Constitutionality of South African Divestment Statutes
Enacted by State and Local Governments
In response to conditions in South Africa, a number of state and local governments passed
statutes or ordinances requiring the divestment o f pension funds from companies that do
business in South Africa or prohibiting governmental bodies from entering into contracts with
such companies. The divestm ent laws survive constitutional scrutiny.
The divestment laws do not place an impermissible burden on foreign commerce. Under the
market participation doctrine, the Supreme Court has held that proprietary, as opposed to
governmental, actions o f state and local governments may be shielded from the strictures of
the Commerce Clause. The divestm ent laws fall within that doctrine. N or do such laws
represent an unconstitutional interference with the federal government’s foreign affairs power.
Finally, such laws are not preempted by either the Export Administration A ct or Executive
Order No. 12532, which imposes certain economic sanctions on South Africa.
April 9, 1986
M em orandum O p in io n for th e A s s o c ia t e A t t o r n e y G eneral
This memorandum addresses the question whether certain state and local
divestment laws are subject to constitutional challenge. These laws vary in
their scope, but their general characteristics are that they either (a) require the
divestment of state or local employee pension funds from companies which do
business in South Africa;1 or (b) restrict or prohibit a city or a state from
entering into contracts with companies that have investments, licenses, or
operations in South Africa.2 We are not aware of state or local statutes that seek
directly to regulate the activities of companies doing business in South Africa.
This memorandum is therefore limited to evaluating the constitutionality of
statutes in which the state exercises its proprietary authority to invest funds
under its control and to award city financed contracts in a manner that discrimi
nates against companies with South African operations.3
1See, e.g., 1985 New Jersey Laws, A ct 308 (directing that the state treasurer not invest p ension funds under
state control in any institution which has outstanding loans to the Republic o f South A frica, o r in the stocks,
securities o r other obligations o f any com pany engaged in business in the Republic and directing that such
existing investm ents be divested within three years); Rhode Island General Laws C hapter 3 5 -1 0 (requiring
divestm ent o f state funds and pension funds invested in any financial institution lending m oney to o r any
corporation doing business in South A fnca).
2 See, e.g.. New York City Local Law 19 (1985) (imposing certain conditions relating to South A frica on
companies bidding for city contracts).
The rationales offered for the divestm ent statutes are also varied. The legislative intent o f the New Jersey
law is “to encourage retreat by com panies essential to the econom y o f South A fnca and thus encourage it to
alter its ways.” Op. N J. A tt’y Gen. (Dec. 19, 1985). In contrast, the stated purpose of M ichigan's law is to
achieve the state's goal o f ending discrim ination Our discussion will apply to all divestm ent statutes,
whatever the intent with which they were passed, except when we indicate otherw ise.
3 Such statutes will be referred to collectively in this memorandum as “divestm ent statutes.”
49
These statutes may be subject to constitutional challenge on the grounds
(1) that state divestment legislation is an impermissible burden on foreign
commerce; (2) that such legislation constitutes an impermissible intrusion into
a field, foreign affairs, that is uniquely the concern of the federal government;
and (3) that the state and local statutes are preempted either by Executive Order
No. 12532, which prohibits certain transactions with South Africa, or by the
Export Administration Act, which declares that free trade is, in general, the
policy of the United States.
Although each of these challenges presents a complex legal issue, we believe
that state divestment statutes of the type described above are constitutional.
First, we believe that a Commerce Clause challenge to divestment statutes
would, and should, fail. In developing what has come to be known as the
market participant doctrine, the Supreme Court has distinguished, quite prop
erly, between the exercise of proprietary powers — powers which are not
unique attributes of sovereignty, but rather are held in common with other
persons and entities — and regulatory power — power to impose regulations
pursuant to the sovereign power to govern. The Court has shielded proprietary
actions from the strictures of the Commerce Clause. State divestment statutes
represent, we believe, an exercise of proprietary power to spend or invest state
funds in a manner that reflects their citizens’ moral sentiments or economic
interests, and accordingly ought to escape invalidation under the Commerce Clause.4
Nor do these statutes violate any specific prohibition against state intrusion
into the area of foreign affairs imposed by Article I, § 10 of the Constitution,
such as the prohibition against entering into treaties with foreign nations.
While the Supreme Court has suggested that a general principle against state
intrusion into foreign affairs, a principle going beyond these specific textual
prohibitions, may be derived from the federal government’s extra-constitu
tional sovereignty, this principle has never been applied to a state’s exercise of
proprietary powers. Indeed, the Court has applied this principle to a state
statute only once. In Zschemig v. Miller, 389 U.S. 429 (1968), the Court struck
down a probate law that permitted state courts to inquire into the operation of
foreign law, to evaluate the credibility of foreign officials, and to engage in
persistent criticism of foreign countries in order to deny citizens of those
nations’ American legacies. Because the Court has upheld state regulatory
statutes that have an indirect impact on foreign affairs, we believe that this
single case represents the Court’s reaction to a particular regulatory statute, the
operation of which intruded extraordinarily deeply into foreign affairs. It does
not imply that the Court would strike down regulatory statutes having a less
direct impact on foreign affairs. In any event, the principle in Zschemig should
not be extended to invalidate exercises of state proprietary, as opposed to
regulatory, powers.
4 A lthough the C ourt expressly reserved the question o f w hether the m arket participant doctrine applies to
the state statu tes that affect foreign, as op p o sed to interstate, commerce, w e believe that the rationale for the
distin ctio n — that the C om m erce Clause w as intended to restrict a state's ability to regulate but not its ability
to p articip ate in m arkets — applies equally to statutes that affect foreign commerce.
50
Finally, under ordinary preemption analysis, Executive Order No. 12532 and
the Export Administration Act do not preempt state regulation of trade with
South Africa. Neither the Order nor the Act represents a comprehensive scheme
to regulate trade with South Africa, nor do they reflect an intent to displace the
state’s traditional authority to invest its funds and make contracts as it chooses.
I. The Commerce Clause
The Supreme Court has shielded state proprietary activity from the strictures
of the Commerce Clause under the market participation doctrine. The first case
to enunciate the market participant analysis was Hughes v. Alexandria Scrap
Corp., 426 U.S. 794 (1976).5 There the Court upheld a Maryland program of
paying a bounty for recycling abandoned cars (hulks) formerly titled in Mary
land. To receive a bounty under the program, scrap processors were required to
submit title documentation, but the documentation requirements for Maryland
processors were more lenient than those for non-Maryland processors. Distin
guishing cases in which it had invalidated state statutes that had “interfered
with the natural functioning of the interstate market through prohibition or
through burdensome regulation,” 426 U.S. at 806, the Court noted that Mary
land neither prohibited nor regulated the sale of hulks, but rather was acting as
a “market participant to bid up their price.” Id. The Court concluded that
“[n]othing in the purposes animating the Commerce Clause prohibits a state, in
the absence of congressional action, from participating in the market and
exercising its right to favor its own citizens over others.” Id. at 810.6
5 The proprietary/regulatory distinction, how ever, is not o f recent vintage o r limited to C om m erce C lause
analysis, but appears in other areas o f Supreme C ourt jurisprudence. In Atkin v. Kansas, 191 U.S. 207 (1903),
the C ourt dism issed a challenge to a statute requiring contractors hired by a state agency to limit their
em ployees to an eight-hour day. The Court stated:
[W ]e can im agine no possible ground to dispute the pow er o f the state to declare that no one
undertaking w ork for it o r for one o f its m unicipal agencies should perm it o r require an em ployee
on such work to labor in excess o f eight hours each day, and to inflict punishm ent upon those who
are em braced by such regulations and yet disregard them. It cannot be deem ed a part o f the liberty
o f any contractor that he be allowed to do public work in any mode he may choose to adopt,
w ithout regard to the w ishes o f the state. On the contrary, it belongs to the state, as the guardian
and trustee fo r its people, and having control o f its affairs, to prescribe the conditions upon
which it will permit public work to be done on its behalf, or on behalf o f its municipalities.
