b'Constitutionality of South African Divestment Statutes\nEnacted by State and Local Governments\nIn response to conditions in South Africa, a number of state and local governments passed\nstatutes or ordinances requiring the divestment o f pension funds from companies that do\nbusiness in South Africa or prohibiting governmental bodies from entering into contracts with\nsuch companies. The divestm ent laws survive constitutional scrutiny.\nThe divestment laws do not place an impermissible burden on foreign commerce. Under the\nmarket participation doctrine, the Supreme Court has held that proprietary, as opposed to\ngovernmental, actions o f state and local governments may be shielded from the strictures of\nthe Commerce Clause. The divestm ent laws fall within that doctrine. N or do such laws\nrepresent an unconstitutional interference with the federal government\xe2\x80\x99s foreign affairs power.\nFinally, such laws are not preempted by either the Export Administration A ct or Executive\nOrder No. 12532, which imposes certain economic sanctions on South Africa.\n\nApril 9, 1986\nM\n\nem orandum\n\nO p in io n\n\nfor th e\n\nA s s o c ia t e A t t o r n e y G\n\neneral\n\nThis memorandum addresses the question whether certain state and local\ndivestment laws are subject to constitutional challenge. These laws vary in\ntheir scope, but their general characteristics are that they either (a) require the\ndivestment of state or local employee pension funds from companies which do\nbusiness in South Africa;1 or (b) restrict or prohibit a city or a state from\nentering into contracts with companies that have investments, licenses, or\noperations in South Africa.2 We are not aware of state or local statutes that seek\ndirectly to regulate the activities of companies doing business in South Africa.\nThis memorandum is therefore limited to evaluating the constitutionality of\nstatutes in which the state exercises its proprietary authority to invest funds\nunder its control and to award city financed contracts in a manner that discrimi\xc2\xad\nnates against companies with South African operations.3\n1See, e.g., 1985 New Jersey Laws, A ct 308 (directing that the state treasurer not invest p ension funds under\nstate control in any institution which has outstanding loans to the Republic o f South A frica, o r in the stocks,\nsecurities o r other obligations o f any com pany engaged in business in the Republic and directing that such\nexisting investm ents be divested within three years); Rhode Island General Laws C hapter 3 5 -1 0 (requiring\ndivestm ent o f state funds and pension funds invested in any financial institution lending m oney to o r any\ncorporation doing business in South A fnca).\n2 See, e.g.. New York City Local Law 19 (1985) (imposing certain conditions relating to South A frica on\ncompanies bidding for city contracts).\nThe rationales offered for the divestm ent statutes are also varied. The legislative intent o f the New Jersey\nlaw is \xe2\x80\x9cto encourage retreat by com panies essential to the econom y o f South A fnca and thus encourage it to\nalter its ways.\xe2\x80\x9d Op. N J. A tt\xe2\x80\x99y Gen. (Dec. 19, 1985). In contrast, the stated purpose of M ichigan\'s law is to\nachieve the state\'s goal o f ending discrim ination Our discussion will apply to all divestm ent statutes,\nwhatever the intent with which they were passed, except when we indicate otherw ise.\n3 Such statutes will be referred to collectively in this memorandum as \xe2\x80\x9cdivestm ent statutes.\xe2\x80\x9d\n\n49\n\n\x0cThese statutes may be subject to constitutional challenge on the grounds\n(1) that state divestment legislation is an impermissible burden on foreign\ncommerce; (2) that such legislation constitutes an impermissible intrusion into\na field, foreign affairs, that is uniquely the concern of the federal government;\nand (3) that the state and local statutes are preempted either by Executive Order\nNo. 12532, which prohibits certain transactions with South Africa, or by the\nExport Administration Act, which declares that free trade is, in general, the\npolicy of the United States.\nAlthough each of these challenges presents a complex legal issue, we believe\nthat state divestment statutes of the type described above are constitutional.\nFirst, we believe that a Commerce Clause challenge to divestment statutes\nwould, and should, fail. In developing what has come to be known as the\nmarket participant doctrine, the Supreme Court has distinguished, quite prop\xc2\xad\nerly, between the exercise of proprietary powers \xe2\x80\x94 powers which are not\nunique attributes of sovereignty, but rather are held in common with other\npersons and entities \xe2\x80\x94 and regulatory power \xe2\x80\x94 power to impose regulations\npursuant to the sovereign power to govern. The Court has shielded proprietary\nactions from the strictures of the Commerce Clause. State divestment statutes\nrepresent, we believe, an exercise of proprietary power to spend or invest state\nfunds in a manner that reflects their citizens\xe2\x80\x99 moral sentiments or economic\ninterests, and accordingly ought to escape invalidation under the Commerce Clause.4\nNor do these statutes violate any specific prohibition against state intrusion\ninto the area of foreign affairs imposed by Article I, \xc2\xa7 10 of the Constitution,\nsuch as the prohibition against entering into treaties with foreign nations.