Trade Briefing Paper No. 3

State and Local Sanctions Fail Constitutional Test

By David R. Schmahmann and James S. Finch
August 6, 1998

A number of state and local governments, including the Commonwealth of Massachusetts, have enacted selective purchasing laws that discriminate against companies that do business in the southeast Asian nation of Burma. The Massachusetts law is currently being challenged on constitutional grounds in federal court.

State and local sanctions conflict with three major constitutional principles. The first and most obvious problem is that they violate federal supremacy in making foreign policy. The U.S. Supreme Court has ruled consistently that our constitutional system of government “requires that federal power in the field affecting foreign relations be left entirely free from local interference.” By explicitly attempting to make foreign policy, state and local sanctions infringe on this exclusive federal power.

Second, state and local selective purchasing laws are inconsistent with the Commerce Clause, which grants Congress the power to regulate commerce with foreign nations. The clause has been interpreted by the Supreme Court to forbid states and localities from, among other things, creating “discriminations favorable or adverse to commerce with particular foreign nations.” States and localities that enact sanctions are not merely “market participants”; they seek to influence commerce with foreign nations.

Finally, state and local sanctions against Burma collide with federal law, in violation of the Constitution’s Supremacy Clause. Article VI, Clause 2, forbids state and local laws that contradict federal laws in matters where the federal government has authority to act. Congress has rejected proposals to ban trade with Burma or force divestiture of existing investments there. Yet selective purchasing laws seek to impose just such a policy on U.S. companies.

Introduction

State and local legislatures across the country have decided to punish the regime in Burma by discriminating against companies that do business there.1 At latest count, the state of Massachusetts and 20 local units of government, including New York City and San Francisco, have enacted “selective purchasing” laws aimed at Burma.2 Those laws bar any state or local contracts with companies that invest in or trade with the targeted country.

Such initiatives, when adopted, amount to a series of secondary boycotts (a boycott not of one’s primary target, but of those that do business with it). These initiatives are intended to exert whatever influence legislatures and councils have—and in the case of states and larger cities this can be considerable—to influence foreign affairs. This local policymaking is, however, unconstitutional because it impinges on the constitutional powers of the federal government. Until recently, though, there have been no cases challenging such initiatives and—before a law journal article we published last year—no critical analysis in the literature.3

Until successfully challenged, state and local boycotts of those who do business in Burma are presumptively valid and, as such, wield considerable influence. Major companies have left Burma, citing the Massachusetts and local laws as their reason. Others have evaluated their business opportunities in Burma and decided that it made more sense to leave, or not to enter, rather than face the loss of state and local business. If such local attempts to restrict foreign commerce and conduct foreign policy are indeed unconstitutional, their unchallenged run should be cause for great concern.

Local campaigns designed to influence foreign events are of relatively recent origin, but their attractiveness to activists is apparent. They offer a high-profile opportunity to draw attention to a cause, with minimal political risk, and at no evident local economic cost. The first such campaign was against South Africa and began in Berkeley, California (which was also the first city to pass an anti-Burma ordinance). The vogue also swept cities and towns into aiding the Sandinistas in Nicaragua, providing sanctuary to Guatemalan and Salvadoran refugees, and demanding cuts in the Pentagon budget. Massachusetts has a law targeting companies that do business with the British Army—because of problems in Northern Ireland—and is currently considering an anti-Indonesia law because of human rights violations in East Timor. At least 10 cities have offices of international affairs, in essence, municipal state departments.

Until recently, this local activism has gone unchallenged in court. In April 1998, the National Foreign Trade Council filed suit in U.S. District Court in Boston challenging the constitutionality of Massachusetts’ two-year-old selective purchasing law against Burma. That it took so long to bring state and local sanctions to court should not be surprising. It would have been a brave company or business association that distinguished itself by seeking to derail a community’s outrage at apartheid, and there are similar risks to challenging laws that target Burma’s regime. Local activism exploits this reluctance by business to challenge these local laws because the challenge itself could easily be distorted to imply support for a particular foreign government.

The issue here, though, is not the character of the Burmese regime. The issue, rather, is whether localities can create a patchwork of local foreign policies that befuddle our national approach and disrupt the allocation of power in our constitutional scheme. That is precisely what the local laws do. From that fact flow three lines of constitutional analysis, any one of which would probably suffice to strike down these laws as unconstitutional.

