State and Local Economic Sanctions: Constitutional Issues
State and Local Economic Sanctions:
Constitutional Issues
Updated July 2, 2008
Jeanne J. Grimmett
Legislative Attorney
American Law Division
State and Local Economic Sanctions:
Constitutional Issues
Summary
States and localities have often proposed or enacted measures restricting their
agencies’ economic transactions with firms that do business with or in foreign
countries whose conduct the 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 such statutes impermissibly invade
federal commerce and foreign affairs authorities and in some cases may be preempted
by federal law. 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 a federal Burma
statute. In American Insurance Association v. Garamendi, a 2003 case, the Court
reaffirmed the relevance of the dormant federal foreign affairs power to preempt state
law, but the scope of the 5-4 decision is unclear.
Due to the current situation in Darfur, a number of states have recently proposed
or enacted some type of divestment legislation against Sudan. States have also
considered divestment legislation involving Iran and 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 Illinois subsequently repealed its statute, and the state’s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 in November 2007.
Congress has considered legislation in the 110th Congress that would authorize
states to divest assets involving Sudan and Iran. The Sudan Accountability and
Divestment Act of 2007, P.L. 110-174, enacted into law December 31, 2007,
authorizes states 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 law also provides that a measure
falling within the scope of the authorization is preempted by any federal law or
regulation. Introduced versions of H.R. 2347 (Frank) and S. 1430 (Obama), each
titled the Iran Sanctions Enabling Act, would support state and local divestment
measures involving investments in Iran’s energy sector. H.R. 2347, as passed the
House July 31, 2007, would authorize states and local governments to adopt
divestment measures involving (1) federally named persons that have an investment
of more than $20 million in Iran’s energy sector, sell arms to the Government of Iran,
or are financial institutions that extend $20 million or more in credit to the
Government of Iran for 45 days or more, (2) persons that sell arms to the Government
of Iran, (3) financial institutions that extend $20 million or more in credit to the
Government of Iran for 45 days or more, and (4) persons included on any Iran-related
entity list issued under a law that authorizes a state or locality to divest assets from
such persons, where the law was enacted on or before the first publication of the
federal list provided for in the bill; a measure so authorized would not be preempted
by any federal law or regulation. This report will be updated.
Contents
Types of State and Local Economic Sanctions...........................1
Overview of Constitutional Issues.....................................2
Foreign Commerce Clause.......................................3
Intrusion into Foreign Affairs....................................5
Federal Preemption............................................6
Recent Federal Judicial Rulings on State Sanctions.......................7
Crosby v. National Foreign Trade Council..........................7
American Insurance Association v. Garamendi.......................9
National Foreign Trade Council v. Giannoulias......................9
Some Future Prospects.............................................12
State and Local Economic Sanctions:
Constitutional Issues
States and localities have often proposed or enacted measures restricting
governmental transactions with firms doing business or having financial ties with
foreign countries whose conduct the state or locality has found objectionable,
particularly in the human rights area.1 This report summarizes constitutional
arguments made for and against these laws and discusses Crosby v. National Foreign
Trade Council and American Insurance Association v. Garamendi, U.S. Supreme
Court decisions that address the constitutionality of state laws affecting U.S. foreign
affairs. The report also discusses National Foreign Trade Council v. Giannoulias,
a 2007 federal district court decision holding an Illinois Sudan sanctions law
unconstitutional. It also suggests some possible legal ramifications of recent case law
for future state and congressional action in this area and identifies legislation
introduced in the 110th Congress addressing state economic sanctions.
Types of State and Local Economic Sanctions
State and local sanctions measures 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 states or local
agencies from investing public funds in such companies. A variation of the latter is
the state or local divestment law, which, for example, may require divestment by
state pension funds of stock in companies that do business with or in a named
country. In the 1990s, a number of state laws focused on conditions on 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 current situation in Darfur, a number of states have proposed or
enacted divestment legislation focused on Sudan.2 At least one state has passed
1 See generally National Conference of State Legislatures, State Divestment Legislation, at
[http://www.ncsl.org/standcomm/sclaborecon/statedivestbills.htm] (last visited July 2,
2 State statutes include, inter alia, Or. Rev. Stat. § 293.814 (2005); N.J. Stat. Ann. § 52:18A-
Ann. tit. 5, § 1956 (West 2006); Conn. Gen. Stat. Ann. § 3-21e (West 2007); Cal. Gov’t
Code § 7513.6 (West 2007); 2007 Md. Code Ann. Adv. Legis. Serv. 39 (Lexis/Nexis); 2007
Tex. Sess. Law Serv. ch. 1375 (West); 2007 Ind. Legis. Serv. P.L. 149-2007 (West); 2007
(continued...)