191 U.S. at 222 (first em phasis added; other em phasis in original). The em phasis in Atkin on proprietary
pow ers w as o f great significance, because two years later in Lochner v. New York, 198 U.S. 45 (1905), the
Court, com posed o f the same mem bers, invalidated under the D ue Process C lause of the Fourteenth A m end
ment a statute in w hich the state exercised its regulatory pow ers to prohibit em ploying a b aker for more than
sixty hours a week.
In 1972 the C ourt summarily affirm ed a low er court ruling that perm itted the state o f Florida to favor
Florida-based publishing houses in purchases o f school textbooks. See American Yearbook Co. v. Askew, 339
F. Supp. 719 (M .D. Fla.), a jfd , 409 U.S. 904 (1972).
6 In enacting state divestm ent statutes, states are not acting to favor their ow n citizens over others. Instead
state divestm ent decisions are intended to advance the moral o r econom ic interests of its citizens. Since th eir
inception states have legislated to reflect the m oral sentim ents o f their com m unities, and we find nothing in
logic or case law to suggest that the representation o f com m unity sentim ents m ay not be a legitim ate basis for
state investment or contractual decisions, particularly in an area in which the Supreme Court has acknowledged that
the state is acting as a “guardian and trustee of its people.” Reeves, Inc. v. Stake, 447 U.S. 429,483 (1980).
Continued
51
In Reeves, Inc. v. Stake, 447 U.S. 429 (1980), the Court upheld South
Dakota’s right to restrict the sale of state-produced cement to state residents.
The Court not only affirmed the market participant doctrine in Alexandria
Scrap as “good sense and sound law,” but expanded on its rationale. Noting
that the Commerce Clause was not intended “to limit the ability of the States
themselves to operate freely in the free market,” the Court emphasized that
“restraint in this area is counseled by considerations of state sovereignty, ‘the
role of each state as guardian and trustee of its people.’” Id. at 437-38 (quoting
A tkin v. Kansas, 191 U.S. 207, 222-23 (1903)). The Court also suggested that
in light of “the long recognized right of a trader or manufacturer, engaged in an
entirely private business, freely to exercise his own independent discretion as
to the parties with whom he will deal,” states acting in a proprietary capacity
“similarly share existing freedoms from federal constraints, including the
inherent limits of the Commerce Clause.” Id. at 438-39 (citations omitted).
In its most recent majority opinion on the market participant doctrine in the
Commerce Clause, the Court again reaffirmed that “when a state or local
government enters the market as a participant it is not subject to the restraints
of the Commerce Clause.” White v. Massachusetts Council o f Constr. Employ
ers, Inc., 460 U.S. 204, 210 (1983). In that case the Court upheld a city order
requiring each contractor on city financed or city administered construction
projects to employ Boston residents in numbers equal to at least fifty percent of
its total workforce. The Court was unmoved by the dissenters’ arguments that
by imposing these requirements the city was taking action that was indistin
guishable from regulating the employment market between private contractors
and their labor force.7
The reasoning of these opinions, and in particular the rationales articulated
in Reeves for the market participant doctrine, logically extend to state divest
ment statutes and, in our view, shield them from scrutiny under the Commerce
Clause. While the Court has not defined the exact scope of the market partici
pation doctrine, see infra Part I.B., and has therefore not fully developed a test
to distinguish between a state’s regulatory and proprietary powers, we believe
6 ( . . . continued)
Indeed, it w ould be peculiar to assert th a t the m arket participant doctrine is limited to shielding actions in
w hich the state is trying to discriminate ag ain st other citizens in favor o f its own. In light of the holding that
local legislation w hich intends to d iscrim inate against citizen s of o ther states for the benefit o f its own
c itizen s is " a lm o s t p e r se illeg al” under th e C om m erce C lause, Pike v. Bruce Church, Inc., 397 U.S. 137, 145
(1970), the state action protected in Hughes w ould seem m ore problem atic than state action in the m arket that
is taken w ithout any intent to discrim inate fo r the econom ic benefit o f its own citizens.
7 In White, the C ourt did agree that th e re are some lim its “on a state’s ability to im pose restrictions that
reach beyond the im m ediate parties with w hich the governm ent transacts business,” 460 U.S. at 211 n.7, but
d eclin ed to identify those limits. For th e reasons stated in Part I.A ., we believe that state divestm ent
legislation falls w ithin any principled lim itation to the doctrine. Som e com m entators believe that the
p rin cip led lim it to the governm ent’s ability to impose restrictions arises when the governm ent has m onopoly
pow er in the m arket in w hich it participates. If the governm ent does have monopoly pow er it has a coercive
pow er to im pose conditions on third parties that is hard to distinguish from the coercive pow er to regulate that
it possesses as a sovereign. I f it does not possess m onopoly power, its pow er to im pose conditions is not
d ifferen t in kind from private entity. See G illien , A Proposed Model o f the Sovereign/Proprietary Distinction ,
133 U . Pa. L. R ev. 661, 680 (1985) (proposing to distinguish between proprietary and sovereign pow er by
determ ining w h eth er pow er is “coercive” ).
52
that, given the rationale for the distinction, state divestment statutes are plainly
proprietary in nature. In refusing to invest its funds in or contract with corpora
tions doing business in South Africa, a state is exercising the prerogatives and
the powers that any private person or entity enjoys as a matter of contract and
property rights. The state is not employing the sovereign power that it uniquely
enjoys in its jurisdiction to compel action under the threat of punishment. All
corporations doing business in jurisdictions that have passed divestment stat
utes continue to be entirely at liberty to do business in South Africa.8
Notwithstanding the fact that the state divestment statutes at issue here are
clearly within the logic of the market participation doctrine, there is language
in some of the cases suggesting limitations on the doctrine’s applicability in
this area. First, the Reeves Court noted that “Commerce Clause scrutiny may
well be more rigorous when a restraint on foreign commerce is alleged,” and
expressly reserved the issue of whether the market participation doctrine
applies to foreign commerce. 447 U.S. at 437-38 n.9.9 Second, in South
Central Timber Dev., Inc. v. Wunnicke, 467 U.S. 82 (1984), a plurality of the
Court refused to apply the market participation doctrine to a state requirement
that purchasers of state-owned timber process the timber in mills located in the
state. Distinguishing between the market for the sale of timber and the market
for the processing of timber, the plurality stated that the state’s participation in
the former did not permit it to impose “downstream restrictions” in the latter.
