State and Local Economic Sanctions: Constitutional Issues

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State and Local Economic Sanctions:

Constitutional Issues

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State and Local Economic Sanctions: Constitutional Issues

Summary

States and localities have occasionally enacted measures restricting their agencies from

conducting economic transactions with entities that do business with or in foreign countries

whose conduct these jurisdictions find objectionable. While some maintain that sub-federal

entities may enact such laws under sovereign proprietary powers and other constitutional

prerogatives, others argue that these measures impermissibly invade federal commerce and

foreign affairs authorities and may, in some cases, be preempted by federal statute. In 2000, the

U.S. Supreme Court unanimously held in Crosby v. National Foreign Trade Council that a

Massachusetts law restricting state transactions with firms doing business in Burma was

preempted by federal statute. In its 2003 decision in American Insurance Association v.

Garamendi, the Court reaffirmed the relevance of the dormant federal foreign affairs power to

preemption analysis when it struck down a California law requiring certain businesses to disclose

information regarding Holocaust-era insurance policies sold in Europe, but the scope of the 5-4

decision is unclear.

In recent years, a number of states have proposed or enacted some type of divestment legislation

against Sudan in response to the troubled situation in Darfur. States have also considered or

adopted divestment legislation involving Iran, Cuba, or terrorist states in general. In February

2007, a federal district court held Illinois’s Sudan sanctions law unconstitutional and permanently

enjoined its enforcement (National Foreign Trade Council v. Giannoulias). Illinois subsequently

repealed its statute, and the state’s appeal in the case was dismissed as moot later that year. In

2012, a U.S. federal district court issued a preliminary injunction barring the enforcement of a

Florida statute which, among other things, restricted the state or local governments from entering

into contracts with certain entities that do business in Cuba.

In recent years, Congress has enacted legislation authorizing states to prohibit investments in, or

divest assets from, Sudan and Iran. The Sudan Accountability and Divestment Act of 2007 (P.L.

110-174) authorizes states and local governments to adopt divestment or investment prohibition

measures involving (1) persons the state or local government determines are conducting business

operations in the Sudanese energy and military equipment sectors or (2) persons having a direct

investment in or carrying on a trade or business with Sudanese entities or the Government of

Sudan, provided certain notification requirements are met. The Comprehensive Iran Sanctions,

Accountability, and Divestment Act (P.L. 111-195) which was enacted in 2010, includes

provisions authorizing state and local governments to divest from those businesses making

investments of $20 million or more in Iran’s energy sector after adequate investigation and

notification have occurred. Both laws provide that a measure falling within the scope of the

authorization is not preempted by any federal law or regulation.

Congressional Research Service

State and Local Economic Sanctions: Constitutional Issues

Contents

Types of State and Local Economic Sanctions ................................................................................ 1

Overview of Constitutional Issues ................................................................................................... 2

Foreign Commerce Clause ........................................................................................................ 2

Intrusion into Foreign Affairs .................................................................................................... 5

Preemption by Federal Enactment ............................................................................................. 6

Notable Federal Judicial Rulings on State Sanctions (2000-Present) .............................................. 7

Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000) ............................................. 7

American Insurance Association v. Garamendi, 539 U.S. 396 (2003) ...................................... 9

National Foreign Trade Council v. Giannoulias, 523 F. Supp. 2d 731 (N.D.Ill. 2007) ............ 9

Faculty Senate of Florida International University v. Winn, 616 F.3d 1206 (11th Cir.

2010)..................................................................................................................................... 12

Odebrecht Constr., Inc. v. Prasad, 876 F. Supp. 2d 1305 (S.D. FL, Jun. 29, 2012) ................ 13

Some Ongoing Legal and Practical Concerns ............................................................................... 14

Notable Federal Enactments .......................................................................................................... 15

Sudan Accountability and Divestment Act .............................................................................. 15

Comprehensive Iran Sanctions, Accountability, and Divestment Act ..................................... 16

Appendixes

Appendix. State Enactments Relating to Divestment in Foreign Countries .................................. 17

Contacts

Author Contact Information........................................................................................................... 20

Acknowledgments ......................................................................................................................... 20

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State and Local Economic Sanctions: Constitutional Issues

tates and localities have at times proposed or enacted measures restricting governmental

transactions with entities doing business or having financial ties with foreign countries

whose conduct is found objectionable, particularly because of terrorism or human rights

concerns.1 This report summarizes constitutional arguments made for and against these laws and

discusses the Supreme Court’s decisions in Crosby v. National Foreign Trade Council and

American Insurance Association v. Garamendi, where the Court addressed the permissibility of

state laws having implications upon U.S. foreign affairs. The report also discusses a 2007 federal

district court decision which held that an Illinois law that imposed sanctions upon Sudan was

unconstitutional, along with a 2012 federal district court decision preliminarily enjoining the

enforcement of a Florida statute which, among other things, restricts the state or local

governments from entering contracts with certain entities that do business in Cuba. The report

also suggests some possible legal ramifications of recent case law for future state and

congressional action in this area, and summarizes recent federal enactments addressing state

economic sanctions.

Types of State and Local Economic Sanctions

State and local sanctions have generally taken the form of (1) selective purchasing or contracting

laws, which generally prohibit state or local agencies from contracting with or procuring goods

and services from companies that do business in a named country, or (2) selective investment

laws, which prohibit state or local agencies from investing public funds in such companies. A

variation of the latter is a state or local divestment law which, for example, may require

divestment by state pension funds of stock in companies that either do business within a named

country or with that country’s government. In the 1990s, a number of state laws focused on

conditions in Burma (Myanmar), while others targeted Nigeria, Tibet, Cuba, Indonesia,

Switzerland, and Northern Ireland. Other state laws addressed poor foreign labor practices

regardless of country.

Due to the troubled situation in Darfur, between 2006 and 2010 a number of states proposed or

enacted divestment legislation focused on Sudan.2 Other states have passed legislation prohibiting

pension fund investment in debt instruments issued by any nation designated by the State

Department as supporting or engaging in terrorism.3 Other pending or enacted state legislation is

aimed at divestment of state funds from companies engaged in certain business activities in Iran,

in either Iran or Sudan, or in state sponsors of terrorism.4

See generally National Conference of State Legislatures, State Divestment Legislation, at http://www.ncsl.org/issuesresearch/labor/state-divestiture-enacted-laws-legislation.aspx (last updated Apr. 9, 2008).

The Government Accountability Office reported in 2010 that 35 states had enacted laws or adopted non-legislative

policies regarding state investments in Sudan. U.S. Gov’t Accountability Office, Sudan Divestment: U.S. Investors Sold

Assets but Could Benefit from Increased Disclosure Regarding Companies’ Ties to Sudan 13, GAO-10-742, June 22,

2010. Between 2006 and 2010, state fund managers divested or froze about $3.5 billion in assets related to Sudan. Id. at

11.

The State Department, pursuant to Section 6(j) of the Export Administration Act, currently lists Cuba, Iran, Sudan,

and Syria as countries whose governments have repeatedly provided support for acts of international terrorism. See

Dep’t of State, Country Reports on Terrorism 2011 (2012), available at

http://www.state.gov/documents/organization/195768.pdf.

See Appendix.

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State and Local Economic Sanctions: Constitutional Issues

In February 2007, a federal district court held that an Illinois statute, which restricted the deposit

of state funds to institutions having customers with ties to Sudan and barring the investment of

state pension funds with Sudanese-connected entities, was constitutionally impermissible. The

state’s appeal to the U.S. Court of Appeals for the Seventh Circuit was subsequently dismissed as

moot.5

Overview of Constitutional Issues

State and local economic sanctions that target foreign government behavior ordinarily raise three

constitutional issues: (1) whether they burden foreign commerce in violation of the Foreign

Commerce Clause and, if so, whether they are protected by the market participant exception to

the Clause; (2) whether they impermissibly interfere with the federal government’s exclusive

power to conduct the nation’s foreign affairs; and (3) where Congress or the President has acted,

whether they are preempted by federal law.6

Foreign Commerce Clause

The Constitution provides Congress with the authority to regulate both interstate and foreign

commerce (Art. I, §8, cl. 3). In addition to this affirmative grant of constitutional authority, the

Supreme Court has recognized that the Commerce Clause implies a corresponding restraint on the

authority of the states to interfere with commerce, even absent Congressional action.7 This

inferred restriction arising from congressional inaction is generally referred to as the “dormant”

National Foreign Trade Council v. Giannoulias, 523 F.Supp.2d 731 (N.D.Ill. 2007).