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 or in either Iran or Sudan.4
In February 2007, an Illinois federal district court held the Illinois Sudan statute
unconstitutional. The state’s appeal to the U.S. Court of Appeals for the Seventh
Circuit was dismissed as moot on November 30, 2007.5
Overview of Constitutional Issues
State and local economic sanctions targeted at what is perceived as
objectionable 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
2 (...continued)
Minn. Sess. Law Serv. ch. 117 (West). Note also Press Release, CALPers, CalPERS Bans
Investment in Nine Companies Tied to Sudan — Pension Fund Adopts Sudan Position
Statement (May 17, 2006), at [http://www.calpers.ca.gov/index.jsp?bc=/about/press/
home.xml]; Press Release, Office of the N.Y. State Comptroller, DiNapoli Announces
Program for Sudan Investments (June 11, 2007), at [http://www.osc.state.ny.us/press/
releases/j une07/061107.htm] .
3 Mich. Comp. Laws Ann. § 38.1133 (West 2005); see also La. Rev. Stat. Ann. § 11:312
(West 2006), requiring state pension and retirement funds to provide seminannual reports
on any investments in firms with facilities or employees in Iran, Libya, North Korea, Sudan
or Syria. Missouri has administratively adopted policies to screen investments by two
Missouri state funds and to require divestment from those firms known to sponsor terrorism
or to operate with the government or government agencies in countries on the State
Department’s terrorist list. See statements of Missouri policies at [http://www.treasurer.
mo.gov/antiterrorinvest.asp].
The State Department, pursuant to section 6(j) of the Export Administration Act,
currently lists Cuba, Iran, North Korean, Sudan, and Syria as countries whose governments
have repeatedly provided support for acts of international terrorism. See 15 C.F.R. Part 742,
Supp. No. 2, para. (a), at [http://www.access.gpo.gov/bis/ear/pdf/742.pdf]. On June 26,
2008, the President announced that North Korea would be removed from the list at the
conclusion of the 45-day congressional notification period contained in 50 U.S.C. App. §
2405(j)(4). Memorandum for the Secretary of State, Certification of Rescission of North
Korea’s Designation as a State Sponsor of Terrorism, June 26, 2008, at [http://www.
whitehouse.gov/ news/rel eases/2008/06/20080626-1.html ].
4 E.g., 2008 Ariz. Legis. Serv. ch. 235 (H.B. 2151)(WEST)(approved May 23, 2008)(Iran);
P.A. 95-616 (S.B. 1621)(WEST)(effective January 1, 2008)(Iran); 2008 Md. Laws ch. 342
(S.B. 214)(effective January 1, 2009)(Iran and Sudan).
5 National Foreign Trade Council v. Giannoulias, 523 F.Supp.2d 731 (N.D.Ill. 2007). For
further discussion of the case and subsequent legislative developments, see infra text
accompanying notes 37-49.
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
In granting Congress exclusive power to regulate interstate and foreign
commerce (Art. I, § 8, cl. 3), the Constitution also impliedly prohibits states and
localities from unreasonably burdening or discriminating against such commerce
unless they are authorized by Congress to do so.7 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
6 For legal background, see, e.g., Cong. Research Service, The Constitution of the United
States of America, 2004 Supp. at 11-14 (H.Doc. 108-19)[hereinafter Constitution
Annotated]; Louis Henkin, Foreign Affairs and the United States Constitution 149-69 (2d
ed. 1996)[hereinafter Henkin]; 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 & Poly 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].
Note 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).