An Intrusion into Foreign Policy

The first and most obvious problem with state and local anti-Burma laws is that they ignore the balance between state and federal power struck by the Framers in the Constitution. In domestic matters, the Framers granted only narrow, enumerated powers to the federal government, and reserved the rest to the states and the people. With respect to foreign affairs, however, the situation is reversed: the Constitution gives the federal government broad authority, and imposes strict prohibitions on the states.4

Accordingly, the Supreme Court has repeatedly held that foreign affairs are exclusively a federal domain:

The Federal Government, representing as it does the collective interest of the… states, is entrusted with full and exclusive responsibility for the conduct of affairs with foreign sovereignties… . Our system of government is such that the interest of the cities, counties, and states, no less than the people of the whole nation, imperatively requires that federal power in the field affecting foreign relations be left entirely free from local interference.5

One need almost go no further. At issue here are state and local initiatives with the specific objective of destabilizing a foreign government. The Supreme Court has taken a hard line even on state action that might incidentally have an effect abroad. When, at the height of the Cold War, Oregon took its stand against communism by disallowing anyone who lived in a communist country from inheriting under an Oregon will, the court was thunderously dismissive. This is “an intrusion by the state into the field of foreign affairs which the Constitution entrusts to the President and the Congress,”6 the Court said. That kind of interference, the Court said, impaired the effective exercise of the nation’s foreign policy and could not stand.

Even the State Department’s support of the Oregon law made no difference. “We deal here with the basic allocation of power between the states and the nation,” Justice Stewart wrote. “Resolution of so fundamental a constitutional issue cannot vary from day to day with the shifting winds of the State Department.”7

If anything, the anti-Burma laws are more vulnerable than was the Oregon one. Oregon’s probate law was arguably designed to protect the property of Oregonians from confiscation but had an incidental foreign impact. By contrast, the anti-Burma laws are designed to have a foreign impact with no tangible local benefit.

Massachusetts and a collection of cities are making foreign policy, pure and simple. According to the U.S. Constitution, they may not.

Shredding the Commerce Clause

In addition to intruding into foreign affairs, the local anti-Burma enactments are inconsistent with the Commerce Clause of the Constitution (Article I, Section 8). This clause prohibits states and localities from passing laws that burden interstate or foreign commerce by, among other things, creating “discriminations favorable or adverse to commerce with particular foreign nations.”8 With respect to foreign trade, the Supreme Court has said, “the people of the United States act through a single government with unified and adequate national power.”9

As to interstate commerce, some impingement is permitted to advance local interests; but where foreign commerce is affected, local actions are subject to very rigorous scrutiny.10 What is permissible in either case is determined with reference to whether the local actions have a legitimate local purpose with “merely foreign resonances.”11 It is unclear how this balancing test could even be applied to the anti-Burma laws, which are by definition designed to have a foreign effect. Their preambles and the statements of their proponents leave no doubt of it. The anti-Burma ordinance enacted by Takoma Park, Maryland, indeed, requires that a copy of it be sent to the Burmese ambassador, the secretary general of the United Nations and opposition leader Aung San Suu Kyi.12

Meanwhile, the measures in question have only the flimsiest pretext of a local purpose. Takoma Park’s enactment “recognizes the important role local communities can take to promote universal respect for human rights and fundamental freedoms,”13 and Boulder, Colorado, goes so far as to find “that an emergency exists in Boulder due to the current situation in Burma.”14 These purported local interests do not resemble anything that the courts have ever recognized as weighing in the balance of the “necessary accommodation between local needs and the overriding requirement of freedom for the national commerce.”15

Language in several of the local laws confirms that their drafters are well aware of the Commerce Clause. Several of the ordinances refer to an exception to the bar on local discrimination against foreign commerce, specifically the so-called market participant exception. This is described by the Berkeley ordinance as follows:

The United States Supreme Court has upheld the power of a municipality to make legitimate economic decisions without being subject to the restraints of the interstate commerce clause when it participates in the marketplace as a corporation or as a citizen, as opposed to exerting its regulatory powers.16

There is indeed a “market participant” doctrine that exempts some state buying and selling decisions—as opposed to taxing and regulatory decisions—from Commerce Clause restrictions. This exception allows states and localities, in their capacities as “market participants,” to seek to advance legitimate local interests even if there is an incidental infringement on the conduct of interstate commerce. For example, a state government can refuse to sell a state-produced commodity to out-of-state buyers to prevent possible local shortages.17

But there are clear limits to this exception. Where a state or locality uses its market power to influence markets in which it is not a participant, it is treated as a de facto regulator rather than a mere market participant, and its exemption from Commerce Clause restrictions is lost. For example, when Alaska tried to condition sales of its state-owned timber on processing the timber in Alaska, the Supreme Court stepped in. It rejected Alaska’s argument that the state was acting simply as a seller of timber and could impose any requirements on a sale that any private person could. In language directly applicable to the local anti-Burma laws, the Court said:

Instead of merely choosing its own trading partners, the state is attempting to govern the private, separate economic relationships of its trading partners… . This restriction on private economic activity takes place after the completion of the parties’ direct commercial relations… . The state may not avail itself of the market participant doctrine to immunize its downstream regulation of the timber processing market in which it is not a participant.18

There is no way to torture this language out of meaning what it says. The exception to the Commerce Clause, on which the local anti-Burma laws rest their legitimacy, simply does not immunize attempts to restrict separate economic relationships in far-off Burma, in which these cities and towns are not market participants.

