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Now that the votes to bar an override of a certain Presidential veto are all but assured and thus the Iran nuclear accord will make it through the Congressional review period unharmed, opponents of the nuclear deal have turned their sights to other targets to disrupt the U.S.’s implementation of the agreement. This includes possible new sanctions legislation that would effectively re-impose some of the nuclear-related sanctions under a different pretext.

In a Wall Street Journal op-ed, Senator James Inhofe (R-OK) and Scott Pruitt, Oklahoma’s Attorney General, however, argue in favor of an approach that often escapes those of us focusing on sanctions: divestment and selective purchasing laws at the state level that target foreign companies engaged in certain business activities with Iran. As Inhofe and Pruitt write, “…states should strengthen and expand [their] sanctions [against Iran].” This includes the prohibition on the investment of public assets, such as pension funds, in foreign companies doing business with Iran and the prohibition on state agencies from contracting with or purchasing goods or services from such companies.

Some might be surprised to see a call for U.S. states to impose economic sanctions against a foreign State like Iran. But, as Inhofe and Pruitt note, 25 states have existing divestment and/or selective purchasing laws on their books, including major states like California, Florida, Illinois, and New York. Most of these laws were legislated over the past several years, as the nuclear dispute reached its peak.

The big issue, though, is whether such state-level sanctions laws will survive at a time in which the U.S. is lifting many of its nuclear-related sanctions on Iran.

It is important to remember that these state laws have had negligible effect during the tenure of their existence, as U.S. sanctions at the federal level covered their ground. But, at a time in which the U.S. will be lifting much of its sanctions on Iran – especially those targeting the activities of foreign persons vis-à-vis Iran – these state laws will begin to have independent effect, including in ways that threaten the foreign policy goals of the U.S. government. In other words, for the first time, conflict is possible between what federal law allows and what certain state laws prohibit in the context of Iran.

U.S. and Iranian negotiators understand this. That is why § 25 of the JCPOA explicitly contemplates a situation in which state laws

“prevent[] implementation of the sanctions lifting as specified in [the] JCPOA”; and, as such, the JCPOA states that the “United States will take appropriate steps, taking into account all available authorities, with a view to achieving such implementation.”

Those authorities could include a federal attempt to preempt those state laws that impede the sanctions relief to Iran and thus harm U.S. foreign policy. By preempting state law, the U.S. government would effectively nullify the state divestment and selective purchasing laws and ensure that the sanctions-lifting could proceed as intended.

Such preemption analysis begins with Crosby v. National Foreign Trade Council, where the National Foreign Trade Council challenged a Massachusetts law restricting state agencies from purchasing goods or services from companies doing business with Burma. Under Crosby, the Supreme Court invalidated the Massachusetts law, treating it as a violation of the Supremacy Clause. According to the Court, the state law “undermine[d] the intended purpose and ‘natural effect’” of federal law, including Congress’s empowerment of the President “to waive, temporarily or permanently, any sanction [under the federal Act]…if he determines and certifies to Congress that application of such sanction would be contrary to the national security interests of the United States.” By independently imposing its own sanctions on Burma, Massachusetts had put itself in conflict with the President’s powers, as granted by Congress, to make final determination as to the proper scope and application of sanctions. As such, the Massachusetts law was in conflict with federal objectives and thus stood preempted.

Crosby’s opinion bodes ill for advocates of state sanctions. With one exception, the case of Iran is the same as that in Crosby: Congress has empowered the President to determine the proper scope and application of sanctions on Iran, as evidenced by the fact that nearly every legislative åIran as well.

However, the one exception is an important one: Title II of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (“CISADA”) expressly authorizes a state or local government to “adopt and enforce measures that meet [certain] requirements…to divest the assets of the state or local government from, or prohibit investment of the assets of the state or local government in, any person that the state or local government determines, using credible information available to the public, engages in [certain] investment activities in Iran.” Such investment activities are limited to instances in which a person “has an investment of $20 million or more in the energy sector of Iran, including in a person that provides oil or liquefied natural gas tankers, or products used to construct or maintain pipelines used to transport oil or liquefied natural gas, for the energy sector of Iran, or is a financial institution that extends $20 million or more in credit to another person…if that person will use the credit for investment in the energy sector of Iran.”   State sanctions laws carefully tailored to these particular instances “[are] not preempted by any federal law or regulation,” according to CISADA.

CISADA’s provision complicates federal preemption of state sanctions laws, but only where the state sanctions laws are carefully tailored to what CISADA outlines. Anything exceeding CISADA’s scope would rise or fall on Crosby’s analysis (and, as we have clarified above, such laws would likely fall).

Several state laws are so tailored to CISADA’s mandate. As such, the White House would need to present a different line of argumentation, which could include novel arguments regarding the scope of federal preemption (federal policy preemption?), as well as arguments regarding the scope of the President’s foreign affairs power. Several lines of argumentation were presented during briefing in Crosby, but the Court settled the issue on the easiest ground – federal preemption. Where the Court would have settled as to other lines of argument, including the President’s foreign affairs power, is unclear.

Nonetheless, the renewed effort to impose additional state sanctions – as proposed by Inhofe and Pruitt – does not look to be a winning proposal. According to draft legislation that Pruitt sent around to other state Attorney-Generals, the proposed bill would target the activities of foreign companies beyond that allowed for in CISADA. Now, some of this – such as the listing of companies that do business with entities in Iran that support international terrorism – would represent no conflict, insofar as federal sanctions relating to this subject matter would extend above and beyond that of the state laws. But other provisions, including that sanctioning foreign companies for doing business with Iran’s energy sector, are not so tailored to CISADA’s allowance and could impede the U.S.’s implementation of sanctions relief as provided under the nuclear accord. Such provisions would stand to be preempted.

Foreign companies considering investing (or otherwise doing business) in Iran are wise to be cautious to moves at both the federal and state level to impose additional sanctions on Iran. However, such caution should understand the constitutional and legal framework under which state divestment and selective purchasing laws operate, as this framework does not favor the survival of such laws. Bearing too much caution could cause foreign companies to be unnecessarily late to the game in Iran – all the more reason why a proper understanding of U.S. sanctions is absolutely required.

 

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