\nWhile the Supreme Court has suggested that a general principle against state\nintrusion into foreign affairs, a principle going beyond these specific textual\nprohibitions, may be derived from the federal government\xe2\x80\x99s extra-constitu\xc2\xad\ntional sovereignty, this principle has never been applied to a state\xe2\x80\x99s exercise of\nproprietary powers. Indeed, the Court has applied this principle to a state\nstatute only once. In Zschemig v. Miller, 389 U.S. 429 (1968), the Court struck\ndown a probate law that permitted state courts to inquire into the operation of\nforeign law, to evaluate the credibility of foreign officials, and to engage in\npersistent criticism of foreign countries in order to deny citizens of those\nnations\xe2\x80\x99 American legacies. Because the Court has upheld state regulatory\nstatutes that have an indirect impact on foreign affairs, we believe that this\nsingle case represents the Court\xe2\x80\x99s reaction to a particular regulatory statute, the\noperation of which intruded extraordinarily deeply into foreign affairs. It does\nnot imply that the Court would strike down regulatory statutes having a less\ndirect impact on foreign affairs. In any event, the principle in Zschemig should\nnot be extended to invalidate exercises of state proprietary, as opposed to\nregulatory, powers.\n4 A lthough the C ourt expressly reserved the question o f w hether the m arket participant doctrine applies to\nthe state statu tes that affect foreign, as op p o sed to interstate, commerce, w e believe that the rationale for the\ndistin ctio n \xe2\x80\x94 that the C om m erce Clause w as intended to restrict a state\'s ability to regulate but not its ability\nto p articip ate in m arkets \xe2\x80\x94 applies equally to statutes that affect foreign commerce.\n\n50\n\n\x0cFinally, under ordinary preemption analysis, Executive Order No. 12532 and\nthe Export Administration Act do not preempt state regulation of trade with\nSouth Africa. Neither the Order nor the Act represents a comprehensive scheme\nto regulate trade with South Africa, nor do they reflect an intent to displace the\nstate\xe2\x80\x99s traditional authority to invest its funds and make contracts as it chooses.\nI. The Commerce Clause\nThe Supreme Court has shielded state proprietary activity from the strictures\nof the Commerce Clause under the market participation doctrine. The first case\nto enunciate the market participant analysis was Hughes v. Alexandria Scrap\nCorp., 426 U.S. 794 (1976).5 There the Court upheld a Maryland program of\npaying a bounty for recycling abandoned cars (hulks) formerly titled in Mary\xc2\xad\nland. To receive a bounty under the program, scrap processors were required to\nsubmit title documentation, but the documentation requirements for Maryland\nprocessors were more lenient than those for non-Maryland processors. Distin\xc2\xad\nguishing cases in which it had invalidated state statutes that had \xe2\x80\x9cinterfered\nwith the natural functioning of the interstate market through prohibition or\nthrough burdensome regulation,\xe2\x80\x9d 426 U.S. at 806, the Court noted that Mary\xc2\xad\nland neither prohibited nor regulated the sale of hulks, but rather was acting as\na \xe2\x80\x9cmarket participant to bid up their price.\xe2\x80\x9d Id. The Court concluded that\n\xe2\x80\x9c[n]othing in the purposes animating the Commerce Clause prohibits a state, in\nthe absence of congressional action, from participating in the market and\nexercising its right to favor its own citizens over others.\xe2\x80\x9d Id. at 810.6\n5 The proprietary/regulatory distinction, how ever, is not o f recent vintage o r limited to C om m erce C lause\nanalysis, but appears in other areas o f Supreme C ourt jurisprudence. In Atkin v. Kansas, 191 U.S. 207 (1903),\nthe C ourt dism issed a challenge to a statute requiring contractors hired by a state agency to limit their\nem ployees to an eight-hour day. The Court stated:\n[W ]e can im agine no possible ground to dispute the pow er o f the state to declare that no one\nundertaking w ork for it o r for one o f its m unicipal agencies should perm it o r require an em ployee\non such work to labor in excess o f eight hours each day, and to inflict punishm ent upon those who\nare em braced by such regulations and yet disregard them. It cannot be deem ed a part o f the liberty\no f any contractor that he be allowed to do public work in any mode he may choose to adopt,\nw ithout regard to the w ishes o f the state. On the contrary, it belongs to the state, as the guardian\n\nand trustee fo r its people, and having control o f its affairs, to prescribe the conditions upon\nwhich it will permit public work to be done on its behalf, or on behalf o f its municipalities.\n191 U.S. at 222 (first em phasis added; other em phasis in original). The em phasis in Atkin on proprietary\npow ers w as o f great significance, because two years later in Lochner v. New York, 198 U.S. 45 (1905), the\nCourt, com posed o f the same mem bers, invalidated under the D ue Process C lause of the Fourteenth A m end\xc2\xad\nment a statute in w hich the state exercised its regulatory pow ers to prohibit em ploying a b aker for more than\nsixty hours a week.