For legal background, see, e.g., Cong. Research Service, The Constitution of the United States of America, 2010

Supp. at 29-32 (H.Doc. 110-17)[hereinafter Constitution Annotated]; Louis Henkin, Foreign Affairs and the United

States Constitution 149-69 (2d ed. 1996)[hereinafter Henkin]; Matthew Schaefer, Constraints on State-Level Foreign

Policy: (Re) Justifying, Refining and Distinguishing the Dormant Foreign Affairs Doctrine, 41 Seton Hall L. Rev. 201

(2011); Judith Resnick, Foreign as Domestic Affairs: Rethinking Horizontal Federalism and Foreign Affairs

Preemption in Light of Translocal Internationalism, 57 Emory L. J. 31 (2007); Adrian Barnes, Do They Have to Buy

From Burma?: A Preemption Analysis of Local Antisweatshop Procurement Laws, 107 Colum. L. Rev. 426 (2007);

Lucien J. Dhooge, Condemning Khartoum: The Illinois Divestment Act and Foreign Relations, 43 Am. Bus. L. J. 245

(2006); Todd Steigman, Lowering the Bar: Invalidation of State Laws Affecting Foreign Affairs Under the Dormant

Foreign Affairs Power After American Insurance Association v. Garamendi, 19 Conn. J. Int’l L. (2004); David D.

Caron, The Structure and Pathologies of Local Selective Procurement Ordinances: A Study of the Apartheid-Era South

Africa Ordinances, 21 Berkeley J. Int’l L. 161 (2003); Brandon P. Denning, American Insurance Ass’n v. Garamendi,

and Deutsch v. Turner Corp., 97 Am. J. Int’l L. 950 (2003); Brandon P. Denning & Jack H. McCall, Crosby v. National

Foreign Trade Council, 94 Am. J. Int’l L. 750 (2000); Jack Goldsmith, Statutory Foreign Affairs Preemption, 2000

Sup. Ct. Rev. 175; Robert Stumberg, Preemption & Human Rights: Local Options After Crosby v. NFTC, 32 Law &

Pol’y Int’l Bus. 109 (2000); Alejandra Carvajal, State and Local ‘Free Burma’ Laws: The Case for Sub-National Trade

Sanctions, 29 Law & Pol’y Int’l Bus. 257 (1998) [hereinafter Carvajal]; Daniel M. Price & John P. Hannah, The

Constitutionality of United States State and Local Sanctions, 39 Harv. Int’l. L. J. 443 (1998) [hereinafter Price &

Hannah]; Jack L. Goldsmith, Federal Courts, Foreign Affairs, and Federalism, 83 Va. L. Rev. 1617 (1997); David

Schmahmann & James Finch, The Unconstitutionality of State and Local Enactments in the United States Restricting

Business Ties with Burma (Myanmar), 30 Vand. J. Transnat’l L. 175 (1997)[hereinafter Schmahmann & Finch];

Richard B. Bilder, The Role of States and Cities in Foreign Affairs, 83 Am. J. Int’l L. 821 (1989); Harold G. Maier,

Preemption of State Law: A Recommended Analysis, 83 Am. J. Int’l L. 832 (1989); Constitutionality of South African

Divestment Statutes Enacted by State and Local Governments, 10 Op. Off. Legal Counsel 49 (1986) (concluded that

certain state divestment laws were constitutional) [hereinafter DOJ Opinion]. See also Timothy J. Conlon, Robert L.

Dudley, & Joel F. Clark, Taking on the World: The International Activities of American State Legislatures, 34 Publius:

The Journal of Federalism 183 (Summer 2004).

See, e.g., Cooley v. Board of Wardens of Port of Philadelphia, 53 U.S. 299 (1851).

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Commerce Clause. Under this established principle, states and localities are impliedly prohibited

from unreasonably burdening or discriminating against either interstate or foreign commerce

unless they are authorized by Congress to do so.8 In a series of cases involving state taxes, the

Supreme Court has set out criteria for examining whether state measures impermissibly burden

foreign commerce where affirmative congressional permission is absent. In sum, the Court has

required a closer examination of measures alleged to infringe the Foreign Commerce Clause than

is required for those alleged to infringe its interstate counterpart, but has also provided scope for

state measures in situations where a federal role is not clearly demanded.

In Japan Line, Ltd. v. County of Los Angeles,9 the Supreme Court struck down on Foreign

Commerce Clause grounds a California state statute that applied an ad valorem property tax on

foreign cargo containers. In doing so, the court identified two reasons why “a more extensive

constitutional inquiry is required” in foreign commerce cases than those involving “purely

interstate commerce.”10 First, there is an “enhanced risk of multiple taxation” upon goods

involved in foreign commerce than in the case of domestic goods.11 Secondly, a state tax upon an

instrumentality in foreign commerce “may impair federal uniformity in an area where federal

uniformity is essential,” or, in other words, may “prevent [] the Federal Government from

‘speaking with one voice when regulating commercial relations with foreign governments.’”12

The Court made clear that “[i]f a state tax contravenes either of these precepts, it is

unconstitutional under the Commerce Clause.”13

Four years later in Container Corp. of America v. Franchise Tax Board,14 the Court upheld a state

income tax law challenged by a multinational enterprise, finding that it did not infringe upon the

federal government’s authority over foreign commerce. The Court viewed the case as involving

several facts which made it distinguishable from the state tax which had been struck down in

See New York v. United States, 505 U.S. 144, 171 (1992) (“While the Commerce Clause has long been understood to

limit the States’ ability to discriminate against interstate commerce, that limit may be lifted…by an expression of the

‘unambiguous intent’ of Congress.”) (internal citations omitted); South-Central Timber Dev., Inc. v. Wunnicke, 467

U.S. 82, 87-93 (1984). See also Kraft Gen. Foods v. Iowa Dept. of Revenue, 505 U.S. 71, 81 (1992)(“Absent a

compelling justification ... a State may not advance its legitimate goals by means that facially discriminate against

foreign commerce.”).

Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979).

Id. at 445-446. With respect to state taxes affecting interstate commerce, the Court has stated that “[a]bsent

congressional approval... [the tax] will not survive Commerce Clause scrutiny if the taxpayer demonstrates that the tax

(1) applies to an activity lacking a substantial nexus to the taxing State; (2) is not fairly apportioned; (3) discriminates

against interstate commerce; or (4) is not fairly related to the services provided by the State.” Barclays Bank Plc v.

Franchise Tax Bd., 512 U.S. 298, 310-311 (1994).

Japan Line, Ltd., 441 U.S. at 446. The Court elaborated on the reasons why goods in foreign commerce faced a

greater risk of multiple taxation than those in interstate:

In order to prevent multiple taxation of interstate commerce, this Court has required that taxes be apportioned

among taxing jurisdictions, so that no instrumentality of commerce is subjected to more than one tax on its full

value. The corollary of the apportionment principle, of course, is that no jurisdiction may tax the instrumentality in

full. "The rule which permits taxation by two or more states on an apportionment basis precludes taxation of all of

the property by the state of the domicile. . . . Otherwise there would be multiple taxation of interstate operations."

The basis for this Court's approval of apportioned property taxation, in other words, has been its ability to enforce

full apportionment by all potential taxing bodies. Yet neither this Court nor this Nation can ensure full

apportionment when one of the taxing entities is a foreign sovereign.

Id. at 446-447 (internal citations omitted).

Id., at 446-48, 451.

Id. at 451.

Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983).

