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Monday, April 25, 2011

State and Local Economic Sanctions: Constitutional Issues

Jeanne J. Grimmett
Legislative Attorney

States and localities have at times proposed or enacted measures restricting their agencies from conducting economic transactions with firms that do business with or in foreign countries whose conduct the jurisdictions find objectionable. While some maintain that sub-federal entities may enact such laws under sovereign proprietary powers and other constitutional prerogatives, others argue that such statutes impermissibly invade federal commerce and foreign affairs authorities and in some cases may be preempted by federal law. In 2000, the U.S. Supreme Court unanimously held in Crosby v. National Foreign Trade Council that a Massachusetts law restricting state transactions with firms doing business in Burma was preempted by a federal Burma statute. In American Insurance Association v. Garamendi, a 2003 case, the Court reaffirmed the relevance of the dormant federal foreign affairs power to preempt state law, but the scope of the 5-4 decision is unclear.

Due to the troubled situation in Darfur, a number of states have proposed or enacted some type of divestment legislation against Sudan. States have also considered or adopted divestment legislation involving Iran and terrorist states in general. In February 2007, a federal district court held Illinois’s Sudan sanctions law unconstitutional and permanently enjoined its enforcement (National Foreign Trade Council v. Giannoulias). Illinois subsequently repealed its statute, and the state’s appeal in the case was dismissed as moot in November 2007.

Congress considered and enacted legislation in the 110
th and 111th Congresses to authorize states to divest assets involving Sudan and Iran. The Sudan Accountability and Divestment Act of 2007, P.L. 110-174, enacted into law December 31, 2007, authorizes states and local governments to adopt divestment measures involving (1) federally identified persons with investments and business in the Sudanese energy and military equipment sectors or (2) persons having a direct investment in or carrying on a trade or business with Sudan or the Government of Sudan, provided certain notification requirements are met. The Comprehensive Iran Sanctions, Accountability, and Divestment Act, P.L. 111-95, enacted into law on July 1, 2010, includes provisions authorizing state and local governments to divest from businesses making investments of $20 million or more in Iran’s energy sector after adequate investigation and notification have occurred. Both laws provide that a measure falling within the scope of the authorization is not preempted by any federal law or regulation.

Date of Report: April 4, 2011
Number of Pages: 17
Order Number: RL33948
Price: $29.95

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