7 New York v. United States, 505 U.S. 144, 171 (1992); South-Central Timber Dev., Inc.
v. Wunnicke, 467 U.S. 82, 87-93 (1984); note, e.g., 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.”).
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, 441 U.S. 434 (1979), 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, stating
that “a more extensive constitutional inquiry is required” in foreign commerce cases
for two reasons: (1) the “enhanced risk of multiple taxation” and (2) the possibility
that the disputed measure “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.’”8 The Court made clear that “[i]f a state tax contravenes either of
these precepts, it is unconstitutional under the Commerce Clause.”9
In Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 194
(1983), the Court upheld a state income tax law at variance with federal policy,
indicating that state law may have “merely foreign resonances” without implicating
foreign affairs and stating that a differing state tax law “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.”10 The Court noted that the second
of these factors “is, of course, essentially a species of preemption analysis.”11 The
Court later concluded in Barclays Bank PLC v. Franchise Tax Board of California,
512 U.S. 298 (1994), 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 in a solo international trade voice 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, 477 U.S. 1 (1986), in which the Court upheld a state tax
on jet fuel purchased by foreign airlines, suggest that “Congress may more passively
indicate that certain state practices do not ‘impair federal uniformity in an area where
federal uniformity is essential,’ ...; it need not convey its intent with the unmistakable
clarity required to permit state regulation that discriminates against interstate
commerce....”12
Where Congress has not clearly immunized a state selective purchasing or
divestment law for Foreign Commerce Clause purposes, arguments that the law
impermissibly burdens foreign commerce13 may be countered by invocation of the
market participant doctrine. First articulated in Hughes v. Alexandria Scrap Corp.,
8 Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 446-48, 451 (1979).
9 Id. at 451.
10 Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 194 (1983).
11 Id.
12 Barclays Bank PLC v. Franchise Tax Board of California, 512 U.S. 298, 323 (1994).
13 See Price & Hannah, supra note 6, at 478-82; Schmahmann & Finch, supra note 6, at
state or local government acts as a buyer or seller of goods rather than as a
regulator.14 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. 15
Intrusion into Foreign Affairs
In Zschernig v. Miller, 389 U.S. 429 (1968), the Supreme Court struck down an
Oregon law prohibiting nonresident aliens from inheriting property if they could not
satisfy the state courts that their home country allowed U.S. nationals to inherit
estates on a reciprocal basis and that payments to foreign heirs from the Oregon
estate would not be confiscated. Although the federal government had not exercised
its power in the area, the Court nonetheless found that the inquiries required by the
state 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.”16 The Court
distinguished Clark v. Allen, 331 U.S. 503 (1947), 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 law.17 Although Zschernig’s parameters have
been viewed as unclear,18 it is argued that selective procurement laws are directed at
influencing or scrutinizing foreign behavior in the manner that the Zschernig Court
14 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.
15 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,
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.st
The Court of Appeals in National Foreign Trade Council v. Natsios, 138 F.3d 38 (1
Cir. 1999), infra note 27, 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 Foreign Commerce
Clause scrutiny because of questions as to whether the exception “applies at all (or without
a much higher level of scrutiny) to the Clause.” Id. at 65; see also Antilles Cement Corp.st
v. Acevedo Vilá, 408 F.3d 41, 46-47 (1 Cir. 2005). As indicated infra, the Supreme Court
did not take up the Foreign Commerce Clause issue in its ruling on the Massachusetts law.
16 Zschernig v. Miller, 389 U.S. 429, 432 (1968).
17 Id. at 433-36.
18 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 11-14.
found objectionable19 and that courts that have upheld restrictive procurement laws
attacked on Zschernig grounds have emphasized that the 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.20
Federal Preemption
In exercising its delegated powers, Congress may, by virtue of the Supremacy
Clause (Art. VI, cl. 2), preempt state and local laws that conflict with or are
incompatible with federal legislation and thus limit the use of powers that a state or
locality may exercise concurrently with Congress. 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,21 and conflict
preemption, in which “compliance with both federal and state regulations is a
physical impossibility,”22 or where the state law, as described by the Supreme Court
in Hines v. Davidowitz, 312 U.S. 52 (1941), “stands as an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress.”23
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. In Hines, which invalidated a state alien registration statute on conflict
grounds, 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,” distinguishing the states’
limited authority with regard to aliens from their broadly-based power to tax.