Of course, private citizens are free to protest, to boycott, and to make decisions with the express aim of influencing not only the federal government in its conduct of foreign policy but foreign governments themselves. Under our constitutional scheme, however, state and local governments simply may not do so, no matter how heartfelt their citizens’ concerns may be. When states or localities act in a manner expressly intended to advance foreign policy goals, they cross a line into territory the Constitution reserves for the federal government exclusively.

One other point bears making. As limited as the market participant doctrine is when it comes to burdening interstate commerce, the Supreme Court has never applied the doctrine to a case involving foreign commerce. Several commentators and the language in at least two Supreme Court decisions suggest it never would.19

Colliding with Federal Law

The anti-Burma laws’ intrusions into foreign affairs and the burdens they place on foreign commerce would render them constitutionally suspect even in the absence of any preemptive federal legislative action. But on the subject of economic relations with Burma, Congress has spoken. The state and local boycotts are in conflict with federal policy and are therefore unconstitutional.

The Supremacy Clause of the Constitution (Article VI, Clause 2) does not permit state laws at odds with federal laws. For example, in 1941 Pennsylvania, in a xenophobic outburst, decided to impose special registration requirements on aliens. Those requirements were different from, and more onerous than, existing federal requirements. The Pennsylvania law contained a number of anti-alien provisions that had actually been considered by Congress, severely criticized, and not included in the federal act. The law was struck down as an obstacle to accomplishing the objectives of Congress and because, in the field of international relations, any concurrent state power to regulate is restricted to the “narrowest of limits.”20

Even where the state or local law does not expressly contravene federal policy, it may be preempted if the court finds that it impinges on the federal government’s overall regulatory scheme in areas entrusted to it by the Constitution. In a case perhaps the closest of all conceptually to the one presented by the anti-Burma laws, the Supreme Court struck down an attempt by Wisconsin to punish companies that repeatedly violated the federal National Labor Relations Act by barring such firms from receiving state contracts. Wisconsin’s heart may have been in the right place, the Supreme Court said, but a patchwork of state laws would detract from the integrated scheme of regulation created by Congress.

If Wisconsin’s debarment law is valid, nothing prevents other states from taking similar action against labor law violators. Each additional statute incrementally diminishes the Board’s control over enforcement of the National Labor Relations Act. The state’s goal may be laudable, but it assumes for the State of Wisconsin a role Congress reserved exclusively for the National Labor Relations Board.21

Incidentally, the Supreme Court in that case also rejected Wisconsin’s argument that it was merely a market participant deciding with whom to do business. Wisconsin may have found doing business with companies that violated federal law distasteful, but in refusing to do business with them, the Court held, “Wisconsin simply is not functioning as a private purchaser of services. For all practical purposes, Wisconsin’s debarment scheme is tantamount to regulation.”22

Juxtaposing federal law on Burma with the local enactments leaves little room for a plausible argument that the state and local ordinances are not preempted. In debate on the federal bill dealing with Burma, Sen. Mitch McConnell (R-Ky.) tried without success to persuade his colleagues in the U.S. Senate to require American business interests to divest entirely from Burma. The proponents of complete divestment did not prevail, and instead the amendment filed by then Sen. William S. Cohen (R-Maine) is now the law of the land. The Cohen amendment empowered the president to prohibit only new investments in Burma. The amendment did not authorize the president to require divestment by companies already in Burma or to ban “the entry into, performance of, or financing of contracts to sell or purchase goods, services, or technology.”23 On May 20, 1997, President Clinton did in fact issue an executive order to ban new investments, primarily in natural resources.

The local ordinances seek to encourage divestment and to discourage sales and purchasing activity in Burma. They are thus an attempt to implement through local action a policy expressly considered and rejected by the Senate. The local measures seek to create precisely the situation that proponents of the Cohen amendment, which is now the law, wanted to avoid: diminishing the U.S. presence in Burma, reducing the flexibility and leverage of the president to influence events in a volatile situation, hobbling American businesses, and removing what may be a salutary American influence from the scene. Whether one agrees with the Senate’s analysis and conclusions is irrelevant: Local measures that undermine the path actually chosen by Congress must be preempted, or the whole Senate debate was simply a waste of time.

A Foreign Policy Mess

The state and local secondary boycott laws have made a mess of our foreign policy toward Burma. Patchwork sanctions almost guarantee a lack of uniformity or even coherence in responding to dynamic changes in Burma.