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State and Local Economic Sanctions: Constitutional Issues

Japan Line, Ltd.15 In upholding the California state income tax law, the Court also elaborated

upon its prior recognition in Japan Line, Ltd. that a state tax may be impermissible if it prevents

the federal government from speaking with “one voice” on international trade issues. Here, the

Court indicated that state action may have “merely foreign resonances” without impermissibly

treading upon the federal government’s authority over foreign affairs. A state tax “will violate the

‘one voice’ standard if it either implicates foreign policy issues which must be left to the Federal

Government or violates a clear federal directive.”16 The Court noted that the second of these

factors “is, of course, essentially a species of preemption analysis.”17

The Court later concluded in Barclays Bank PLC v. Franchise Tax Board of California,18 a case

examining California’s income-based corporate franchise tax, that even a state statute that may

make it more difficult for the federal government to speak with a single voice on international

trade will be sustained if there is no clear indication that Congress had intended to bar the state

practice. The Court stated that Container Corporation and a subsequent case, Wardair Canada

Inc. v. Florida Dep’t of Revenue,19 in which the Court upheld a state tax on jet fuel purchased by

foreign airlines, suggested that “Congress may more passively indicate that certain state practices

do not ‘impair federal uniformity in an area where federal uniformity is essential....’” Moreover,

Congress “need not convey its intent with the unmistakable clarity required to permit state

regulation that discriminates against interstate commerce....”20

Where Congress has not clearly immunized a state selective purchasing or divestment law for

Foreign Commerce Clause purposes, arguments that any such law impermissibly burdens foreign

commerce21 may be countered by invocation of the market participant doctrine. First articulated

in the Supreme Court’s 1976 ruling in Hughes v. Alexandria Scrap Corp.,22 the doctrine exempts

The Court explained:

Nevertheless, there are also a number of ways in which this case is clearly distinguishable from Japan Line. First,

it involves a tax on income rather than a tax on property. We distinguished property from income taxation in [prior

cases]… suggesting that "[the] reasons for allocation to a single situs that often apply in the case of property

taxation carry little force" in the case of income taxation. Second, the double taxation in this case, although real, is

not the "[inevitable]" result of the California taxing scheme. Cf. Japan Line, 441 U.S., at 447. In Japan Line, we

relied strongly on the fact that one taxing jurisdiction claimed the right to tax a given value in full, and another

taxing jurisdiction claimed the right to tax the same entity in part -- a combination resulting necessarily in double

taxation. Id., at 447, 452, 455. Here, by contrast, we are faced with two distinct methods of allocating the income

of a multinational enterprise. The "arm's-length" approach divides the pie on the basis of formal accounting

principles. The formula apportionment method divides the same pie on the basis of a mathematical generalization.

Whether the combination of the two methods results in the same income being taxed twice or in some portion of

income not being taxed at all is dependent solely on the facts of the individual case. The third difference between

this case and Japan Line is that the tax here falls, not on the foreign owners of an instrumentality of foreign

commerce, but on a corporation domiciled and headquartered in the United States. We specifically left open in

Japan Line the application of that case to "domestically owned instrumentalities engaged in foreign commerce,"

id., at 444, n. 7, and -- to the extent that corporations can be analogized to cargo containers in the first place -- this

case falls clearly within that reservation.

Container Corp. of America, 463 U.S. at 187-189.

Id. at 194.

Id.

Barclays Bank PLC v. Franchise Tax Bd. of California, 512 U.S. 298 (1994).

Wardair Canada Inc. v. Florida Dep’t of Revenue, 477 U.S. 1 (1986).

Barclays Bank PLC, 512 U.S. at 323.

See Price & Hannah, supra note 6, at 478-82; Schmahmann & Finch, supra note 6, at 189-91.

Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976).

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State and Local Economic Sanctions: Constitutional Issues

from the clause those laws in which the state or local government acts as a buyer or seller of

goods rather than as a regulator.23 It is counter-argued, however, that the doctrine is inapplicable

where the state seeks to affect behavior beyond the immediate market in which it is operating;

that it does not immunize laws from other constitutional challenges; and that, as suggested by the

Supreme Court, it may not even apply in Foreign Commerce Clause cases.24

Intrusion into Foreign Affairs

“Power over external affairs is not shared by the States; it is vested in the national government

exclusively.”25 State or local laws which encroach upon the federal government’s authority over

foreign affairs may be deemed constitutionally impermissible. In its 1968 decision in Zschernig v.

Miller,26 the Supreme Court struck down an Oregon law prohibiting nonresident aliens from

inheriting property if they could not satisfy certain requirements. Namely, the Oregon statute

required such aliens to demonstrate to the Oregon state courts that their home countries allowed

U.S. nationals to inherit estates on a reciprocal basis and that payments to foreign heirs from the

Oregon estates would not be confiscated.

Although the federal government had not exercised its power in the area, the Supreme Court

nonetheless found that the inquiries required by the Oregon statute would result in “an intrusion

by the State into the field of foreign affairs which the Constitution entrusts to the President and

the Congress.”27 The Court distinguished its earlier decision in Clark v. Allen,28 which had upheld

a similar California statute, on the ground that the statute in that case could be implemented

through “a routine reading of foreign law” and did not require the particularized inquiries

demanded by the Oregon statute.29

Carvajal, supra note 6, at 270-74; DOJ Opinion, supra note 6, at 53-59 (concluded that state divestment laws were

constitutional). Trojan Technologies, Inc. v. Pennsylvania, 916 F.2d 903, 909-913 (3d Cir. 1990), cert. denied, 501

U.S. 1212 (1991), applied the doctrine to a state “Buy America” law.

See, e.g., South Central Timber Dev., Inc. v. Wunnicke, 467 U.S. at 99 (downstream effects); United Building &

Construction Trades Council v. Mayor & Council of Camden, 465 U.S. 208 (1984)(no immunity from other

constitutional challenges); Reeves, Inc. v. Stake, 447 U.S. 429, 437-38, n.9 (1980)(application in Foreign Commerce

Clause cases unclear). See generally Price & Hannah, supra note 6, at 482-90; Schmahmann & Finch, supra note 6, at

191-97.

The Court of Appeals in National Foreign Trade Council v. Natsios, 181 F.3d 38 (1st Cir. 1999), concluded that the

State of Massachusetts was not acting as a market participant in enacting its Burma sanctions law because it was

“attempting to impose on companies with which it does business conditions that apply to activities not even remotely

connected to such companies’ interactions with Massachusetts.” Id. at 63. The court also found that in any event the

state would not be shielded from scrutiny under the Foreign Commerce Clause because of questions as to whether the

market participant exception “applies at all (or without a much higher level of scrutiny) to the Clause.” Id. at 65. See

also Antilles Cement Corp. v. Acevedo Vilá, 408 F.3d 41, 46-47 (1st Cir. 2005). As indicated infra, the Supreme Court

in Crosby v. Nat'l Foreign Trade Council, 530 U.S. 363 (2000), did not take up the Foreign Commerce Clause issue in

its ruling on the Massachusetts law.

United States v. Pink, 315 U.S. 203, 232 (1942). See also, e.g., Hines v. Davidowitz, 312 U.S. 52, 63 (1941) (The

Federal Government, representing as it does the collective interests of the…states, is entrusted with full and exclusive

responsibility for the conduct of affairs with foreign sovereignties.”).

Zschernig v. Miller, 389 U.S. 429 (1968).

Id. at 432

Clark v. Allen, 331 U.S. 503 (1947).

Zschernig, 389 U.S. at 433-36.

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State and Local Economic Sanctions: Constitutional Issues

Many observers have characterized the parameters of the Zschernig ruling as unclear.30

Application of the ruling is often an issue in litigation concerning state or local measures which

restrict economic transactions with companies doing business with foreign entities whose conduct

the state or locality finds objectionable. It has been argued, for example, that state or local

selective procurement laws, through which jurisdictions condition eligibility for a public contract

upon business entity refraining from certain activities within or in relation to a foreign country,

are directed at influencing or scrutinizing foreign behavior in the manner that the Zschernig Court

found objectionable.31 Courts that have upheld restrictive procurement laws that were challenged

on Zschernig grounds have emphasized that the challenged laws applied neutrally to all foreign

products, and thus did not require the assessment of a particular government’s policies that might

result in constitutional infirmity.32

Preemption by Federal Enactment

The Supremacy Clause of the Constitution establishes that federal statutes, treaties, and the

Constitution itself are “the supreme Law of the Land.”33 Accordingly, states can be precluded

from taking actions that are otherwise within their authority if federal law is thereby thwarted.