19 E.g., Price & Hannah, supra note 6, at 457-65; Schmahmann & Finch, supra note 6, at
20 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); and generally Price & Hannah,
supra note 6, at 469-71. Prior to the lower court rulings on the Massachusetts Burma law,
see infra note 24, 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. 221 (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.
21 See, e.g., Wardair Canada Inc. v. Florida Dep’t of Revenue, 477 U.S. 1, 6 (1986).
22 Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963).
23 See also Sprietsma v. Mercury Marine, 537 U.S. 51, 64-65 (2002); Freightliner Corp. v.
Myrick, 514 U.S. 280, 287 (1995).
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 sanctions law may thus
argue that, absent express preemption, a state law may conflict with federal laws and
policies targeted at a specific country with respect to the activities and persons
covered, or that there is reason to presume that Congress intended that all state and
local measures targeting a particular country be preempted.24 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.25 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.”26
Recent Federal Judicial Rulings on State Sanctions
Crosby v. National Foreign Trade Council
In Crosby v. National Foreign Trade Council, 530 U. S. 363 (2000), the
Supreme Court unanimously ruled that a Massachusetts selective purchasing law
targeted at Burma was preempted by federal Burma sanctions contained in the
Foreign Operations Appropriations Act, 1997, P.L. 104-208.27 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.
Although various Supreme Court cases had 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.28
24 Price & Hannah, supra note 6, at 472-78; Schmahmann & Finch, supra note 6, at 184-89.
25 See, e.g., DOJ Opinion, supra note 6, at 64-65.
26 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.
27 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.st
Natsios, 181 F.3d 38 (1 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).
28 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 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
(continued...)
Although Congress had not expressly preempted state laws in the federal Burma
statute, the Court, applying conflict preemption, found that the state law served as
“an obstacle to the accomplishment and execution of the full purposes and objectives
of Congress,” as 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
Bu rm a. ” 29
After rejecting the state’s argument that the law could not be preempted because
it was based on the state’s spending power, the Court found that the law lacked the
flexibility inherent in the federal statute: the former had stringent application
requirements and no termination provision, while the latter 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. 30 The state law was also found to exceed federal
authorities in covering most state contracts, foreign and domestic firms, and firms
already operating in Burma, whereas 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.31 Finally, the state law had impeded the
President’s ability to pursue the multilateral strategy envisioned in the federal act, the
Court citing 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.32
Finally, the Court rejected the state’s argument that in not expressly preempting
the state law Congress had implicitly permitted it, the state noting that Congress was
aware of the Massachusetts law when in adopted the federal Burma statute in 1996.
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, citing Hines, 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.”33 The Court found that in this
28 (...continued)
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.
29 Crosby v. National Foreign Trade Council, 530 U.S. 363, 373-74 (2000).
30 Id. at 374-77.
31 Id. at 377-80.
32 Id. at 380-86.
33 Id. at 387-88.
case Congress’ silence was ambiguous and as such insufficient to warrant the state’s
inference of congressional intent.34
American Insurance Association v. Garamendi
In American Insurance Association v. Garamendi, 539 U.S. 396 (2003), 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 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 evident in the
German agreement, as well as in similar agreements with Austria and France, and in
executive branch statements supporting this approach, determined that there was a
“clear conflict” between the policies adopted by the executive and the “iron fist” that35
California sought to use. 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 not36
to be equated with congressional disapproval.”
National Foreign Trade Council v. Giannoulias
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 Act37
unconstitutional and permanently enjoined its enforcement. 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. Defendants
have since appealed the ruling.38
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
34 Id. at 388.
35 American Insurance Association v. Garamendi, 539 U.S. 396, 425, 427 (2003).
36 Id. at 429.
37 National Foreign Trade Council v. Giannoulias,523 F. Supp. 2d 731 (N.D.Ill. 2007).
38 National Foreign Trade Council v. Giannoulias, appeal docketed, No. 07- 2004 (7th Cir.
May 2, 2007).