Local activism makes U.S. foreign policy hostage to parochial concerns and viewpoints. When the European Union and Japan complained to the State Department that the Massachusetts anti-Burma law violated the Government Procurement Agreement of the World Trade Organization, Byron Rushing, the Massachusetts state representative behind the anti-Burma law, responded that he had “no idea we were party to the Government Procurement blah blah.” It is also Rushing’s view, incidentally, that the Massachusetts Constitution takes precedence over the federal because it is “older.” 24

Finally, there is the practical problem of companies attempting to operate in Burma having first to contact the city clerks of a variety of college towns to find out what the foreign policy initiative of the day happens to be. This mess cannot be what the Framers of the U.S. Constitution had in mind.

Notes

1. For a comprehensive analysis of U.S. sanctions policy against Burma, see Leon T. Hadar, “U.S. Sanctions against Burma: A Failure on All Fronts,” Cato Institute Trade Policy Analysis no. 1, March 26, 1998.

2. See Organization for International Investment, “State and Local Sanctions Watch List,” at www.usaengage.org/news/status.

3. David R. Schmahmann and James S. Finch, “The Unconstitutionality of State and Local Enactments in the United States Restricting Business Ties with Burma (Myanmar),” Vanderbilt Journal of Transnational Law 30, no. 2 (March 1997): 175-207.

4. The Constitution grants Congress the authority to impose duties, regulate foreign commerce, set rules for naturalization, and declare war (Article I, Section 8). The president is the commander in chief of the armed forces and has the power, with the advice and consent of the Senate, to make treaties (Article II, Section 2). States, meanwhile, are barred from entering into treaties or alliances or levying duties on imports or exports (Article I, Section 10).

5. Hines v. Davidowitz, 312 U.S. 52, 63 (1941).

6. Zschernig v. Miller, 389 U.S. 429, 432 (1968).

7. Ibid. at 443.

8. Cooley v. Board of Wardens, 53 U.S. (12 How.) 299, 317 (1851).

9. Japan Line v. County of Los Angeles, 441 U.S. 434, 448 (1979) (quoting Board of Trustees v. United States, 289 U.S. 48, 59 (1933)).

10. Ibid. at 446; see also South-Central Timber Dev. v. Wunnicke, 467 U.S. 82, 100 (1984).

11. Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 194 (1983).

12. Takoma Park, Md., Ordinance 1966-33 (Oct. 28, 1996).

13. Ibid.

14. Boulder, Colo., Ordinance no. 5855 (Dec. 3, 1996).

15. Great Atl. & Pac. Tea Co. v. Cottrell, 424 U.S. 366, 371 (1976) (quoting Freeman v. Hewit, 329 U.S. 249, 253 (1946)). Note that in an analogous context, the Supreme Court rejected claims that conditions abroad inflict legally cognizable damage at home. When environmentalists tried to stop construction projects abroad that allegedly threatened endangered species, they claimed the right to bring the matter to court on the theory that a person who uses any part of a broadly defined ecosystem is injured when any other part of that ecosystem, however distant, is adversely affected. The Supreme Court rejected the argument. “A local connection to an event abroad,” it determined, “requires more than an ingenious academic exercise in the conceivable.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 566-67 (1992).

16. Berkeley, Calif., Resolution no. 57, 881-N.S., IIIB & IVB (Feb. 28, 1995). See also Madison, Wis., Resolution no. 52, 471, I.D. no. 17607 (Aug. 15, 1995); Oakland, Calif., Selective Purchasing Law; San Francisco, Calif., Admin. Code § 12J.1 (1996); Takoma Park, Md., Ordinance 1966-33 (Oct. 28, 1996).

17. See Reeves, Inc. v. Stake, 447 U.S. 429 (1980).

18. South-Central Timber at 98-99.

19. See Howard N. Fenton, “The Fallacy of Federalism in Foreign Affairs: State and Local Foreign Policy Trade Restrictions,” Northwestern Journal of International Law and Business 13, no. 1 (1993): 563-64. See also South-Central Timber and Reeves, Inc..

20. Hines at 68.

21. Wisconsin Department of Industry v. Gould, 475 U.S. 282, 286 (1986).

22. Ibid. at 289.

23. Omnibus Consolidated Appropriations Act of 1997, P. L. 104-208, § 569(f)(2)(c). 110 Stat. 3009.

24. “The Mass That Roared,” The Economist, February 8, 1997, pp. 32-33.

David R. Schmahmann is a partner in the Boston law firm of Nutter, McClennen & Fish. James S. Finch is a partner in the international law firm of Russin & Vecchi and its resident partner in Rangoon, Burma.