The extent to which federal law preempts, or supersedes, state law in a given area is entirely

within the control of Congress. Congress may, by clearly or expressly stating its intent, choose to

preempt all state laws, no state laws, or only certain state laws. Absent an express statement from

Congress, an act of Congress may also impliedly preempt state or local action in a given area.

Where Congress has not expressly preempted state and local laws, two types of implied federal

preemption may be found: field preemption, in which federal regulation is so pervasive that one

can reasonably infer that states or localities have no role to play,34 and conflict preemption, in

which “compliance with both federal and state regulations is a physical impossibility,”35 or where

the state law “stands as an obstacle to the accomplishment and execution of the full purposes and

objectives of Congress.”36 The delineation between preemption categories, and in particular

between conflict and field preemption, is not rigid.37

See, e.g., Henkin, supra note 6, at 162-65; Bilder, supra note 6, at 825-26; for further discussion, see Constitution

Annotated, supra note 6, at 29-32.

E.g., Price & Hannah, supra note 6, at 457-65; Schmahmann & Finch, supra note 6, at 198-99.

See Trojan Technologies, 916 F.2d 903; K.S.B. Technical Sales Corp. v. North Jersey Dist. Water Supply Comm’n,

381 A.2d 774 (N.J. 1977). See generally Price & Hannah, supra note 6, at 469-71. Prior to the lower court rulings on

the Massachusetts Burma law, see infra note 25, at least one state “Buy America” law had been struck down on foreign

affairs grounds. Bethlehem Steel Corp. v. Bd. of Comm’rs of the Dep’t of Water & Power of Los Angeles, 276 Cal.

App. 2d 221 (Cal. Ct. App. 1969).

It has also been argued that while state and local divestment measures may well survive Zschernig scrutiny, the

principles underlying the market participant doctrine—that the Commerce Clause was not intended “to limit the ability

of the States themselves to operate freely in the free market” and that judicial restraint in the area is “counseled by

considerations of state sovereignty, the role of each state as ‘guardian and trustee of its people,’”—should make the

doctrine generally applicable and thus state proprietary actions should not be subject to the Zschernig principle. DOJ

Opinion, supra note 6, at 63-64, quoting Reeves, Inc. v. Stake, 447 U.S. at 437-38.

U.S. CONST., Art. VI, cl. 2.

See, e.g., Wardair Canada Inc. v. Florida Dep’t of Revenue, 477 U.S. 1, 6 (1986).

Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963).

Arizona v. United States, 132 S. Ct. 2492, 2501 (2012), quoting Florida Lime & Avocado Growers, Inc. v. Paul, 373

U.S. 132, 142-43 (1963) and Hines, 312 U.S. at 67. See also, e.g., Sprietsma v. Mercury Marine, 537 U.S. 51, 64-65

(2002); Crosby, 530 U.S. at 372-373;Freightliner Corp. v. Myrick, 514 U.S. 280, 287 (1995); Silkwood v. Kerr-McGee

Corp., 464 U.S. 238, 248-49 (1984); Pac. Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm'n, 461

(continued...)

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State and Local Economic Sanctions: Constitutional Issues

In preemption cases involving foreign affairs, courts may well weigh the deference traditionally

accorded areas subject to state and local regulation against the policy considerations implicated

by the federal scheme affecting foreign affairs or commerce. For example, in the Supreme Court’s

ruling in the 1941 case of Hines v. Davidowitz, which invalidated a state alien registration statute,

the Court reiterated the long-recognized, constitutionally based supremacy of federal authority in

foreign affairs and made clear that any concurrent state power in the area must be “restricted to

the narrowest of limits.….”38

Depending on the nature of a state statute and the type of federal action taken to deal with a

problematic foreign nation, opponents of a state sanctions law may thus argue that, even absent

express preemption by a federal statute, (1) a state law may conflict with federal laws and policies

targeted at a specific country with respect to the activities and persons covered, or (2) there is

reason to presume that Congress intended that all state and local measures targeting a particular

country be preempted.39 In response, it might be maintained, inter alia, that federal limitations on

the exercise of proprietary powers to contract and invest must be expressly intended or must

result from a highly pervasive federal scheme.40 Moreover, state laws may arguably mandate

consequences that differ from federal remedies or that do not exist on the federal level so long as

the federal legislation or action involved does not constitute a “complex and interrelated federal

scheme of law, remedy and administration.”41

Notable Federal Judicial Rulings on State Sanctions

(2000-Present)

Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000)

In Crosby v. National Foreign Trade Council, the Supreme Court unanimously ruled that a

Massachusetts selective purchasing law targeted at Burma was impliedly preempted by federal

sanctions against Burma contained in the Foreign Operations Appropriations Act, 1997 (P.L. 104208).42 At the time, the absence of well-developed case law directly addressing sub-federal

sanctions had made the outcome of a constitutional challenge to state sanctions laws unclear.

(...continued)

U.S. 190, 203-04 (1983).

English v. Gen. Elec. Co., 496 U.S. 72, 79 n.5 (1990) (“By referring to these three categories, we should not be taken

to mean that they are rigidly distinct. Indeed, field pre-emption may be understood as a species of conflict pre-emption:

A state law that falls within a pre-empted field conflicts with Congress' intent (either express or plainly implied) to

exclude state regulation.”); Crosby, 530 U.S. at 373 n.6.

Hines, 312 U.S. at 68.

Price & Hannah, supra note 6, at 472-78; Schmahmann & Finch, supra note 6, at 184-89.

See, e.g., DOJ Opinion, supra note 6, at 64-65.

See id. at 65-66, citing Wisconsin Dep’t of Industry, Labor, and Human Relations v. Gould, Inc., 475 U.S. 282, 286

(1986); Carvajal, supra note 6, at 261-65.

The Supreme Court narrowed the ruling of the First Circuit Court of Appeals, which had held that the state law

infringed the federal foreign affairs power, violated the Foreign Commerce Clause, and was preempted by federal law.

National Foreign Trade Council v. Natsios, 181 F.3d 38 (1st Cir. 1999). The district court ruled that the statute was an

unconstitutional infringement on the federal foreign affairs powers. National Foreign Trade Council v. Baker, 26

F.Supp.2d 287 (D.Mass.1998).

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Although various Supreme Court cases had previously examined aspects of such laws, none

directly ruled on such a statute. Moreover, the few state cases scrutinizing such measures on

constitutional grounds differed in result.43

Although Congress had not expressly preempted state laws in the federal Burma statute, the Court

found the Massachusetts law was impliedly preempted because it “undermines the intended

purpose and ‘natural effect’ of at least three provisions of the federal Act, namely, its delegation

of effective discretion to the President to control economic sanctions against Burma, its limitation

of sanctions solely to United States persons and new investment, and its directive to proceed

diplomatically in developing a comprehensive, multilateral strategy towards Burma.”44

After rejecting the state’s argument that the law could not be preempted because it was based on

an exercise of the state’s spending power, the Court found that the law lacked the flexibility

inherent in the federal statute: the state law had stringent application requirements and no

termination provision, while federal law authorized the President to lift federal measures in

certain circumstances, allowed him to prohibit new investment based on his own findings, and

provided waiver authority with regard to all sanctions imposed in the statute.45 The state law was

also found to exceed federal authorities. While the Massachusetts law covered most state

contracts, foreign and domestic firms, and firms already operating in Burma, the federal law

imposed sanctions solely on U.S. persons, authorized a prohibition on new investment only, and

exempted purchase and sales contracts from any ban.46 Finally, the Court ruled that the state law

had impeded the President’s ability to pursue the multilateral strategy envisioned in the federal

act, with the Court noting formal protests from U.S. trading partners, World Trade Organization

complaints, and the distraction caused by the state law in discussions with foreign countries

regarding the situation in Burma.47

Finally, the Court rejected the state’s argument that Congress had implicitly permitted the state

law because it had failed to expressly preempt state sanctions against Burma. Massachusetts

noted that Congress was aware of the state’s law when it adopted the federal Burma statute in

1996. However, the Court found that “[a] failure to provide for preemption expressly may reflect

nothing more than the settled character of implied preemption doctrine that the courts will

dependably apply” and that “in any event, the existence of a conflict cognizable under the

Supremacy Clause does not depend on express recognition that federal and state law may

conflict.”48 The Court found that in this case Congress’s silence was ambiguous and insufficient

Compare, e.g., Bd. of Trustees of Employees’ Retirement System v. Mayor of Baltimore City, 317 Md. 72, 562 A.2d

720 (Md. 1989), cert. denied sub nom. Lubman v. Mayor and City Council of Baltimore, 493 U.S. 1093

(1990)(municipal ordinance requiring city pension funds to divest their holding in companies doing business in South

Africa upheld in face of preemption, foreign affairs and Foreign Commerce Clause challenges), with Springfield Rare

Coin Galleries v. Johnson, 115 Ill. 2d 221, 503 N.E. 2d 300, 307 (Ill. 1986)(state could not use its constitutional taxing

power to exempt from state taxes any coins and currencies issued by the United States or any foreign country except

South Africa; creation of tax classification based on political and social policies of a single foreign nation

impermissibly intruded into regulation of foreign affairs; “regulations which amount to embargoes or boycotts” found

to be “outside the realm of permissible State activity”). Like the federal Burma law implicated in Crosby, the

Comprehensive Anti-Apartheid Act of 1986, cited in Bd. of Trustees, supra, did not expressly preempt sub-federal

laws.