467 U.S. at 99. Finally, in Wisconsin D ep't o f Industry, Labor, and Human
Relations v. Gould, Inc., 475 U.S. 282 (1986), the Court held that the National
Labor Relations Act (NLRA) preempted a Wisconsin statute forbidding certain
repeat violators of the NLRA from doing business with the state. In the course
of that opinion, the Court stated the state statute was “tantamount to regula
tion.” Id. at 289.
For the reasons that follow, we believe that the market participant doctrine
applies to state proprietary activity affecting foreign as well as interstate
commerce and that the state divestment laws at issue here are constitutional
exercises of the states’ proprietary authority.
A. The Application o f the Market Participation Doctrine to the Foreign
Commerce Clause
The rationales underlying the market participant doctrine apply no less to the
Foreign than to the Interstate Commerce Clause. The historical evidence no
more suggests that the Commerce Clause was intended to limit the ability of
states to purchase goods (including securities) and services in the marketplace
when their operations indirectly affect foreign commerce than it indicates such
8 Although the Supreme C ourt has not yet addressed any case in which the state acts as investor rather than
a buyer o r seller in a market, we believe that rationales given for the doctrine apply to the state as an investor
as well as to the state as a buyer o r seller. An investor, at bottom , is simply a purchaser o f securities.
9 The plurality opinion in South Central Timber, infra, also supports its position that A la sk a 's restrictions
on the tim ber m arket are invalid by reference to the stricter scrutiny under the Foreign C om m erce Clause. 467
U.S. at 100.
53
an intent when their operations affect domestic commerce. To be sure, state
ments of the Framers suggest that they were more immediately concerned with
state restrictions on foreign commerce than on interstate commerce.10 Conse
quently, it may be plausibly, although not indisputably, argued that Congress
was given “a larger range o f action” over foreign than over interstate com
merce. See Abel, supra note 10, at 465-75." But nothing in the historical
record suggests that the Framers were concerned with state proprietary actions
affecting either foreign or interstate commerce.12 To the contrary, the Com
merce Clause was designed by the Framers to address the problems caused by
exercises of state regulatory power, generally the power to impose imposts and
taxes on commerce. See U.S. Const, art. I, § 10, cl. 2; see also The Federalist
No. 42, at 267-68 (C. Rossiter ed., 1961). See generally Abel, supra note 10, at
465-75 (citing Framers’ discussions of the types of state activities that Com
merce Clause was designed to prevent).13
The other rationales for the market participation doctrine cited by Reeves
also apply to participation affecting foreign commerce. The role of the state as
“guardian and trustee for its people” in spending or investing their funds is as
strong when the state’s market participation affects foreign as when it affects
interstate commerce. The right of a trader or manufacturer to deal with whom
10 A t the C onstitutional Convention, state action affecting interstate com m erce was m entioned only nine
tim es, w hile the fram ers issued a “proliferation o f statem ents . . . where com m erce w as discussed in a context
specifically pointing to foreign com m erce.” Abel, The Commerce Clause in the Constitutional Convention
and in Contemporary Comment, 25 M inn. L. Rev. 432, 4 7 0 (1941).
11 Jam es M adison h im self suggested th at the interstate commerce pow er was o f a purely “negative”
ch aracter and, unlike the pow er over fo reig n com m erce, was not to be used “for the positive purposes of
g o v e rn m e n t/’ L etter o f Feb. 13, 1829 to J.C . Cabell, 3 Farrand, The Records o f the Federal Convention o f
1787 478 (1966). For a contrasting view o f the historical evidence, see C orw in, The Commerce Power Versus
State Rights ix (1936) (“ In 1789 C ongress was deem ed to have the sam e power over commerce am ong the
states as o v er that w ith foreign nations, th e same right to restrain the o th e r for what it thought to be the good
o f the co u n try ” ).
12 It may be argued that a t the time o f th e drafting and ratification o f the C onstitution that there was no
distin ctio n m ade betw een proprietary a ctiv ity and regulatory powers o f states. The Suprem e Court, however,
has im plicitly endorsed a distinction betw een proprietary and regulatory pow ers as a m ater o f original intent.
In Reeves , th e C ourt noted that it w as n o part o f the “constitutional plan to lim it the ability o f states
them selves to operate freely in the free m ark et.” Reeves, 4 2 9 U.S. at 437 (1980). Such a distinction, while not
discussed at th e C onvention o r in the Federalist Papers, w as plainly understood at the tim e of the drafting of
the C onstitution. In 1787, as today, states engaged in m arketplace activity that was indistinguishable from
th at o f private entities. They also exercised uniquely sovereign pow er to regulate the conduct o f persons
w ithin their ju risd ictio ns. T hat discussions o f the C om m erce Clause invariably centered on the latter type o f
pow er is therefore significant.
13 In The Federalist, A lexander H am ilton wrote that:
T h e principal purposes to be answ ered by the union are these — the common defense o f the
m em bers; the preservation of the p u b lic peace, as w ell against internal convulsions and external
attack s; regulation o f commerce w ith other nations and between the states; the superintendence
o f o u r intercourse, political and com m ercial with foreign countries.
The Federalist No. 23, at 153 (C. R ossiter ed. 1961). In The Federalist No. 22, H am ilton discusses the need
fo r federal “superintendence” a t length. H is concern is evidently that states will erect tariffs in contravention
o f agreem ents entered into by the national government. See The Federalist No. 22, at 144 (C. R ossiter ed.
1961) (“ N o nation acquainted with the n atu re o f our political association would be unw ise enough to enter
into stip u latio n s w ith the U nited States, conceding on th eir part privileges o f im portance, while they were
app rised that th e engagem ents on the part o f the Union m ight at any tim e be violated by its m em b ers.. . . ”).
T h e concern th at states w ill impose tariffs in violation o f national agreem ents is obviously quite distant from
the concern th at states w ill refuse to in v est in American com panies that d o business in a foreign country.
54
he chooses is as great when his decision affects foreign as when it affects
interstate commerce. Therefore, we believe that the rationale for the market
participation doctrine ineluctably leads to the conclusion that when a state or
local government enters the market as a participant it is not subject to the
restraints of the Commerce Clause, whether Foreign or Interstate.
Japan Line, Ltd. v. County o f Los Angeles, 441 U.S. 434 (1979), the most
recent authority for the proposition that scrutiny is stricter under the Foreign
Commerce Clause, does not suggest the contrary. In that case, the Supreme
Court struck down a state ad valorem tax assessed on shipping containers
within the state which were used exclusively in foreign commerce. The Court
did not dispute that the tax might be constitutional if applied to containers used
in interstate commerce, but held that a “more extensive inquiry is required”
when a regulation affects foreign commerce. 441 U.S. at 445-46. To justify its
strict scrutiny, the Court first noted that the tax resulted in multiple taxation of
the instrumentalities of foreign commerce. Second, the Court determined that
the tax at issue interfered with the ability of the nation to pursue a uniform
policy in light of a treaty with Japan that forbade the taxation of containers.