\nIn 1972 the C ourt summarily affirm ed a low er court ruling that perm itted the state o f Florida to favor\nFlorida-based publishing houses in purchases o f school textbooks. See American Yearbook Co. v. Askew, 339\nF. Supp. 719 (M .D. Fla.), a jfd , 409 U.S. 904 (1972).\n6 In enacting state divestm ent statutes, states are not acting to favor their ow n citizens over others. Instead\nstate divestm ent decisions are intended to advance the moral o r econom ic interests of its citizens. Since th eir\ninception states have legislated to reflect the m oral sentim ents o f their com m unities, and we find nothing in\nlogic or case law to suggest that the representation o f com m unity sentim ents m ay not be a legitim ate basis for\nstate investment or contractual decisions, particularly in an area in which the Supreme Court has acknowledged that\nthe state is acting as a \xe2\x80\x9cguardian and trustee of its people.\xe2\x80\x9d Reeves, Inc. v. Stake, 447 U.S. 429,483 (1980).\nContinued\n\n51\n\n\x0cIn Reeves, Inc. v. Stake, 447 U.S. 429 (1980), the Court upheld South\nDakota\xe2\x80\x99s right to restrict the sale of state-produced cement to state residents.\nThe Court not only affirmed the market participant doctrine in Alexandria\nScrap as \xe2\x80\x9cgood sense and sound law,\xe2\x80\x9d but expanded on its rationale. Noting\nthat the Commerce Clause was not intended \xe2\x80\x9cto limit the ability of the States\nthemselves to operate freely in the free market,\xe2\x80\x9d the Court emphasized that\n\xe2\x80\x9crestraint in this area is counseled by considerations of state sovereignty, \xe2\x80\x98the\nrole of each state as guardian and trustee of its people.\xe2\x80\x99\xe2\x80\x9d Id. at 437-38 (quoting\nA tkin v. Kansas, 191 U.S. 207, 222-23 (1903)). The Court also suggested that\nin light of \xe2\x80\x9cthe long recognized right of a trader or manufacturer, engaged in an\nentirely private business, freely to exercise his own independent discretion as\nto the parties with whom he will deal,\xe2\x80\x9d states acting in a proprietary capacity\n\xe2\x80\x9csimilarly share existing freedoms from federal constraints, including the\ninherent limits of the Commerce Clause.\xe2\x80\x9d Id. at 438-39 (citations omitted).\nIn its most recent majority opinion on the market participant doctrine in the\nCommerce Clause, the Court again reaffirmed that \xe2\x80\x9cwhen a state or local\ngovernment enters the market as a participant it is not subject to the restraints\nof the Commerce Clause.\xe2\x80\x9d White v. Massachusetts Council o f Constr. Employ\xc2\xad\ners, Inc., 460 U.S. 204, 210 (1983). In that case the Court upheld a city order\nrequiring each contractor on city financed or city administered construction\nprojects to employ Boston residents in numbers equal to at least fifty percent of\nits total workforce. The Court was unmoved by the dissenters\xe2\x80\x99 arguments that\nby imposing these requirements the city was taking action that was indistin\xc2\xad\nguishable from regulating the employment market between private contractors\nand their labor force.7\nThe reasoning of these opinions, and in particular the rationales articulated\nin Reeves for the market participant doctrine, logically extend to state divest\xc2\xad\nment statutes and, in our view, shield them from scrutiny under the Commerce\nClause. While the Court has not defined the exact scope of the market partici\xc2\xad\npation doctrine, see infra Part I.B., and has therefore not fully developed a test\nto distinguish between a state\xe2\x80\x99s regulatory and proprietary powers, we believe\n6 ( . . . continued)\nIndeed, it w ould be peculiar to assert th a t the m arket participant doctrine is limited to shielding actions in\nw hich the state is trying to discriminate ag ain st other citizens in favor o f its own. In light of the holding that\nlocal legislation w hich intends to d iscrim inate against citizen s of o ther states for the benefit o f its own\nc itizen s is " a lm o s t p e r se illeg al\xe2\x80\x9d under th e C om m erce C lause, Pike v. Bruce Church, Inc., 397 U.S. 137, 145\n(1970), the state action protected in Hughes w ould seem m ore problem atic than state action in the m arket that\nis taken w ithout any intent to discrim inate fo r the econom ic benefit o f its own citizens.\n7 In White, the C ourt did agree that th e re are some lim its \xe2\x80\x9con a state\xe2\x80\x99s ability to im pose restrictions that\nreach beyond the im m ediate parties with w hich the governm ent transacts business,\xe2\x80\x9d 460 U.S. at 211 n.7, but\nd eclin ed to identify those limits. For th e reasons stated in Part I.A ., we believe that state divestm ent\nlegislation falls w ithin any principled lim itation to the doctrine. Som e com m entators believe that the\np rin cip led lim it to the governm ent\xe2\x80\x99s ability to impose restrictions arises when the governm ent has m onopoly\npow er in the m arket in w hich it participates. If the governm ent does have monopoly pow er it has a coercive\npow er to im pose conditions on third parties that is hard to distinguish from the coercive pow er to regulate that\nit possesses as a sovereign. I f it does not possess m onopoly power, its pow er to im pose conditions is not\nd ifferen t in kind from private entity. See G illien , A Proposed Model o f the Sovereign/Proprietary Distinction ,\n133 U . Pa. L. R ev. 661, 680 (1985) (proposing to distinguish between proprietary and sovereign pow er by\ndeterm ining w h eth er pow er is \xe2\x80\x9ccoercive\xe2\x80\x9d ).