Crosby v. National Foreign Trade Council, 530 U.S. 363, 373-74 (2000).

Id. at 374-77.

Id. at 377-80.

Id. at 380-86.

Id. at 387-88.

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to warrant an inference of congressional intent to permit states to adopt their own Burmese

sanctions.49

American Insurance Association v. Garamendi, 539 U.S. 396 (2003)

In American Insurance Association v. Garamendi, the Supreme Court reaffirmed the Zschernig

Court’s finding of a dormant federal foreign affairs power. In a 5-4 vote, the Court struck down a

California law, the Holocaust Victim Insurance Relief Act, which required any insurer doing

business in the state to disclose information about all life insurance policies issued in Europe

during the Nazi regime. An executive agreement with Germany signed by the President provided

that the International Commission on Holocaust Era Insurance Claims would serve as the sole

vehicle for voluntary insurance claims to reduce litigation between foreign nationals and German

firms. Despite the lack of a specific preemption clause, the Court, citing the “kid glove” approach

chosen by the executive branch that was evident in the German agreement and similar agreements

with Austria and France, along with executive branch statements supporting this approach,

determined that there was a “clear conflict” between the policies adopted by the executive and the

“iron fist” that California sought to use.50 The Court made clear that state law could be preempted

by the President’s exercise of his independent constitutional authority to conduct foreign affairs,

noting that Congress had not acted on the matter addressed in the California law and that given

this independent authority, “congressional silence is not to be equated with congressional

disapproval.”51

National Foreign Trade Council v. Giannoulias, 523 F. Supp. 2d 731

(N.D.Ill. 2007)

In National Foreign Trade Council v. Giannoulias, the first lower federal court decision since

Crosby and Garamendi to address a state sanctions law, the U.S. District Court for the Northern

District of Illinois held the Illinois Sudan Act unconstitutional and permanently enjoined its

enforcement.52 At issue in the February 23, 2007, decision was a statute that placed restrictions

both on the deposit of state funds and the investment of state and municipal pension assets.

The Illinois law amended the Deposit of State Moneys Act to prohibit the Illinois Treasurer from

investing state funds in commercial instruments of Sudan and so-called “forbidden entities” and

also from depositing state funds into any financial institution that did not certify that it “has

implemented policies and practices that require loan applicants to certify that they are not

‘forbidden entities.’” The category of “forbidden entities” included any company that had not

certified that it did not own or control certain Sudan-related property or assets and did not engage

in certain Sudan-related transactions.

The statute also amended the Illinois Pension Code to prohibit the fiduciary of any pension fund

established under the Code from investing in any entity unless the company managing the funds’

assets certified that the managing company had not transferred any assets of the Illinois

Id. at 388.

American Insurance Association v. Garamendi, 539 U.S. 396, 425, 427 (2003).

Id. at 429.

National Foreign Trade Council v. Giannoulias, 523 F. Supp. 2d 731 (N.D.Ill. 2007).

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retirement system or pension fund to a forbidden entity. The statute ultimately required that none

of the assets of the system or fund be invested in “forbidden entities” by the end of July 2007. For

purposes of the pension amendments, the term “forbidden entity” included (1) the firms described

above; (2) any publicly traded company that owned or controlled Sudan-related property or assets

or engaged in other Sudan-related transactions; and (3) any non-publicly traded company that

failed to submit to the fund’s managing company a sworn affidavit averring that the company did

not own or control any Sudan-related property or conduct business transactions in Sudan. The

statute was challenged on preemption, foreign affairs, and foreign commerce grounds.

In reaching its decision, the court set out federal law regarding Sudan, beginning with a 1997

Executive Order signed by President Clinton freezing Sudanese property in the United States and

prohibiting various transactions between the United States and Sudan, and continuing with three

subsequent public laws: the Sudan Peace Act (2002),53 the Comprehensive Peace in Sudan Act

(2004),54 and the Darfur Peace and Accountability Act (2006).55 None of these statutes contains a

provision expressly preempting states from enacting their own sanctions against the Sudan.

Addressing the statutory preemption argument, the court held that, with respect to the amendment

to the Deposit of State Moneys Act, the Illinois statute’s “lack of flexibility, extended geographic

reach, and impact on foreign entities interferes with the national government’s conduct of foreign

affairs,” and was thus preempted by federal law.56 On the other hand, the pension amendments

were found not to be preempted, since federal law did not expressly address divestment, and, in

the district court’s view “the potential effects of pension divestment on the national government’s

ability to conduct foreign policy are highly attenuated.”57 The court stated that it had not been

presented with evidence “suggesting that these pension funds’ inability to purchase the securities

of such companies would be in any way likely to affect their decision to do business in that

country” and thus it had not been shown “that pension fund divestment stands as an ‘obstacle to

the accomplishment and execution of the full purposes and objectives of Congress’ with regard to

Sudan policy.”58

Regarding the claim that the state measure impermissibly intruded upon the federal government’s

authority over foreign affairs, the court found scant prior case law on the issue, but concluded that

the amendments to the Deposit of State Moneys Act “would have an impact on the national

government’s ability to deal with Sudan that is at least equal to or greater than the impact of the

state laws in Zschernig and Garamendi.”59 The court considered that the amendments might

cause multinational companies to pull out of Sudan, resulting in a “real and direct” effect on

Sudan’s economy, and that they thus clearly had “more than an incidental or indirect effect” in

Sudan.60 Noting as well the amendments’ “substantive and direct impact on the national

government’s ability to carry out the flexible and measured approach to Sudanese relations that

P.L. 107-245.

P.L. 108-497.

P.L. 109-344.

Giannoulias, 523 F. Supp.2d at 741-42. Because of its adverse holdings on Sudan-related preemption and the foreign

affairs infringement, the court did not address whether the banking amendments were preempted by the National Bank

Act. Id. at 750.

Id. at 742.

Id. (citing Crosby, 530 U.S. at 372).

Id. at 745.

Id.

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Congress and the president have created,” the court held that they interfered impermissibly with

the federal government’s power to conduct the nation’s foreign affairs.61 At the same time, the

court held that the pension amendments did not improperly intrude on the federal foreign affairs

authority, finding that they did not place the same kind of pressure on firms to sever business ties

with that country that flowed from the banking amendments and thus were not likely to affect the

firms’ willingness to do business in Sudan.

Because the court had already found the banking amendments unconstitutional on two grounds, it

did not consider them in light of the Foreign Commerce Clause. Nevertheless, it did find that

“there is little doubt that the conduct the Illinois Sudan Act seeks to proscribe involves foreign

commerce”62 and that “[w]ithout the protection of the market participant exception, the

amendment to the Pension Code violates the Foreign Commerce Clause.”63 The court found that

to the extent that the state was exercising control over municipal pension funds, however, it was

acting as a market regulator and that the market participant doctrine, even if it were determined

applicable in Foreign Commerce Clause cases, did not apply to this situation. With respect to the

state’s control of its own pension funds, the court held that, even if the amendment was

constitutional if only applied to these funds, it could not be severed from the unconstitutional

portion of the statute. The court therefore struck down the pension amendment as a whole.

