
Fortunately, leadership of the House Financial Services Committee and the Senate Banking Committee are aware of these developments and have called on principals in the Executive branch to engage with Europeans to refocus CS3D exclusively on European territory.
Revisions to CS3D Present a Strategic Moment for Transatlantic Collaboration
As has been common practice, the United States should have primacy over the rules that U.S. companies follow, just as the EU should have the same right to regulate EU companies. In recognition of this principle, Senator Bill Hagerty has introduced legislation inspired by the EU Blocking Statute, the PROTECT USA Act, that would prevent U.S.-parented companies and their subsidiaries from complying with CS3D. The PROTECT USA Act (S. 985) takes the EU’s own stated perspective and applies that very view to protecting the United States from the application of extraterritorial laws and regulations.
During its Omnibus exercise, the EU should acknowledge the contradiction between its Blocking Statute and CS3D, as Senator Hagerty’s legislation highlights, remove the extraterritorial application of CS3D, and respect the jurisdictional sovereignty of its key trading partners, like the United States.
Now that the EU is making progress in revising CS3D through its Omnibus discussions, a great opportunity exists to increase the competitiveness of the EU and improve upon the U.S.-EU relationship. The EU should reflect its own principles on extraterritorial laws and regulations in its revision of CS3D.
About the authors
Tom Quaadman
Tom Quaadman develops and executes strategic policies to implement a global corporate financial reporting system, address ongoing attempts of minority shareholder abuse of the proxy system, communicate the benefits of efficient American capital markets, and promote an innovation economy and the long-term interests of all investors.