\n\n52\n\n\x0cthat, given the rationale for the distinction, state divestment statutes are plainly\nproprietary in nature. In refusing to invest its funds in or contract with corpora\xc2\xad\ntions doing business in South Africa, a state is exercising the prerogatives and\nthe powers that any private person or entity enjoys as a matter of contract and\nproperty rights. The state is not employing the sovereign power that it uniquely\nenjoys in its jurisdiction to compel action under the threat of punishment. All\ncorporations doing business in jurisdictions that have passed divestment stat\xc2\xad\nutes continue to be entirely at liberty to do business in South Africa.8\nNotwithstanding the fact that the state divestment statutes at issue here are\nclearly within the logic of the market participation doctrine, there is language\nin some of the cases suggesting limitations on the doctrine\xe2\x80\x99s applicability in\nthis area. First, the Reeves Court noted that \xe2\x80\x9cCommerce Clause scrutiny may\nwell be more rigorous when a restraint on foreign commerce is alleged,\xe2\x80\x9d and\nexpressly reserved the issue of whether the market participation doctrine\napplies to foreign commerce. 447 U.S. at 437-38 n.9.9 Second, in South\nCentral Timber Dev., Inc. v. Wunnicke, 467 U.S. 82 (1984), a plurality of the\nCourt refused to apply the market participation doctrine to a state requirement\nthat purchasers of state-owned timber process the timber in mills located in the\nstate. Distinguishing between the market for the sale of timber and the market\nfor the processing of timber, the plurality stated that the state\xe2\x80\x99s participation in\nthe former did not permit it to impose \xe2\x80\x9cdownstream restrictions\xe2\x80\x9d in the latter.\n467 U.S. at 99. Finally, in Wisconsin D ep\'t o f Industry, Labor, and Human\nRelations v. Gould, Inc., 475 U.S. 282 (1986), the Court held that the National\nLabor Relations Act (NLRA) preempted a Wisconsin statute forbidding certain\nrepeat violators of the NLRA from doing business with the state. In the course\nof that opinion, the Court stated the state statute was \xe2\x80\x9ctantamount to regula\xc2\xad\ntion.\xe2\x80\x9d Id. at 289.\nFor the reasons that follow, we believe that the market participant doctrine\napplies to state proprietary activity affecting foreign as well as interstate\ncommerce and that the state divestment laws at issue here are constitutional\nexercises of the states\xe2\x80\x99 proprietary authority.\nA. The Application o f the Market Participation Doctrine to the Foreign\nCommerce Clause\n\nThe rationales underlying the market participant doctrine apply no less to the\nForeign than to the Interstate Commerce Clause. The historical evidence no\nmore suggests that the Commerce Clause was intended to limit the ability of\nstates to purchase goods (including securities) and services in the marketplace\nwhen their operations indirectly affect foreign commerce than it indicates such\n8 Although the Supreme C ourt has not yet addressed any case in which the state acts as investor rather than\na buyer o r seller in a market, we believe that rationales given for the doctrine apply to the state as an investor\nas well as to the state as a buyer o r seller. An investor, at bottom , is simply a purchaser o f securities.\n9 The plurality opinion in South Central Timber, infra, also supports its position that A la sk a \'s restrictions\non the tim ber m arket are invalid by reference to the stricter scrutiny under the Foreign C om m erce Clause. 467\nU.S. at 100.\n\n53\n\n\x0can intent when their operations affect domestic commerce. To be sure, state\xc2\xad\nments of the Framers suggest that they were more immediately concerned with\nstate restrictions on foreign commerce than on interstate commerce.10 Conse\xc2\xad\nquently, it may be plausibly, although not indisputably, argued that Congress\nwas given \xe2\x80\x9ca larger range o f action\xe2\x80\x9d over foreign than over interstate com\xc2\xad\nmerce. See Abel, supra note 10, at 465-75." But nothing in the historical\nrecord suggests that the Framers were concerned with state proprietary actions\naffecting either foreign or interstate commerce.12 To the contrary, the Com\xc2\xad\nmerce Clause was designed by the Framers to address the problems caused by\nexercises of state regulatory power, generally the power to impose imposts and\ntaxes on commerce. See U.S. Const, art. I, \xc2\xa7 10, cl. 2; see also The Federalist\nNo. 42, at 267-68 (C. Rossiter ed., 1961). See generally Abel, supra note 10, at\n465-75 (citing Framers\xe2\x80\x99 discussions of the types of state activities that Com\xc2\xad\nmerce Clause was designed to prevent).13\nThe other rationales for the market participation doctrine cited by Reeves\nalso apply to participation affecting foreign commerce. The role of the state as\n\xe2\x80\x9cguardian and trustee for its people\xe2\x80\x9d in spending or investing their funds is as\nstrong when the state\xe2\x80\x99s market participation affects foreign as when it affects\ninterstate commerce. The right of a trader or manufacturer to deal with whom\n10 A t the C onstitutional Convention, state action affecting interstate com m erce was m entioned only nine\ntim es, w hile the fram ers issued a \xe2\x80\x9cproliferation o f statem ents . . . where com m erce w as discussed in a context\nspecifically pointing to foreign com m erce.