The State of Illinois appealed the decision to the U.S. Court of Appeals for the Seventh Circuit. It

also enacted new Sudan-related divestment legislation, which included a repeal of the invalidated

provisions.64 In October 2007, the state moved to dismiss the appeal as moot and to vacate the

district court judgment. The appellate court granted the motion and remanded the case to the

district court on November 30, 2007, with instructions to vacate the decision.

Id.

Id. at 747.

Id. at 749.

Ill. Pub. Act 095-0521 (S.B. 1168) (effective August 28, 2007), available at http://www.ilga.gov/legislation/

publicacts/fulltext.asp?Name=095-0521.

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Faculty Senate of Florida International University v. Winn, 616 F.3d

1206 (11th Cir. 2010)

Faculty Senate of Florida International University v. Winn, a per curiam opinion of the U.S.

Court of Appeals for the Eleventh Circuit, held that states can restrict the use of funds to sponsor

travel by state education employees to specific countries for national security reasons.65 At issue

in Winn was a Florida statute prohibiting the allocation of both public and non-public funds for

travel to countries that the federal government had identified as “State Sponsors of Terror.”66

Presented with plaintiff’s arguments that the law impeded the federal foreign policy powers, the

court distinguished Crosby and Garamendi by emphasizing that there were no penalties for

traveling to these countries and that no conflict with a federal law existed.67 The court also

considered Zschernig, but found that Florida’s willingness to follow the federal list of state

sponsors rather than create its own criteria minimized the possibility of interference with the

Executive’s foreign affairs powers.68 Finally, the Eleventh Circuit emphasized that this statute did

not place broad limits on trade with or travel to these countries and thus lacked a large economic

effect on the target nations.69 The U.S. Supreme Court denied certiorari in the case on June 25,

2012.70

Faculty Senate of Fla. Int’l U. v. Winn, 616 F.3d 1206 (11th Cir. 2010) (per curiam).

Id. at 1207-08.

Id. at 1209, 1211.

Id. at 1211.

Id. at 1210.

Faculty Senate of Fla. Int’l Univ. v. Florida, 183 L. Ed. 2d 675, 80 U.S.L.W. 3016 (U.S. June 25, 2012) (No. 101139).

In response to the Court’s invitation for U.S. government views on the case, the Solicitor General maintained that, as

applied to petitioners, the Florida statute conflicted with federal law and was therefore preempted, but also stated that

plenary review should be denied, mainly because the record in the case was “poorly developed” and the petitioners

neither contended that the decision conflicted with another circuit court ruling nor identified any other state laws that

might be affected by the decision. Brief for the United States as Amicus Curiae, at 20, Faculty Senate of Fla. Int’l Univ.

v. Florida, No. 10-1139, at http://www.justice.gov/osg/briefs/2011/2pet/6invit/2010-1139.pet.ami.inv.pdf.

The Solicitor General argued, in part, that federal sanctions regimes involving countries designated as state sponsors of

terror did not prohibit academic travel to these destinations, noting that 2011 regulations issued by the Treasury

Department at the direction of the President further eased restrictions on such travel to Cuba. The U.S. government

analogized the situation in Crosby v. National Foreign Trade Council, maintaining that “[b]y foreclosing the avenue

through which financing of such travel occurs – i.e., by barring the disbursement of state and even federal or private

funds by state universities – Florida’s Travel Act ‘undermines the congressional calibration of force’ against foreign

designated nations, …‘blunt[s] the consequences of discretionary Presidential action’ with respect to those nations, …

and ‘compromise[s] the very capacity of the President to speak for the Nation with one voice in dealing with other

governments,’ ….” Id. at 16.

Addressing the proprietary nature of state spending decisions, the Solicitor General noted that in Crosby, the Court had

rejected Massachusetts’s argument that its statute was protected from preemption because it was an exercise of the

state’s proprietary rather than its regulatory power, adding that “[a]lthough a State’s spending decisions in a proprietary

capacity generally are unaffected by federal law, … the State [of Florida] correctly acknowledges … that the mere fact

that a state law takes the form of a spending measure does not categorically insulate it from preemption.” Id. at 17. In

arguing against plenary review, however, the U.S. government maintained that the petitioners wrongly argued that the

circuit court decision conflicted with Crosby: “Crosby recognized that a State’s exercise of its spending power is not

altogether immune from preemption, … but it did not overrule the distinction that this Court has drawn between a

State’s acts as a regulator and its acts as a proprietor. The court of appeals erred in holding that the [Travel] Act

represents a permissible exercise of Florida’s proprietary authority over its own fisc insofar as federal and private acts

are concerned, but the court did not hold more broadly that Florida may always avoid preemption in ‘the guise of

setting budgetary priorities.’” Id. at 21.

(continued...)

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Odebrecht Constr., Inc. v. Prasad, 876 F. Supp. 2d 1305 (S.D. FL, Jun.

29, 2012)

In Odebrecht Constr., Inc. v. Prasad, the U.S. District Court for the Southern District of Florida

granted a preliminary injunction halting the enforcement of a Florida law that sought to prevent

the state and local governments from awarding public contracts to companies with business

connections to Cuba.71 Specifically, the law prohibited companies “engaged in business

operations in Cuba,”72 from bidding on, or entering contracts with, state or local entities for

“goods or services of $1 million or more.”73 In granting the preliminary injunction,74 the court

determined that there was a substantial likelihood that the Florida law was preempted by federal

law, impermissibly interfered with the federal government’s foreign affairs power, and violated

the Foreign Commerce Clause.75

In holding that the statute was likely preempted by federal law, the court relied principally on the

Supreme Court’s decision in Crosby. Like the Massachusetts state law challenged in that case, the

Florida law was found to likely conflict with federal law because it impermissibly “frustrates the

President’s discretion to carefully calibrate sanctions against Cuba,” and “diminishes the

President’s bargaining power by imposing inconsistent sanctions.”76 In addition, the district court

determined that the law would likely also fall under field preemption grounds, as “Congress has

clearly intended to ‘occupy the field’ relating to this country’s policy toward Cuba.”77

(...continued)

In denying the petition for certiorari, the Court rejected the U.S. government’s suggestion that further proceedings in

the case may nonetheless be warranted. While arguing against plenary review, the U.S. government had proposed that

the Court might wish to grant the petition, vacate the appellate decision, and remand for further proceedings in light of

the new 2011 Cuba travel regulations, an action that, in the U.S. government’s view, would also permit the appeals

court “to focus more specifically on whether the State may validly decline to administer federal and private grants.” Id.

at 22.

Odebrecht Constr., Inc. v. Prasad, 876 F. Supp. 2d 1305 (S.D. FL, Jun. 29, 2012) The law was challenged by a

subsidiary of a Brazilian company that was involved in a $1 billion contract to expand the Cuban port of Mariel. The

subsidiary, a Florida construction company, had previously been awarded a number of public projects.

The law also applied to those companies with “business operations” in Syria; however, that aspect of the law was not

challenged in Odebrecht.

2012 Fla. Laws 196 §2.

The granting of a preliminary injunction is not equivalent to a decision on the merits. Rather, a court will issue such

an injunction to prevent the implementation of the law until the court can reach a final decision on the merits of the

challenge. Granting a preliminary injunction is an “extraordinary” remedy requiring that the party show that: (1) a

substantial likelihood of success on the merits, (2) irreparable injury will result unless if the injunction is not granted

(3) the threatened injury is outweighed by damage caused to the opposing party, and (4) the injunction is not contrary

to the public interest. Thus, in granting the preliminary injunction, the district court did not invalidate the Florida law,

but rather has temporarily barred its implementation due primarily to a conclusion that there is a “substantial

likelihood” that the law is preempted, infringes on the federal government’s foreign affairs power, and violates the

foreign commerce clause. Odebrecht, 876 F. Supp. 2d 1313-1314.

Id. at 1321.

Id. at 1320-1323.

Id. at 1325.

