Sudan Divestment Statute Fails to Pass Constitutional Muster

by Amy B. Briggs and Ashley K. Dunning

The Illinois legislature’s attempt to pressure the Sudanese government to end human-rights atrocities has been struck down. On February 23, 2007, the United States District Court, Northern District of Illinois ruled that the Illinois Act to End Atrocities and Terrorism in the Sudan ("the Act") was unconstitutional. National Foreign Trade Council, Inc., et al. v. Giannoulias, No. 06 C 4251, 2007 U.S. Dist. LEXIS 13341 (N.D. Ill. February 23, 2007). Accordingly, the court entered an order permanently barring Illinois from enforcing the Act altogether.

In 2005, Illinois adopted the Act, which mandated a graduated divestment schedule for any pension fund established under the Illinois Pension Code. By July 27, 2007, all pension funds were to be fully divested from "forbidden entities" (i.e., companies doing business with or in Sudan ). (The Act also contained a separate provision regulating financial institutions, which the Court found unconstitutional as well for separate reasons not discussed here. "The Act" thus refers only to those statutes that amended the Illinois Pension Code.)

The National Foreign Trade Council, Inc. and eight municipal pension funds challenged the Act, primarily on the grounds that the Act was preempted by federal law and ran afoul of the Foreign Commerce Clause. The court first ruled that the Act was not preempted by federal law because (1) the Act governed divestment of holdings connected with Sudan whereas federal law was silent on divestment and (2) the potential effects of divestment on the federal government’s ability to conduct foreign policy was "highly attenuated" and "speculative." The court noted that there was no evidence "suggesting that these pension funds’ inability to purchase the securities of such companies would be in any way likely to affect their decision to do business in that country."

Nonetheless, the court enjoined enforcement of the Act finding that it violated the Foreign Commerce Clause. The Foreign Commerce Clause prohibits state regulations that (1) facially discriminate against foreign commerce or (2) interfere with the federal government’s "ability to speak with one voice in regulating commercial affairs with foreign states." The court easily concluded that there was "little doubt" that the act proscribed conduct involving foreign commerce.

Finally, the court rejected the defendant’s argument that the state entities were merely acting as "market participants" and thus not subject to the Foreign Commerce Clause. The court found that the Act’s amendment to the Illinois Pension Code affected both state-controlled and municipal pension funds. Because the "market participant" exception does not apply where the alleged "market participants" are local agencies, it did not apply here.

The court’s ruling does not answer an interesting question that may now need resolution by California courts: When a pension divestment statute, such as either of California’s Sudan Divestment bills (AB 2941 and AB 2179), applies only to state (and not county) retirement systems, would the "market participant" exception apply so that the statute would not violate the Foreign Commerce Clause?