\xe2\x80\x9d Abel, The Commerce Clause in the Constitutional Convention\nand in Contemporary Comment, 25 M inn. L. Rev. 432, 4 7 0 (1941).\n11 Jam es M adison h im self suggested th at the interstate commerce pow er was o f a purely \xe2\x80\x9cnegative\xe2\x80\x9d\nch aracter and, unlike the pow er over fo reig n com m erce, was not to be used \xe2\x80\x9cfor the positive purposes of\ng o v e rn m e n t/\xe2\x80\x99 L etter o f Feb. 13, 1829 to J.C . Cabell, 3 Farrand, The Records o f the Federal Convention o f\n1787 478 (1966). For a contrasting view o f the historical evidence, see C orw in, The Commerce Power Versus\nState Rights ix (1936) (\xe2\x80\x9c In 1789 C ongress was deem ed to have the sam e power over commerce am ong the\nstates 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\no f the co u n try \xe2\x80\x9d ).\n12 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\ndistin ctio n m ade betw een proprietary a ctiv ity and regulatory powers o f states. The Suprem e Court, however,\nhas im plicitly endorsed a distinction betw een proprietary and regulatory pow ers as a m ater o f original intent.\nIn Reeves , th e C ourt noted that it w as n o part o f the \xe2\x80\x9cconstitutional plan to lim it the ability o f states\nthem selves to operate freely in the free m ark et.\xe2\x80\x9d Reeves, 4 2 9 U.S. at 437 (1980). Such a distinction, while not\ndiscussed at th e C onvention o r in the Federalist Papers, w as plainly understood at the tim e of the drafting of\nthe C onstitution. In 1787, as today, states engaged in m arketplace activity that was indistinguishable from\nth at o f private entities. They also exercised uniquely sovereign pow er to regulate the conduct o f persons\nw 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\npow er is therefore significant.\n13 In The Federalist, A lexander H am ilton wrote that:\nT h e principal purposes to be answ ered by the union are these \xe2\x80\x94 the common defense o f the\nm em bers; the preservation of the p u b lic peace, as w ell against internal convulsions and external\nattack s; regulation o f commerce w ith other nations and between the states; the superintendence\no f o u r intercourse, political and com m ercial with foreign countries.\nThe Federalist No. 23, at 153 (C. R ossiter ed. 1961). In The Federalist No. 22, H am ilton discusses the need\nfo r federal \xe2\x80\x9csuperintendence\xe2\x80\x9d a t length. H is concern is evidently that states will erect tariffs in contravention\no f agreem ents entered into by the national government. See The Federalist No. 22, at 144 (C. R ossiter ed.\n1961) (\xe2\x80\x9c N o nation acquainted with the n atu re o f our political association would be unw ise enough to enter\ninto stip u latio n s w ith the U nited States, conceding on th eir part privileges o f im portance, while they were\napp 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.. . . \xe2\x80\x9d).\nT h e concern th at states w ill impose tariffs in violation o f national agreem ents is obviously quite distant from\nthe concern th at states w ill refuse to in v est in American com panies that d o business in a foreign country.\n\n54\n\n\x0che chooses is as great when his decision affects foreign as when it affects\ninterstate commerce. Therefore, we believe that the rationale for the market\nparticipation doctrine ineluctably leads to the conclusion that when a state or\nlocal government enters the market as a participant it is not subject to the\nrestraints of the Commerce Clause, whether Foreign or Interstate.\nJapan Line, Ltd. v. County o f Los Angeles, 441 U.S. 434 (1979), the most\nrecent authority for the proposition that scrutiny is stricter under the Foreign\nCommerce Clause, does not suggest the contrary. In that case, the Supreme\nCourt struck down a state ad valorem tax assessed on shipping containers\nwithin the state which were used exclusively in foreign commerce. The Court\ndid not dispute that the tax might be constitutional if applied to containers used\nin interstate commerce, but held that a \xe2\x80\x9cmore extensive inquiry is required\xe2\x80\x9d\nwhen a regulation affects foreign commerce. 441 U.S. at 445-46. To justify its\nstrict scrutiny, the Court first noted that the tax resulted in multiple taxation of\nthe instrumentalities of foreign commerce. Second, the Court determined that\nthe tax at issue interfered with the ability of the nation to pursue a uniform\npolicy in light of a treaty with Japan that forbade the taxation of containers.