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 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 not only the firms
described above, but also any publicly traded company that owned or controlled
Sudan-related property or assets or engaged in other Sudan-related transactions, and
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 and did not transactions business 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), the Comprehensive Peace in Sudan Act (2004), and the Darfur Peace and
Accountability Act (2006). None of these statutes contains a provision addressing
state law preemption and, as noted earlier, a “no preemption” provision in the House-
passed version of the 2006 enactment was not included in the final statute.
Addressing the statutory preemption argument, the court held that, with respect
to the amendment to the Deposit of State Moneys Act, the 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.39 On the other hand, the pension amendments were found not to be
preempted, since federal law did not expressly address divestment, and, in the court’s
view “the potential effects of pension divestment on the national government’s ability
to conduct foreign policy are highly attenuated.”40 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, citing Crosby, 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.”41
39 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.
40 Id. at 742.
41 Id.
Regarding foreign affairs preemption, 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.”42 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.43 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 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.44 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 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”45 and that “[w]ithout the
protection of the market participant exception, the amendment to the Pension Code
violates the Foreign Commerce Clause.”46 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
that the doctrine had a role in Foreign Commerce Clause cases, was inapplicable in
this situation. With respect to the state’s control of its own pension funds, the court
held that, even were it to find that the amendment was constitutional if only applied
to these funds, it could not sever the unconstitutional portion of the statute and thus
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.47 In October 2007, the state moved
to dismiss the appeal as moot and to vacate the district court judgment. The court
granted the motion and remanded on November 30, 2007.
42 Id. at 745.
43 Id.
44 Id.
45 Id. at 747.
46 Id. at 749.
47 Ill. Pub. Act 095-0521 (S.B. 1168)(effective August 28, 2007), available at
[http://www.ilga.gov/legi slation/publicacts/fulltext.asp?Name=095-0521].
Some Future Prospects
Where state or local sanctions are held to be preempted by federal statute,48
Congress could choose expressly to authorize such measures in new legislation. It
is also possible that a sub-national sanctions law could be written so as not to conflict
with a federal enactment. Where Congress has not enacted 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 — among them, whether in a Foreign Commerce
Clause challenge legislative silence would be construed as implied authorization of
a state sanctions law or, instead, as a manifestation of an overriding federal policy49
that a particular country not be subject to restrictive U.S. measures. 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, Garamendi suggests that executive agreements or statements might preempt
any state action, despite a lack of specific agreement language showing the intent to
do so.50 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.”51
48 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 would prevail over an exercise of independent executive foreign affairs
power. See Garamendi, 539 U.S. at 427; note Barclays Bank, 512 U.S. at 328-30; Hamdan
v. Rumsfeld, 126 S.Ct. 2749, 2774, n.23 (2006); and id. at 2799-804 (Kennedy, J.,
concurring).
49 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.
50 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.
51 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
(continued...)
110th Congress Legislation
Legislation has been considered in the 110th Congress supporting state
divestment measures related to Sudan as well as state and local measures targeting
certain Iran-related investments. 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 scope52
of the authorization is not preempted by any federal law or regulation. The
enactment is based on S. 2271, an original bill of the Senate Committee on Banking,
Hosing 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 July 31, 2007.
Introduced versions of H.R. 2347 (Frank) and S. 1430 (Obama), each titled the
Iran Sanctions Enabling Act, would support state and local divestment measures
involving investments in Iran’s energy sector. H.R. 2347, as passed the House July
31, 2007, would authorize states and local governments to adopt divestment
measures involving (1) federally named persons that have an investment of more than
$20 million in Iran’s energy sector, sell arms to the Government of Iran, or are
financial institutions that extend $20 million or more in credit to the Government of
Iran for 45 days or more, (2) persons that sell arms to the Government of Iran, (3)
financial institutions that extend $20 million or more in credit to the Government of
Iran for 45 days or more, and (4) persons included on any Iran-related entity list
issued under a law that authorizes a state or locality to divest assets from such
persons, where the law was enacted on or before the first publication of the federal
list provided for in the bill; a measure so authorized would not be preempted by any
federal law or regulation.
51 (...continued)
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 13-14.
52 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.