Japan Lines does not address the issue of whether the Commerce Clause
applies to a state’s action as a market participant. One of the rationales for the
decision — the danger that states may subject foreigners to multiple regulation
or taxation — clearly does not apply to state divestment statutes. As we will discuss
in Part m , the national interest in uniformity is not impaired by these divestment
statutes, because no statute or treaty purports to regulate proprietary decisions with
respect to doing business with companies that operate in South Africa.
More recently, in Container Corp. v. Franchise Tax Bd., 463 U.S. 159
(1983), the Court distinguished Japan Lines and upheld a unitary tax on the
subsidiaries of foreign corporations, noting that no statute or treaty prohibited
the tax, and that the risk of retaliation seemed slight. The Court stated that
while it would review the state tax at issue, it had “little competence in
determining precisely when foreign nations will be offended by particular acts,
and even less competence in deciding how to balance a particular risk of
retaliation against the sovereign right of the United States as a whole to let the
states tax as they please.” Id. at 194. Such sentiments confirm our conclusion
that courts would be justifiably reluctant to strike down an exercise of state
proprietary power on account of potential interference with foreign affairs when
Congress and the President have not acted to prohibit state divestment statutes.
B. Possible Restrictions on the Scope o f the Market Participant Doctrine
In South-Central Timber Dev., Inc. v. Wunnicke, supra, four Justices sug
gested that they would restrict the scope of the market participant doctrine.14
14 Justice W hite wrote the plurality opinion; he was jo in ed by Justices B rennan, B lackm un and Stevens.
Justice R ehnquist, joined by Justice O ’Connor, dissented from the plurality’s view s on the issue o f w hether
A laska w as acting as a m arket participant, stating that the m arket participant doctrine should shield the
Continued
55
They refused to uphold an Alaskan statute which required that timber pur
chased from Alaska be processed in the state. The plurality opinion sharply
distinguished the market for timber sales and the market for timber processing
and stated that Alaska’s participation in the former market did not immunize
from Commerce Clause scrutiny restrictions imposed “downstream” on the
latter market. 467 U.S. at 98-99. Citing the law on restraints on alienations, the
plurality opinion first reasoned that the market participant doctrine should not
apply because a state as a private trader intuitively has a “greater interest as a
‘private trader’ in the immediate transaction than it has in what its purchaser
does with the goods after the State no longer has an interest in them.” Id. at 98.
Second, the Court stated that “downstream restrictions” have greater regulatory
effect than limitations on the immediate transaction.” Id.
We believe that even were South-Central Timber a majority holding, it
would not prevent the application of the market participation doctrine to state
divestment statutes. The requirements that the state divestment statutes impose
on those who contract with or receive investment capital from the state are
more like the requirements imposed on construction firms in White v. Massa
chusetts Council o f Constr., supra, than the requirements imposed by Alaska
on buyers of timber. The state divestment statutes do not attach continuing
conditions on the use of a natural resource once that resource passes out of the
control of the states and into the hands of a private trader. Instead these statutes
impose conditions precedent on companies who are competing for state con
tracts or investments. They thus are not comparable to restraints on alienation.
Nor do we believe that state divestment statutes generally constitute regula
tion because of their “downstream effects” in a market in which the state is not
a market participant. The plurality opinion in South-Central Timber rested on
the finding that Alaska was not a participant in the timber processing market.
According to Justice White, Alaska’s contractual condition demanding that its
timber be processed in-state was therefore to be scrutinized for regulatory
effects. In contrast, state divestment statutes do not impose conditions in
markets in which the state is not participating. For instance, in refusing to buy
computers from a certain computer manufacturer, the state is acting in a way
that affects the market for computers — a market in which it is ex hypothesi a
participant. In refusing to invest in the computer company, the state is simply
affecting the market for securities — a market in which the state is participating
as an investor.15
14 ( . . . continued)
A laskan statute from C om m erce Clause scrutiny. C hief Justice Burger and Justice Powell dissented, arguing
that the court should rem and the case to the Ninth C ircuit to permit that court to consider the market
particip an t issue. Justice M arshall did not participate.
15 A lthough the p lurality opinion does n o t fully explicate the reasons that the im position of this particular
contractu al condition caused “downstream effects” am ounting to regulation, a plausible rationale would be
that A laska h as m onopoly pow er in the A lask an tim ber m arket. This w ould be consistent w ith the argum ent of
som e com m entators that a state should be treated as a regulator when it exercises m onopoly power. See supra
note 7. B ecause o f its m onopoly position, A laska was in a position to coerce the contractors in a m anner that
is d ifficu lt to distin g u ish from the coercive effect o f sovereign regulatory power. The conditions required by
Continued
56
The plurality opinion in South-Central Timber, however, is not binding
precedent, and we believe that not all of its reasoning flows logically from the
structure of the market participation doctrine. Wherever the state exercises its
power as a buyer or investor to impose some contractual term on a company
with which it deals, it is acting as in its proprietary rather than regulatory
capacity. The kind of contractual condition the state chooses to impose should
not affect the application of the market participation doctrine, given the ration
ales supporting the doctrine. In imposing requirements on companies with
which it is doing business, the state is still acting as “a guardian and trustee of
its people,” Reeves, 447 U.S. at 438, and is still acting with the freedom
permitted private businesses in the absence of state or federal legislation to the
contrary. Thus, the legality of the state’s contractual condition is more logically
evaluated under legal provisions, which Congress has enacted to regulate
exercises of proprietary power, than under the Commerce Clause. See South-
Central Timber , 467 U.S. at 102-03 (Rehnquist, J., dissenting). Therefore we
believe that if the Court follows the sound logic of its majority opinions
interpreting the market participation doctrine, the South African divestment
statutes will be upheld.
Finally, it may be argued that in Wisconsin D ep’t o f Industry, Labor and
Human Relations v. Gould, Inc., 475 U.S. 282 (1986), the Supreme Court
implicitly restricted the scope of the market participant doctrine in Commerce
Clause analysis. In that case, the Supreme Court held that the National Labor
Relations Act (NLRA) preempted a Wisconsin statute, which suspended
Wisconsin’s business dealings with persons or firms who had violated the
NLRA three times within a 5-year period. The Court reasoned that because the
Wisconsin debarment statute functioned as a supplemental sanction for viola
tions of the NLRA, it conflicted with the National Labor Relations Board’s
comprehensive regulation of industrial relations in the same way as would a
state prohibition on private parties doing business with repeat labor law viola
tors. Thus the holding in Gould rests explicitly on the preemptive force of the
NLRA and is not premised in any way on the dormant Commerce Clause.