\nJapan Lines does not address the issue of whether the Commerce Clause\napplies to a state\xe2\x80\x99s action as a market participant. One of the rationales for the\ndecision \xe2\x80\x94 the danger that states may subject foreigners to multiple regulation\nor taxation \xe2\x80\x94 clearly does not apply to state divestment statutes. As we will discuss\nin Part m , the national interest in uniformity is not impaired by these divestment\nstatutes, because no statute or treaty purports to regulate proprietary decisions with\nrespect to doing business with companies that operate in South Africa.\nMore recently, in Container Corp. v. Franchise Tax Bd., 463 U.S. 159\n(1983), the Court distinguished Japan Lines and upheld a unitary tax on the\nsubsidiaries of foreign corporations, noting that no statute or treaty prohibited\nthe tax, and that the risk of retaliation seemed slight. The Court stated that\nwhile it would review the state tax at issue, it had \xe2\x80\x9clittle competence in\ndetermining precisely when foreign nations will be offended by particular acts,\nand even less competence in deciding how to balance a particular risk of\nretaliation against the sovereign right of the United States as a whole to let the\nstates tax as they please.\xe2\x80\x9d Id. at 194. Such sentiments confirm our conclusion\nthat courts would be justifiably reluctant to strike down an exercise of state\nproprietary power on account of potential interference with foreign affairs when\nCongress and the President have not acted to prohibit state divestment statutes.\nB. Possible Restrictions on the Scope o f the Market Participant Doctrine\n\nIn South-Central Timber Dev., Inc. v. Wunnicke, supra, four Justices sug\xc2\xad\ngested that they would restrict the scope of the market participant doctrine.14\n14 Justice W hite wrote the plurality opinion; he was jo in ed by Justices B rennan, B lackm un and Stevens.\nJustice R ehnquist, joined by Justice O \xe2\x80\x99Connor, dissented from the plurality\xe2\x80\x99s view s on the issue o f w hether\nA laska w as acting as a m arket participant, stating that the m arket participant doctrine should shield the\nContinued\n\n55\n\n\x0cThey refused to uphold an Alaskan statute which required that timber pur\xc2\xad\nchased from Alaska be processed in the state. The plurality opinion sharply\ndistinguished the market for timber sales and the market for timber processing\nand stated that Alaska\xe2\x80\x99s participation in the former market did not immunize\nfrom Commerce Clause scrutiny restrictions imposed \xe2\x80\x9cdownstream\xe2\x80\x9d on the\nlatter market. 467 U.S. at 98-99. Citing the law on restraints on alienations, the\nplurality opinion first reasoned that the market participant doctrine should not\napply because a state as a private trader intuitively has a \xe2\x80\x9cgreater interest as a\n\xe2\x80\x98private trader\xe2\x80\x99 in the immediate transaction than it has in what its purchaser\ndoes with the goods after the State no longer has an interest in them.\xe2\x80\x9d Id. at 98.\nSecond, the Court stated that \xe2\x80\x9cdownstream restrictions\xe2\x80\x9d have greater regulatory\neffect than limitations on the immediate transaction.\xe2\x80\x9d Id.\nWe believe that even were South-Central Timber a majority holding, it\nwould not prevent the application of the market participation doctrine to state\ndivestment statutes. The requirements that the state divestment statutes impose\non those who contract with or receive investment capital from the state are\nmore like the requirements imposed on construction firms in White v. Massa\xc2\xad\nchusetts Council o f Constr., supra, than the requirements imposed by Alaska\non buyers of timber. The state divestment statutes do not attach continuing\nconditions on the use of a natural resource once that resource passes out of the\ncontrol of the states and into the hands of a private trader. Instead these statutes\nimpose conditions precedent on companies who are competing for state con\xc2\xad\ntracts or investments. They thus are not comparable to restraints on alienation.\nNor do we believe that state divestment statutes generally constitute regula\xc2\xad\ntion because of their \xe2\x80\x9cdownstream effects\xe2\x80\x9d in a market in which the state is not\na market participant. The plurality opinion in South-Central Timber rested on\nthe finding that Alaska was not a participant in the timber processing market.\nAccording to Justice White, Alaska\xe2\x80\x99s contractual condition demanding that its\ntimber be processed in-state was therefore to be scrutinized for regulatory\neffects. In contrast, state divestment statutes do not impose conditions in\nmarkets in which the state is not participating. For instance, in refusing to buy\ncomputers from a certain computer manufacturer, the state is acting in a way\nthat affects the market for computers \xe2\x80\x94 a market in which it is ex hypothesi a\nparticipant. In refusing to invest in the computer company, the state is simply\naffecting the market for securities \xe2\x80\x94 a market in which the state is participating\nas an investor.15\n14 ( . . . continued)\nA laskan statute from C om m erce Clause scrutiny. C hief Justice Burger and Justice Powell dissented, arguing\nthat the court should rem and the case to the Ninth C ircuit to permit that court to consider the market\nparticip an t issue. Justice M arshall did not participate.