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In addition to being preempted, the district court also held that the Florida statute was likely to

infringe on the federal government’s foreign affairs power by forcing “foreign companies to

choose between doing business with Florida and lawful business with Cuba,” and because the

statute had the “potential for diplomatic disruption or embarrassment.”78 Finally, the court

determined that the law also likely violated the Foreign Commerce Clause because it

discriminated against foreign companies and regulated economic activity “beyond [the state’s]

borders that implicates foreign affairs and impairs federal uniformity.”79

The district court’s ruling has been appealed, but the Eleventh Circuit has yet to issue a ruling in

the case.

Some Ongoing Legal and Practical Concerns

Where state or local sanctions are held to be preempted by federal statute, Congress may choose

expressly to authorize such measures in new legislation.80 It is also possible that a state or local

sanctions law could be written so as not to conflict with a federal enactment. Where Congress has

not enacted or authorized sanctions against a particular country, state or local sanctions directed at

that jurisdiction may be challenged on dormant foreign affairs or Foreign Commerce Clause

grounds, given that Crosby did not address, and thus did not foreclose or limit the use of, these

constitutional arguments. At the same time, questions remain as to the outcome of these

arguments in a particular case. For example, if state or local sanctions were challenged on

Foreign Commerce Clause grounds, would congressional silence be construed by a reviewing

court as implied authorization of these measures or, instead, as a manifestation of an overriding

federal policy that a particular country not be subject to restrictive U.S. measures?81 Whether the

market participant exception applies in Foreign Commerce Clause cases also remains unclear.

Where a state law is challenged as intruding into the federal foreign affairs power, the Supreme

Court’s ruling in Garamendi suggests that executive agreements or statements might preempt

Id. at 27.

Id. at 32-33.

A sub-federal sanctions law enacted under a congressional authorization could be challenged on statutory preemption

grounds as having exceeded the scope of the authorization. Were it found to be included, however, negative inferences

to be drawn from the dormant Foreign Commerce Clause and dormant foreign affairs power might also be removed by

virtue of the federal enactment. Moreover, Garamendi does not preclude that such a state law authorized by Congress

would prevail over an exercise of independent executive foreign affairs power. See Garamendi, 539 U.S. at 427; note

also Barclays Bank, 512 U.S. at 328-30; Further, five years after it decided Garamendi, the Supreme Court recognized

in Medellin v. Texas, 552 U.S. 491 (2008), that not every invocation of foreign affairs authority by the President has

preemptive effect. There, the Court ruled that a presidential memorandum ordering a Texas court to re-open a criminal

case, so as to give effect to a non-self-executing treaty requirement, did not constitute federal law preempting the

state’s procedural default rules. The Court noted that it had previously recognized in Garamendi and other cases that

the exercise of the Executive’s “narrow and strictly limited authority to settle international claims disputes pursuant to

an executive agreement” may serve as a basis for preempting inconsistent state law. Id. at 532.However, the Medellin

Court characterized this authority as applicable in “narrow set of circumstances”; it cannot serve as a basis for

preempting each and every state action which is deemed inconsistent with the Executive’s foreign policy goals. Id. at

531-532 (noting as well that the President’s use of executive agreements to settle claims was supported by a

“‘particularly longstanding practice’ of congressional acquiescence”).

As shown in Crosby, in the context of statutory preemption, an ambiguous congressional silence does not warrant an

inference of implied permission of a state law where there exists considerable evidence of a conflict between the state

and federal enactments.

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state action, despite a lack of specific agreement language showing the intent to do so.82 At the

same time, the Court recommended following Justice Harlan’s standard from the Zschernig case

as a minimum threshold for foreign affairs preemption, that is, that the state legislation should

“produce something more than incidental effect in conflict with express foreign policy of the

National Government.”83

Some commentators have provided practical criticisms of the state divestment laws. For instance,

state investors rely on private organizations to identify firms with business interests in targeted

countries. The particular concern is that this information might be inaccurate or fail to take

account of the federal government’s interests. This could lead to divestment activities inconsistent

or directly counter to U.S. foreign policy goals. In response, the National Conference of State

Legislatures has asked the federal government to provide U.S. investors with “authoritative

information” regarding foreign and domestic firms with financial and investment activities in

states that sponsor terrorism.84

There are also overarching concerns about whether public plans are suitable means for achieving

foreign policy goals. Besides questions of their efficacy in changing foreign government

behavior, divestment measures could diminish the rate of return on investment. There are

increased administrative costs related to screening investments for ties to targeted nations. Broad

restrictions on investment in certain companies could also undermine the goal of a diversified

portfolio. These risks are likely to be especially problematic because there may well be limited

overlap between those authorizing and making divestment decisions and the stakeholders whom

these decisions will affect.85

Notable Federal Enactments

Sudan Accountability and Divestment Act

The Sudan Accountability and Divestment Act of 2007 (P.L. 110-174), enacted into law on

December 31, 2007, authorizes state and local governments to adopt divestment measures

involving (1) federally identified persons with investments and business in the Sudanese energy

and military equipment sectors or (2) persons having a direct investment in or carrying on a trade

or business with Sudan or the Government of Sudan, provided certain notification requirements

are met; the statute also provides that a measure falling within the scope of the authorization is

See Garamendi, 539 U.S. at 424-25. The dissent would have left the California law intact absent a clear statement or

formal expression by the federal government disapproving it. See id. at 430.

See id. at 420. Applying principles ordinarily used in statutory preemption analysis, Justice Souter suggests that a

state law should be preempted under field preemption with or without action by the national government if the state

acts in a domain of foreign affairs not traditionally allocated to it; in the event of conflict between the federal foreign

policy interest and an act of a state within its sphere of “traditional competence” that affects foreign affairs, a balancing

test between the two interests might occur. Id. at 420, n.11. The Court does not establish a precise threshold, although,

citing Boyle v. United Technologies Corp., 487 U.S. 500, 507-508 (1988), it suggests that, “in an area of uniquely

federal interest,” “[t]he conflict with federal policy need not be as sharp as that which must exist for ordinary

preemption.” For additional discussion of Garamendi, see Constitution Annotated, supra note 6, at 26, 29.

Divestment Policy – NCSL 2010 Legislative Summit, National Conference of State Legislatures, at

http://www.ncsl.org/default.aspx?TabId=20933 (last visited Jan. 17, 2013).

Alicia H. Munnell, Should Public Plans Engage in Social Investing?, 7-12 An Issue In Brief: Ctr. for Ret. Research

at Boston Coll. (2007), available at http://crr.bc.edu/images/stories/Briefs/ib_7-12.pdf.

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not preempted by any federal law or regulation.86 The enactment is based on S. 2271, an original

bill of the Senate Committee on Banking, Housing, and Urban Affairs (S.Rept. 110-213). H.R.

180 (Lee) and S. 831 (Durbin) also addressed Sudan divestment by state and local governments;

H.R. 180 passed the House on July 31, 2007. President George W. Bush, upon signing the act,

stated that “the executive branch shall construe and enforce this legislation in a manner that does

not conflict” with the federal government’s “exclusive authority” to conduct foreign relations.87

Comprehensive Iran Sanctions, Accountability, and Divestment Act

The Comprehensive Iran Sanctions, Accountability, and Divestment Act (P.L. 111-195), enacted

into law on July 1, 2010, includes provisions authorizing state and local governments to divest or

prohibit investments of public monies in Iran.88 Responding to state and local divestment

activities related to Iran, Congress designed Title II’s divestment provisions to “remove [] any

doubt as to the constitutionality of these measures.”89 Specifically, states can require public

divestment from businesses making investments of (or extending credit to persons who will make

investments of) $20 million or more in Iran’s energy sector.90 States must provide notice to those

affected by divestment measures and give those affected the opportunity to comment or challenge

the measures’ applicability to their business dealings.91 If 90 days elapse after notice is given

without the notified company changing its behavior, divestment can occur.92 The statute clearly

states that no federal laws or regulations preempt actions taken by the states under these

provisions.93

Federal legislation proposed in 2006 to immunize state Sudan divestment laws was not enacted into public law. H.R.

3127, the Darfur Peace and Accountability Act, as originally passed the House in April 2006, provided that federal

laws were not to be construed to preempt certain Sudan-related state sanctions. In September 2006, the Senate passed

an amended version of the legislation without the state law provision; the House later agreed to the Senate amendment.

See P.L. 109-344.