Nevertheless, in response to the argument that preemption analysis was
inappropriate, the Court briefly discussed the market participation doctrine
only to dismiss it as inapposite. It held that “the market participant doctrine
reflects the particular concerns underlying the Commerce Clause, not any
general notion regarding the necessary extent of state power in areas where
Congress has acted." Id. at 289 (emphasis added). Emphasizing that “what the
Commerce Clause would permit States to do in the absence of the NLRA is
thus an entirely different question from what the States may do with the Act in
15 Continued
the divestm ent statutes, how ever, are not im posed from a position o f m onopoly power N o state approaches
having m onopoly pow er in the capital m arkets and therefore state statutes directing the manner o f the
investm ent o f their funds are in no sense coercive. M oreover, because states rarely have monopoly pow er m
markets in which they purchase goods and services, most divestm ent statutes which take the form o f refusing
to contract with com panies doing business w ith South A frica are readily distinguishable from South-Central
Timber.
57
place,” the Court held that in passing the NLRA, Congress intended to prohibit
the states from interfering in any way with the “interrelated federal scheme of
law, remedy, and administration.” Id. (citations omitted).
The only support for arguing that Gould restricted the scope of the market
participation doctrine in the Commerce Clause comes from a single sentence at
the start of the Court’s discussion of the applicability of the doctrine to
preemption analysis under the NLRA:
We agree with the Court of Appeals, however, that by flatly
prohibiting state purchases from repeat labor law violators, Wis
consin “simply is not functioning as a private purchaser of
services,” 750 F.2d at 614; for all practical purposes, Wisconsin’s
debarment scheme is tantamount to regulation.
Id. We do not read this sentence as indicating that the Supreme Court would
consider a refusal to contract with companies doing business in South Africa to
be regulation under the Commerce Clause.
First, the most logical interpretation of this sentence is that the Court viewed
the Wisconsin statute as regulation because the statute specifically linked the
state’s decisions to violations o f the NLRA, a federal regulatory scheme. This
reading is supported by the Court’s citation to the appellate court’s opinion,
which in its discussion of preemption stated:
Wisconsin simply is not functioning as a private purchaser of
services. The question is the rationale underlying Wisconsin’s
law. When the policy the law promotes is not efficient use of
state funds but the intent to effect compliance with the NLRA, the
regulation is preempted by the NLRA’s establishment of a com
prehensive regulatory scheme meant to preclude state action.
Gould v. Wisconsin D ep’t o f Industry, Labor and Human Relations, 750 F.2d
608,614 (7th Cir. 1984) (emphasis added). The South African divestment laws
do not depend for their operation on reference to a federal or state regulatory
scheme. Moreover, unlike a regulatory scheme, the statutes do not disqualify
companies from eligibility for state contracts on the basis of past actions, but
rather make the continuing eligibility of the companies subject to certain
conditions with which they can comply. Thus, these statutes do not operate like
the statute at issue in Gould, but rather like the statute at issue in White v.
Massachusetts Council of Constr. Employers, supra, in which the City of
Boston refused to do business with contractors who did not satisfy certain
conditions. Because Gould reaffirmed the continuing validity of White, see 475
U.S. at 289, we do not believe that Gould may be fairly interpreted to deny that
such conditional refusals to deal enjoy protection from Commerce Clause
scrutiny.
Second, Gould carefully distinguished the sound foundations of the market
participation doctrine in Commerce Clause analysis from the inappropriateness
of its extension in the area of preemption analysis under the NLRA. The Court
58
reaffirmed that the Commerce Clause is not intended to “limit the ability of the
States themselves to operate freely in the free market,” id. (quoting Reeves, 447
U.S. at 437), and emphasized that the NLRA, in contrast, was intended “in
large part to entrust the administration of the labor policy for the Nation to a
centralized administrative agency.” Id. at 289-90 (citations omitted). What is
deemed to be regulation in analyzing the preemptive effect of the NLRA
therefore is not a guide to what will be considered regulation under Commerce
Clause analysis. Finally, it is hardly conceivable that the Court wished to shed
light on the scope of the market participation doctrine in the Commerce Clause
by means of a single sentence in a preemption case. As we have seen from the
discussion in South-Central Timber, the scope of the doctrine is highly contro
versial and at least two of the Justices have taken a position that is flatly
inconsistent with treating a debarment statute as “regulation” under the Com
merce Clause. See South-Central Timber, 467 U.S. at 101-02 (Rehnquist, J.,
dissenting). We therefore do not believe that Gould sheds appreciable light on
the scope of the market participation doctrine.16
II. Interference with the Federal Government’s
Foreign Affairs Power
No provision of the Constitution furnishes the federal government with a
general power to conduct foreign affairs. The President, of course, is Com
mander in Chief of the armed forces of the United States and is also authorized
to enter into treaties and to appoint and receive ambassadors. U.S. Const, art. II,
§ 2. Congress is given authority to regulate foreign commerce, to define
offenses against the law of nations and to declare war. Id., art. I, § 8.17The state
divestment statutes do not interfere with any of these enumerated foreign
affairs powers of the President or Congress.
Nor does the Constitution contain a general prohibition against state actions
that interfere with the federal government’s conduct of foreign affairs. The
Constitution imposes the. following specific prohibitions on the states in the
area of foreign affairs:
No State shall enter into any Treaty, Alliance, or Confedera
tion; grant Letters of Marque and Reprisal.
* * *
No State shall, without the Consent of the Congress, lay any
Imposts or Duties on Imports or Exports, except what may be
16 In any event, even on its broadest reading, the sentence in Gould does not suggest that a refusal to invest
in a certain class o f com panies is tantam ount to regulation. A refusal to contract with a com pany has the effect
o f denying the company a discrete amount o f sales that it would otherw ise have enjoyed. Such a refusal
therefore has the potential to change the com pany’s behavior so that it may receive the city contract. The
refusal to invest in a com pany, particularly a com pany w ith a nationw ide market fo r its securities, has
considerably less effect, because market forces will lead others to purchase the securities at the sam e or
m arginally low er prices. B ecause a refusal to invest has such limited potential impact, it cannot seriously be
called regulation even in a Figurative sense o f that term.
17 The Foreign Com m erce C lause is discussed above. See supra Part I.
59
absolutely necessary for executing its inspection Laws: and the
net Produce of all Duties and Imposts, laid by any State on
Imports or Exports, shall be for the Use of the Treasury of the
United States; and all such Laws shall be subject to the Revision
and Controul of the Congress.
No State shall, without the Consent of Congress, lay any Duty
of Tonnage, keep Troops, or Ships of War in time of Peace,
enter into any agreement or Compact with another State, or with
a foreign Power, or engage in War, unless actually invaded or in
such imminent Danger as will not admit of delay.
U.S. Const, art. I, § 10, els. 1-3. None of these prohibitions puts any explicit
limit on the use of state regulatory or proprietary power that affects foreign
governments and consequently the conduct of foreign affairs.
Nevertheless, the Supreme Court has recognized a general principle of
federal governmental power to conduct foreign affairs beyond the powers
enumerated in the Constitution. This general power has been derived from the
proposition that the power to regulate international affairs never resided in the
states and therefore was not transmitted to the federal government by the
Constitution. Instead, the federal government inherited this general power as a
successor to Great Britain. United States v. Curtiss-Wright Export Corp., 299
U.S. 304 (1936).18
18 The C ourt explained its theory as follows:
It w ill co n trib u te to the elucidation o f th e question if we first consider the difference betw een the
pow ers o f the federal government in respect o f foreign o r external affairs and those in respect o f
dom estic o r internal affairs. That there are differences betw een them, and that these differences
are fundam ental, m ay not be doubted.