\n15 A lthough the p lurality opinion does n o t fully explicate the reasons that the im position of this particular\ncontractu al condition caused \xe2\x80\x9cdownstream effects\xe2\x80\x9d am ounting to regulation, a plausible rationale would be\nthat 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\nsom e com m entators that a state should be treated as a regulator when it exercises m onopoly power. See supra\nnote 7. B ecause o f its m onopoly position, A laska was in a position to coerce the contractors in a m anner that\nis d ifficu lt to distin g u ish from the coercive effect o f sovereign regulatory power. The conditions required by\nContinued\n\n56\n\n\x0cThe plurality opinion in South-Central Timber, however, is not binding\nprecedent, and we believe that not all of its reasoning flows logically from the\nstructure of the market participation doctrine. Wherever the state exercises its\npower as a buyer or investor to impose some contractual term on a company\nwith which it deals, it is acting as in its proprietary rather than regulatory\ncapacity. The kind of contractual condition the state chooses to impose should\nnot affect the application of the market participation doctrine, given the ration\xc2\xad\nales supporting the doctrine. In imposing requirements on companies with\nwhich it is doing business, the state is still acting as \xe2\x80\x9ca guardian and trustee of\nits people,\xe2\x80\x9d Reeves, 447 U.S. at 438, and is still acting with the freedom\npermitted private businesses in the absence of state or federal legislation to the\ncontrary. Thus, the legality of the state\xe2\x80\x99s contractual condition is more logically\nevaluated under legal provisions, which Congress has enacted to regulate\nexercises of proprietary power, than under the Commerce Clause. See SouthCentral Timber , 467 U.S. at 102-03 (Rehnquist, J., dissenting). Therefore we\nbelieve that if the Court follows the sound logic of its majority opinions\ninterpreting the market participation doctrine, the South African divestment\nstatutes will be upheld.\nFinally, it may be argued that in Wisconsin D ep\xe2\x80\x99t o f Industry, Labor and\nHuman Relations v. Gould, Inc., 475 U.S. 282 (1986), the Supreme Court\nimplicitly restricted the scope of the market participant doctrine in Commerce\nClause analysis. In that case, the Supreme Court held that the National Labor\nRelations Act (NLRA) preempted a Wisconsin statute, which suspended\nWisconsin\xe2\x80\x99s business dealings with persons or firms who had violated the\nNLRA three times within a 5-year period. The Court reasoned that because the\nWisconsin debarment statute functioned as a supplemental sanction for viola\xc2\xad\ntions of the NLRA, it conflicted with the National Labor Relations Board\xe2\x80\x99s\ncomprehensive regulation of industrial relations in the same way as would a\nstate prohibition on private parties doing business with repeat labor law viola\xc2\xad\ntors. Thus the holding in Gould rests explicitly on the preemptive force of the\nNLRA and is not premised in any way on the dormant Commerce Clause.\nNevertheless, in response to the argument that preemption analysis was\ninappropriate, the Court briefly discussed the market participation doctrine\nonly to dismiss it as inapposite. It held that \xe2\x80\x9cthe market participant doctrine\nreflects the particular concerns underlying the Commerce Clause, not any\ngeneral notion regarding the necessary extent of state power in areas where\nCongress has acted." Id. at 289 (emphasis added). Emphasizing that \xe2\x80\x9cwhat the\nCommerce Clause would permit States to do in the absence of the NLRA is\nthus an entirely different question from what the States may do with the Act in\n15 Continued\nthe divestm ent statutes, how ever, are not im posed from a position o f m onopoly power N o state approaches\nhaving m onopoly pow er in the capital m arkets and therefore state statutes directing the manner o f the\ninvestm ent o f their funds are in no sense coercive. M oreover, because states rarely have monopoly pow er m\nmarkets in which they purchase goods and services, most divestm ent statutes which take the form o f refusing\nto contract with com panies doing business w ith South A frica are readily distinguishable from South-Central\n\nTimber.\n\n57\n\n\x0cplace,\xe2\x80\x9d the Court held that in passing the NLRA, Congress intended to prohibit\nthe states from interfering in any way with the \xe2\x80\x9cinterrelated federal scheme of\nlaw, remedy, and administration.\xe2\x80\x9d Id. (citations omitted).\nThe only support for arguing that Gould restricted the scope of the market\nparticipation doctrine in the Commerce Clause comes from a single sentence at\nthe start of the Court\xe2\x80\x99s discussion of the applicability of the doctrine to\npreemption analysis under the NLRA:\nWe agree with the Court of Appeals, however, that by flatly\nprohibiting state purchases from repeat labor law violators, Wis\xc2\xad\nconsin \xe2\x80\x9csimply is not functioning as a private purchaser of\nservices,\xe2\x80\x9d 750 F.2d at 614; for all practical purposes, Wisconsin\xe2\x80\x99s\ndebarment scheme is tantamount to regulation.