Statement on Signing the Sudan Accountability and Divestment Act of 2007, 43 Weekly Comp. Pres. Doc. 1646

(December 31, 2007). Implicit in this statement is the argument that state divestment statutes could still be

unconstitutional notwithstanding a federal statute authorizing their enactment. Criticism of President Bush’s signing

statement was aired at a February 2008 hearing of the House Committee on Financial Services. Negative Implications

of the President’s Signing Statement on the Sudan Accountability and Divestment Act: Hearing Before the H. Comm.

on Financial Services, 110th Cong. (2008), at http://www.gpo.gov/fdsys/pkg/CHRG-110hhrg41178/pdf/CHRG110hhrg41178.pdf. Although the committee had invited the White House counsel or a designee to testify at the hearing,

the invitation was declined on the ground that the hearing might touch on what the White House counsel considered to

be privileged White House communications. Id. at 66 (letter from Fred F. Fielding, Counsel to the President, to Hon.

Barney Frank, Chairman, House Committee on Financial Services (February 4, 2008)).

22 U.S.C. §8532. The Iran Threat Reduction and Syria Human Rights Act of 2012 amended this provision to clarify

that state regulators retained the authority to “issue and enforce rules governing the safety, soundness, and solvency of

a financial institution subject to its jurisdiction or the business of insurance.” P.L. 112-158 §222, 112th Cong. (2012).

H.Rept. 111-512, at 50. The statute grandfathered in previously enacted measures that met the listed procedural

requirements. 22 U.S.C.A. §8532(i).

22 U.S.C.A. §8532(c).

22 U.S.C.A. §8532(d)(1)-(3).

Id.

22 U.S.C.A. §8532(f). The enactment is based on H.R. 2194, introduced by Representative Howard Berman (D-CA).

In the previous Congress, H.R. 2347 (Frank) and S. 1430 (Obama) addressed Iran divestment by state and local

governments; H.R. 2347 passed the House July 31, 2007.

Congressional Research Service

State and Local Economic Sanctions: Constitutional Issues

Appendix. State Enactments Relating to Divestment

in Foreign Countries

Below is a list of state laws related to divestment of public funds from companies doing business

in foreign countries. Unless otherwise indicated, the provided statute fits the general model of

identifying companies doing business in a country and, after giving notice and opportunity to

discontinue the offending activity, requiring divestment of public funds from these companies.

Some, but not all, of these measures include language providing for their expiration in the event

that Congress or the President take specified action.

State

Arizona

California

Sudan

Iran

Other

Ariz. Rev. Stat. Ann. §§35391 to 391.06

Ariz. Rev. Stat. Ann. §§35393 to 393.06

(also barring the entering

of government contracts

with companies having

scrutinized business

operations in Sudan)

(also barring the entering

of government contracts

with companies having

scrutinized business

operations in Iran)

Also requires divestment

from companies operating

in state sponsors of

terrorism. Ariz. Rev. Stat.

§35-392

Cal. Gov’t Code §7513.6,

Cal. Pub. Cont. Code

§§10475-10490

Cal. Gov’t Code §7513.7,

Cal. Pub. Cont. Code

§§2200 to 2208

(also barring bids on

government contracts with

companies having

scrutinized business

operations in Sudan)

(also barring bids on

government contracts with

companies having

scrutinized business

operations in Iran)

Colorado

Colo. Rev. Stat. §§24-54.8101 to 54.8-110

Connecticut

Conn. Gen. Stat. Ann. §321e

Conn. Gen. Stat. Ann. §313g

District of Columbia

D.C. Code §§1-335.01 to

335.07

D.C. Code §§1-336.01 to

336.06

Florida

Fla. Stat. §215.473

Georgia

Ga. Code Ann. §50-5-84

(barring bids on state

contracts by companies

with business operations in

Sudan)

Ga. Code Ann. §47-2083.1

Hawaii

2007 Haw. Sess. Laws, Act

192, §§1 to 10

Congressional Research Service

Also requires divestment

from companies with

business activities in Cuba;

bars the entering of

government contracts with

companies having business

operations in Cuba or

Syria. Fla. Stat. §§215.471,

287.135

State and Local Economic Sanctions: Constitutional Issues

State

Illinois

Sudan

40 Ill. Comp. Stat. 5/1110.6

Iran

Other

30 Ill. Comp. Stat. 500/5036; 40 Ill. Comp. Stat. 5/1110.15

(also requiring notification

of business activities in

Iran by companies bidding

for public contracts)

Indiana

Ind. Code §§5-10.2-9-.03

to 5-10.2-9-36

Ind. Code §§4-13.6-6-5; 513-8-14; 5-16-1-9; 5-2216.5-1 to 5-22-16.5-14; 523-1-5; 8-23-9-59; 21-377-1 to 21-37-7-2;

(barring the entering of

government contracts with

companies having

scrutinized business

operations in Iran)

Iowa

Iowa Code Ann. §§12F.2

to 12F.7

Kansas

Kan. Stat. Ann. §74-4921c

Louisiana

La. Rev. Stat. Ann.

§§11:311 to 11:316

La. Rev. Stat. Ann.

§§11:311 to 11:316

(reporting requirements

relating to investments)

(reporting requirements

relating to investments)

Md. Code Ann., State Pers.

& Pens. §21-123.1

Md. State Fin. & Proc.

Code Ann. §§17-701 to

17-707; Md. Code Ann.,

State Pers. & Pens. §21123.1

Maryland

Also requires divestment

from companies operating

in state sponsors of

terrorism. Ind. Code §§510.2-10-.03 to 5-10.2-1030

Iowa Code Ann. §§12H.2

to 12H.7

Also establishes reporting

requirements relating to

investments in North

Korea and Syria. La. Rev.

Stat. Ann. §§11:311 to

11:316

(also barring bids on

government contracts by

companies having

scrutinized business

operations in Iran)

Michigan

Mich. Comp. Laws

§38.1133c

Mich. Comp. Laws

§38.1133d

Minnesota

Minn. Stat. Ann. §11A.243

Minn. Stat. Ann. §11A.244

Nevada

Also requires divestment

from certain companies

operating in state sponsors

of terrorism. Mich. Comp.

Laws §§129.291- to

129.301

Nev. Rev. Stat. Ann.

§286.723

(report on investments in

companies doing business

in Iran)

Congressional Research Service

State and Local Economic Sanctions: Constitutional Issues

State

New Jersey

Sudan

N.J. Stat. Ann. §52:18A89.9

Iran

Other

N.J. Stat. Ann. §§52:18A89.12; 52:32-55 to 52:3260

(also barring bids on

government contracts by

companies having

scrutinized business

operations in Iran)

North Carolina

N.C. Gen. Stat. §§14786.41 to 147.86.49

Oklahoma

Bars investment of state

funds in bonds or similar

obligations of a foreign

government that is either

totalitarian or is a state

sponsor of terrorism. 62

Okl. St. §89.2

Oregon

Or. Rev. Stat. Ann.

§§293.811 to 293.817

Pennsylvania

72 Pa. Cons. Stat. Ann.

§§3837.1 to 3837.10

South Carolina

S.C. Code Ann. §9-16-55

South Dakota

72 Pa. Cons. Stat. Ann.

§§3837.1 to 3837.104

S.D. Codified laws §§4-548 to 4-5-60

Texas

Tex. Gov’t Code Ann.

§§806.001 to 806.103

Utah

Utah Code Ann. §63G-6208

Utah Code Ann. §49-11306

(provides that

procurement rules must

be consistent with

provisions of the Sudan

Accountability and

Divestment Act of 2007

(P.L. 110-174) prohibiting

a state agency from

contracting with a person

doing business in Sudan)

(report on investments in

companies doing business

in Iran)

Source: Table produced from materials collected from state legislative databases by the Congressional Research

Service.

Congressional Research Service

State and Local Economic Sanctions: Constitutional Issues

Author Contact Information

(name redacted)

Legislative Attorney

[redacted]@crs.loc.gov, 7-....

(name redacted)

Legislative Attorney

[redacted]@crs.loc.gov, 7-....

Acknowledgments

Joseph A. Schoorl, law clerk in the American Law Division, CRS, contributed substantially to an earlier

2011 update of this report.

Congressional Research Service

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