T he tw o classes o f pow ers are different, both in respect o f their origin and their nature. The
broad statem ent that the federal governm ent can exercise no pow ers except those specifically
enum erated in the C onstitution, and su ch im plied pow ers as are necessary and proper to carry
into effect the enum erated powers, is categorically true only in respect o f our internal affairs. In
that field, the prim ary purpose o f th e C onstitution w as to carve from the general mass of
leg islativ e pow ers then possessed by the states such portions as it was thought desirable to vest m
the federal governm ent, leaving those n o t included in the enum eration still in the states. Carter v.
Carter Coal Co., 298 U.S. 238, 294. T hat this doctrine applies only to powers which the states
had, is s e lf evident. And since the states severally never possessed international pow ers, such
pow ers could not have been carved fro m the mass o f state pow ers but obviously were transmitted
to the U nited States from some o th er source. During the colonial period, those pow ers were
possessed exclusively by and were en tirely under the control o f the C row n. By the D eclaration o f
Independence, “the Representatives o f the U nited States o f A m erica" declared the U nited [not
the several] C olonies to be free and independent states, and as such to have “full Pow er to levy
W ar, conclude Peace, contract A lliances, establish C om m erce and to do all other Acts and Things
w hich Independent States may o f rig h t d o .”
Curtiss-Wright Corp., 299 U.S. at 315-16 (S utherland, J.) (em phasis m original).
Justice S u th e rlan d 's argum ent has been ju stly criticized as a m isreading o f the historical evidence. The
fram ers seem to have believed that federal pow er in foreign affairs rested on explicit and im plicit constitu
tional g rants o f authority. See generally, C . Lofren, United States v. Curtiss-Wright Export Corporation: An
Historical Reassessment, 83 Y ale L. Rev. 1 (1973).
60
A. The Effect o f Zschemig v. Miller
The Court has only once employed this general power to strike down an
exercise of state police power that affected foreign affairs. In Zschem ig v.
Miller, 389 U.S. 429 (1968), the Court invalidated an Oregon statute as an
unconstitutional intrusion into the federal field of foreign affairs, even though,
as the federal government itself admitted, the statute did not conflict with any
federal treaty or statute. The state statute at issue provided that a nonresident
alien could not inherit property from an Oregon decedent unless three condi
tions were satisfied: (1) the alien’s government must accord Americans the
right to inherit on equal terms with its citizens; (2) the alien’s government must
give Americans the right to receive payment in the United States of funds from
foreign estates; and (3) the nonresident alien must be able to receive “the
benefit, use or control” of the proceeds of the Oregon estate “without confisca
tion” by his government. The Court concluded that this type of probate law as
enforced in the Oregon courts had “a direct impact on foreign relations and
may well adversely affect the power of the central government to deal with
those problems.” Id. at 441. Justice Douglas stressed that the federal
government’s foreign policy prerogatives were offended because the state
courts made persistent inquiries into the actual administration of foreign laws
and in doing so questioned the credibility of foreign officials and made ad hoc
decisions based on “foreign policy attitudes” toward particular governments.
See 389 U.S. at 437 (“As one reads the Oregon decisions, it seems that foreign
policy attitudes, the freezing or thawing of the ‘cold war,’ and the like are the
real desiderata”).
Zschemig stands for the proposition that the Court will scrutinize state
statutes to determine whether such statutes have a direct impact on foreign
relations; the case may not fairly be interpreted to mean that the court will
strike down any state exercise of authority that has some indirect impact on
foreign affairs or that is intended to affect the behavior of foreign governments.
Zschemig did not overrule Clark v. Allen, 331 U.S. 503 (1947), in which the
Court, in an opinion also written by Justice Douglas, upheld the facial validity
of a California statute similar to the first two sections of the Oregon law.19
Although the California statute was clearly designed to influence foreign
countries to change their laws to allow Americans to inherit, the Court dis
missed the challenge to the statute as “farfetched.” Id. at 517.20 Emphasizing
that “rights of succession” were peculiarly a matter of local law, the Court
agreed that “what California has done will have some incidental or indirect
effect on foreign countries,” but concluded “that is true of many state laws
which none would claim cross the forbidden line.” Id.
19The C alifornia statute requires (1) that the a lie n 's governm ent must accord Americans the right to inherit
on equal term s with its citizens; and (2) that the a lie n 's governm ent must give Americans the right to receive
paym ent in the United States o f funds from foreign estates.
20The C ourt analogized the case to Blythe v Hinckley , J80 U.S. 333 (1901), which rejected the claim that
a statute granting aliens an unqualified n g b t to inherit property constituted, in the absence of a treaty, a
forbidden intrusion into foreign affairs.
61
Read together, Zschemig and Clark suggest that even in scrutinizing state
statutes that have an impact on foreign affairs, the Court will balance the degree
to which the statute intrudes on foreign affairs against the degree to which the
exercise of the state power falls within traditional state powers. In both Clark
and Zschem ig, states were performing a traditional state function in establish
ing a rule of inheritance. What distinguished the cases was that the California
statute had only an indirect influence on foreign affairs because the state
legislature’s judgment could be implemented simply through the “routine
reading of foreign law.” Zschemig, 389 U.S. at 433. The Oregon statute, on the
other hand, by forcing state courts to assess the actual operation of foreign laws
allowed state courts to evaluate the credibility of foreign representatives and engage
in persistent “judicial criticism” of foreign states — actions that are outside the state
court’s ordinary competence and which have a direct impact on foreign relations.
Application of such a balancing test to divestment statutes yields the conclu
sion that they do not impermissibly encroach into the realm of foreign affairs.
First, like the statute at issue in Clark, and unlike the statute at issue in
Zschem ig, the implementation of the South African divestment statute would
require no investigation by state officials into the operation of South African
law and require no assessment of the credibility of South African officials.
Second, the statute would fall directly on American companies and only
indirectly on South Africa. Moreover, in deciding how it will invest funds
under its control, a state acts as “guardian and trustee of its people,” see Reeves,
447 U.S. at 438, and therefore the state should be given greater latitude to
express its citizens’ views than in regulatory measures.
Finally, in evaluating the impact of state investment decisions on foreign
policy, it should be noted that a state is necessarily involved in the investment
of state funds. States do not have to put reciprocity clauses in their probate
statutes, but a state must decide to invest state funds on some basis. A state for
instance, may decide not to invest in a company doing business in South Africa
because it believes that there is a large risk of revolution and, thus, of expro
priation in that country. The decision would have an impact on South Africa
and on national policy toward that country identical to a decision to divest on
the basis of moral opposition to South Africa’s system of apartheid.21 But
surely no one would suggest that states are constitutionally forbidden from
making such investment decisions. We therefore question the proposition that
state divestment statutes should be subject to challenge simply because they
have some impact on South Africa and our foreign policy toward that country.
If state investment decisions are subject to invalidation for intrusion into
foreign policy, we perceive no limiting principle to prevent constant judicial
scrutiny of those decisions for consistency with some perceived foreign policy.
21 It m ight be argued that a decision to d iv est based on moral grounds had a greater stigm atizing effect than
such a decision based on purely economic g rounds. W e b elieve, how ever, that a refusal to invest on econom ic
grounds rep resen ts a vote o f no>confidence in South A frica 's future and therefore has a stigm atizing effect. In
any event, no c ase suggests that the moral v iew s o f the com m unity may not be a basis for legislation relating
to the state ’s investm ent practices o r its b usiness dealings. See supra note 6.
62
B. Zschemig v. M iller and the Market Participant Doctrine
Although we believe that South African divestment statutes should and
would survive application of the principle embodied in Zschemig v. Miller, we
do not think the principle should be extended to state proprietorial action.
We believe that the reasoning underlying the market participant doctrine in
the area of the dormant Commerce Clause has general applicability.22 Any
constitutional principle or privilege relied on to preempt state exercise of
proprietary power must be analyzed to determine whether the principle or
privilege was specifically aimed at constraining proprietary power.23 In the
absence of any such intent, it is inappropriate to strike down a state’s exercise
of proprietary power unless the federal government affirmatively invokes its
authority to regulate the state’s market dealings to the extent and in the same
manner that it may regulate any other participant.24
The historical rationale for the general federal power over foreign affairs
does not imply the displacement of state proprietary power. Although, accord
ing to Curtiss-Wright, the states never had any power to conduct foreign
relations and consequently the federal government received such powers as
22 Gould , 475 U.S. 282, is not to the contrary. There the C ourt rejected the extension o f the m arket
participant doctrine to preem ption analysis under the NLRA, reasoning that the NLRA’s com prehensive
regulatory scheme reflects an intent to prevent state action that supplem ents the penalties prescribed by the
Act. The C ourt specifically contrasted the NLRA with the C om m erce C lause, w hich does not interfere in and
o f itself with the pow er o f the states to contract freely in the open market. Therefore the m arket participation
doctrine may be extended to legal provisions o r principles that are not intended to constrain state proprietary
as opposed to regulatory power.
23 We do not believe, o f course, that the regulatory/proprietary distinction should be applied to dim inish the
constitutional protections that apply directly to the states. A state could not, for instance, grant contracts on
the basis o f racial preference simply because it was exercising proprietary rather than regulatory pow ers.
Sim ilarly, because m ost o f the protections o f the Bill o f Rights have been applied directly to states by the
Supreme C ourt, state action o f w hatever kind — proprietary or regulatory — is subordinate to those rights. In
contrast, the legal provisions at issue here — the Commerce C lause, the general federal pow er over foreign
affairs, and E xecutive O rder No. 12532 — impose no explicit prohibition on the states’ exercise o f power. In
attem pting to determ ine the extent to which the negative im plications o f these provisions should forestall the
exercise o f state power, the proprietary /regulatory distinction is useful because it bears both on the strength o f
the state interest in exercising pow er and the federal interest in constraining that pow er. See W ells &
H ellerstein, The Governmental-Proprietary Distinction in Constitutional Law , 66 Va. L. Rev. 1073, 1134—35
(1980)
24 Garcia v. San Antonio Metropolitan Transit Authority , 469 U.S. 528 ( 1985), is not inconsistent w ith the
application o f the proprietary/regulatory distinction to lim it the use o f negative implications o f constitutional
principles to prohibit state action. In Garcia , the Suprem e C ourt held that notions o f state sovereignty did not
prevent the federal governm ent from imposing m inim um wage and overtime provisions on em ployees o f state
mass transit system s. The Garcia C ourt explicitly overruled National League o f Cities v. Usery , 426 U.S. 833
(1976), which held that “traditional governm ental functions o f the state” w ere immune from federal regula
tion. In arguing that state divestm ent statutes are not preem pted by the federal foreign affairs power, the
C om m erce C lause, o r any federal statute, we do not argue that a state’s actions as a market participant cannot
be regulated o r prohibited if C ongress chooses to do so.
Indeed, the underlying rationale o f Garcia supports the argum ent that the representative branches o f the
federal governm ent rather than the courts should decide w hether the state m ay divest from or refuse to
contract with com panies which do business in South Africa. In Garcia, the C ourt reasoned that there w as no
need for the judiciary to protect state sovereignty because “the [national] political process ensures that laws
that unduly burden the states will not be prom ulgated.” 469 U.S. at 556. The protection o f national political
process is rendered illusory, however, if the state proprietorial actions are struck down by the negative
im plications o f unexercised federal pow ers rather than affirm ative action o f the federal governm ent.
63
successor to Great Britain, the states have always possessed proprietary pow
ers. As the Supreme Court has emphasized, the power to impose conditions on
state contractors derives from the power of any corporate entity, private or
public, to deal with whomever it chooses. See, e.g., Perkins v. Lukens Steel Co.,
310 U.S. 113, 127 (1940) (“Like private individuals and businesses, the gov
ernment enjoys the unrestricted power to produce its own supplies and to
determine with whom it will deal and to fix the terms and conditions upon
which it will make the needed purchases”). Because states, like any corporate
entity, possessed proprietary powers at the time of the Constitution, these
powers should not be displaced unless they are prohibited by a specific limita
tion imposed by the Constitution or federal legislation passed pursuant to a
constitutional grant of power to the federal government.25
Moreover, the functional rationale for displacing state regulatory power does
not apply fully to a state’s exercise of proprietary power. A state regulation
prohibiting certain corporations (e.g., those organized under the state’s laws, or
those doing business within the state’s borders) from undertaking business in a
foreign country would directly affect that foreign country and might have a
large potential influence on that country’s attitudes toward the United States. In
contrast, the state’s power to refuse to deal locally with companies doing
business in a foreign country is by its nature limited, because it leaves the
ultimate decisions whether to continue to do business in the foreign country
with the corporations themselves.
IV. Preemption!
The final ground on which the divestment statutes may be attacked is that of
preemption. It has been suggested that both the Export Administration Act and
Executive Order No. 12532 demonstrate an intent by the federal government to
preempt any exercise of state power that affects companies doing business with
South Africa. Neither Executive Order No. 12532 nor the Act, however,
represents a comprehensive regulation of trade or investment with South Af
rica, nor do they display any intent to displace the traditional power of the state
to make investment and contracting decisions.
The touchstone of a preemption claim is the intent of Congress. See Malone
v. White M otor Corp., 435 U.S. 497, 504 (1978). When the state law at issue in
a preemption case is enacted “in a field which the states have traditionally . . .
occupied we start with the assumption that historic . .. powers of the states
[are] not to be [ousted] by the Federal Act unless that were the clear and
manifest purpose of Congress.” Rice v. Santa Fe Elevator Corp., 331 U.S. 218,
230 (1947). The exercise of proprietary powers to contract with and invest in
companies of their choice is, to say the least, a field traditionally occupied by
23 As w e h ave discu ssed above, see supra notes 12, 13, w hen the Fram ers discussed the danger o f state
intervention in foreign affairs, the danger to which they specifically referred invariably arose from an
exercise o f state regulatory pow er, usually in the form o f tariffs. O ur research has revealed no evidence that
Fram ers w ere concerned w ith th e effects o f decisions by states as market participants.
64
the states. Therefore, it should be inferred that Congress or the President
intended to preempt state proprietary powers only when such an intent is
explicit or “where the scheme of federal regulation [is] so pervasive as to make
reasonable the inference that Congress [or the President] left no room to
supplement it.” Id.
Here, however, neither Executive Order No. 12532 nor the Export Adminis
tration Act explicitly prevents the state from investing or contracting with
companies it chooses, even if those choices are based on its views toward South
Africa. Nor does either Executive Order No. 12532 or the Export Administra
tion Act demonstrate an intent to occupy the field of investment or contractual
decisions so as to raise any inference that the state divestment statutes are
preempted.26
The Export Administration Act permits the President to control exports for
reasons of national security, foreign policy and short supply. See 50 U.S.C.
app. §§ 2404-2406. The Act outlines the factors governing invocation of the
Act and establishes various procedures for reporting to Congress. The legisla
tion is thus principally designed to authorize the President to curtail trade in a
national emergency. Although the Export Administration Act does state that it
is the policy of the United States to encourage free trade, see 50 U.S.C. app.
§ 2401, it does not purport generally to regulate the proprietary decisions of
entities — public or private — with respect to companies doing business in any
particular nation.27 Therefore, whatever the preemptive effect of the statute on
state regulation of companies doing business in South Africa, the Export
Administration Act cannot be deemed to preempt state divestment statutes.
The recent case of Wisconsin D ep’t o f Industry v. Gould, Inc., supra, does
not strengthen the case for preemption by the Export Administration Act. The
NLRA represents a ‘“complex and interrelated federal scheme of law, remedy
26 Hines v. Davidowitz, 312 U.S. 20 (1941) is therefore inapposite. In that case, the Suprem e Court struck
down a Pennsylvania law that required aliens living in the state to register on the grounds that Congress had
already passes a “com plete system for alien registration." Id. at 51. Here C ongress has passed no legislation
com prehensively regulating investm ent or contractual decisions.
27 The Export A dm inistration Act forbids corporations from joining a boycott against one foreign nation
initiated by another foreign nation. Section 2407 o f the Export A dm inistration Act authonzes the President to
issue regulations prohibiting entities from
taking o r know ingly agreeing to take . . . [certain] actions with intent to comply w ith, further, or
support any boycott fostered o r imposed by a foreign country against a country that is fnendly to
the U nited States and which is not itself the object o f any form o f boycott pursuant to United
States law and regulations.
These boycott provisions are inapplicable here, however, because the states in enacting the divestm ent
statutes are not joining a boycott initiated by another country, but are acting either to safeguard their
investm ents or to reflect the m oral view s o f their citizens tow ard South A frica’s racial policies.
Indeed, the boycott provisions support the proposition that other provisions in general do not preempt state
law. Section 2407(c) specifically declares:
[Section] 2407 and the regulations issued pursuant to it, shall preem pt any law, rule, o r regula
tions o f any o f the several States or the D istrict o f C o lu m b ia ,. . . or o f any governm ental
subdivision thereof, which law, rule, o r regulation pertains to participation in, com pliance with,
im plem entation of, or the furnishing o f inform ation regarding, restrictive trade practices, or
boycotts fostered o r imposed by foreign countries against other countries.
The inference through the principle o f inclusio unius est exclusio alterius is therefore that the other
provisions o f the A ct are not intended to preem pt state law.
65
and administration.’” 475 U.S. at 286; see San Diego Building Trade Council
v. Garmon, 359 U.S. 236 (1969). As a result the NLRA occupies the field of
industrial relations and the preemptive effect of labor law has always been
given extraordinarily broad scope. As the Gould Court itself noted, “it is by
now a commonplace that in passing the NLRA, Congress largely displaced
state regulation of industrial relations.” 475 U.S. at 286. In contrast, the Export
Administration Act does not represent a complex scheme of regulation: its
essential function is simply to permit the President under certain conditions to
regulate trade with certain countries.
Moreover, the essential premise of Gould was that the Wisconsin statute
acted as a supplemental remedy to the NLRA because it specifically condi
tioned the suspension of state business dealings on a violation of the NLRA.
Because the NLRA already provided a comprehensive and integrated set of
remedies, Wisconsin’s debarment statute, viewed as an additional sanction,
was preempted. See Gamer v. Teamsters, 346 U.S. 485,498-99 (1953) (stating
that the “conflict [between state and federal law] is imminent” whenever “two
remedies are brought to bear on the activity”). State divestment statutes,
however, do not provide remedies for violations of a federal statute which itself
provides a comprehensive remedial scheme.
In our view, Executive Order No. 12532 is an even weaker reed on which to
rest a preemption claim. Executive Order No. 12532 declared a national emer
gency pursuant to the International Emergency Economic Powers Act of 1977
(50 U.S.C. §§ 1701 et seq.) (IEEPA). Using authority granted under IEEPA,
the President imposed certain economic sanctions on South Africa. He also
required United States companies operating in South Africa to conduct their
business there according to certain principles. Nothing in Executive Order No.
12532, however, purported to require entities to continue to do business with
South Africa or with companies doing business in South Africa. Nor does it
represent a comprehensive scheme which is designed to regulate contractual or
investment decisions relating to South Africa.
Moreover, as the President himself stated, Executive Order No. 12532
“reflected Congressional concerns” underlying proposed legislation designed
to forbid certain transactions with South Africa. See Message of the President
to the Congress of the United States: Transmitting Notification of a Declaration
of a National Emergency with Respect to South Africa (Sept. 9, 1985). In the
course of the congressional debate on the statutory proposals, many proponents
stated that the legislation was not intended to preempt state divestment legisla
tion. See, e.g., 131 Cong. Rec. 18824 (1985) (remarks of Senator Cranston). In
the absence of language to the contrary, this background strongly suggests that
Executive Order No. 12532 was not intended to preempt state legislation.28
28 G iven th at E xecutive O rder No. 12532 does not on its face regulate state contracts or state investments,
cou rts iikely w ould not take a preemption claim seriously un less the A dm inistration filed a b rief stating that
the E xecutive O rder was intended to p reem p t state laws. Cf. Container Corp., 463 U.S. at 195 n.33 (absence
o f S olicitor G en eral’s b rie f claiming th at C alifornia tax interfered w ith execution o f U nited States foreign
policy was facto r in c o u rt’s decision n o t to strike down tax). Therefore, in filing a b rie f arguing for the
C ontinued
66
Conclusion
For the reasons stated, we believe that state divestment legislation is consti
tutional. We therefore do not believe that the United States should file suit to
invalidate these laws or file any amicus brief on behalf of those seeking to
invalidate them.
C harles J. C o o p e r
Assistant Attorney General
Office o f Legal Counsel
28 (. . . continued)
preem ptive effect o f the Executive O rder and, to a lesser extent, in making other argum ents in favor o f the
preem ption o f state divestm ent, the A dm inistration would inevitably be m aking a policy choice — one that
w ould not com port w ith its general policy o f favoring federalism .
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