\nId. We do not read this sentence as indicating that the Supreme Court would\n\nconsider a refusal to contract with companies doing business in South Africa to\nbe regulation under the Commerce Clause.\nFirst, the most logical interpretation of this sentence is that the Court viewed\nthe Wisconsin statute as regulation because the statute specifically linked the\nstate\xe2\x80\x99s decisions to violations o f the NLRA, a federal regulatory scheme. This\nreading is supported by the Court\xe2\x80\x99s citation to the appellate court\xe2\x80\x99s opinion,\nwhich in its discussion of preemption stated:\nWisconsin simply is not functioning as a private purchaser of\nservices. The question is the rationale underlying Wisconsin\xe2\x80\x99s\nlaw. When the policy the law promotes is not efficient use of\nstate funds but the intent to effect compliance with the NLRA, the\nregulation is preempted by the NLRA\xe2\x80\x99s establishment of a com\xc2\xad\nprehensive regulatory scheme meant to preclude state action.\nGould v. Wisconsin D ep\xe2\x80\x99t o f Industry, Labor and Human Relations, 750 F.2d\n608,614 (7th Cir. 1984) (emphasis added). The South African divestment laws\ndo not depend for their operation on reference to a federal or state regulatory\nscheme. Moreover, unlike a regulatory scheme, the statutes do not disqualify\ncompanies from eligibility for state contracts on the basis of past actions, but\nrather make the continuing eligibility of the companies subject to certain\nconditions with which they can comply. Thus, these statutes do not operate like\nthe statute at issue in Gould, but rather like the statute at issue in White v.\nMassachusetts Council of Constr. Employers, supra, in which the City of\nBoston refused to do business with contractors who did not satisfy certain\nconditions. Because Gould reaffirmed the continuing validity of White, see 475\nU.S. at 289, we do not believe that Gould may be fairly interpreted to deny that\nsuch conditional refusals to deal enjoy protection from Commerce Clause\nscrutiny.\nSecond, Gould carefully distinguished the sound foundations of the market\nparticipation doctrine in Commerce Clause analysis from the inappropriateness\nof its extension in the area of preemption analysis under the NLRA. The Court\n\n58\n\n\x0creaffirmed that the Commerce Clause is not intended to \xe2\x80\x9climit the ability of the\nStates themselves to operate freely in the free market,\xe2\x80\x9d id. (quoting Reeves, 447\nU.S. at 437), and emphasized that the NLRA, in contrast, was intended \xe2\x80\x9cin\nlarge part to entrust the administration of the labor policy for the Nation to a\ncentralized administrative agency.\xe2\x80\x9d Id. at 289-90 (citations omitted). What is\ndeemed to be regulation in analyzing the preemptive effect of the NLRA\ntherefore is not a guide to what will be considered regulation under Commerce\nClause analysis. Finally, it is hardly conceivable that the Court wished to shed\nlight on the scope of the market participation doctrine in the Commerce Clause\nby means of a single sentence in a preemption case. As we have seen from the\ndiscussion in South-Central Timber, the scope of the doctrine is highly contro\xc2\xad\nversial and at least two of the Justices have taken a position that is flatly\ninconsistent with treating a debarment statute as \xe2\x80\x9cregulation\xe2\x80\x9d under the Com\xc2\xad\nmerce Clause. See South-Central Timber, 467 U.S. at 101-02 (Rehnquist, J.,\ndissenting). We therefore do not believe that Gould sheds appreciable light on\nthe scope of the market participation doctrine.16\nII. Interference with the Federal Government\xe2\x80\x99s\nForeign Affairs Power\nNo provision of the Constitution furnishes the federal government with a\ngeneral power to conduct foreign affairs. The President, of course, is Com\xc2\xad\nmander in Chief of the armed forces of the United States and is also authorized\nto enter into treaties and to appoint and receive ambassadors. U.S. Const, art. II,\n\xc2\xa7 2. Congress is given authority to regulate foreign commerce, to define\noffenses against the law of nations and to declare war. Id., art. I, \xc2\xa7 8.17The state\ndivestment statutes do not interfere with any of these enumerated foreign\naffairs powers of the President or Congress.\nNor does the Constitution contain a general prohibition against state actions\nthat interfere with the federal government\xe2\x80\x99s conduct of foreign affairs. The\nConstitution imposes the. following specific prohibitions on the states in the\narea of foreign affairs:\nNo State shall enter into any Treaty, Alliance, or Confedera\xc2\xad\ntion; grant Letters of Marque and Reprisal.\n*\n\n*\n\n*\n\nNo State shall, without the Consent of the Congress, lay any\nImposts or Duties on Imports or Exports, except what may be\n16 In any event, even on its broadest reading, the sentence in Gould does not suggest that a refusal to invest\nin a certain class o f com panies is tantam ount to regulation. A refusal to contract with a com pany has the effect\no f denying the company a discrete amount o f sales that it would otherw ise have enjoyed. Such a refusal\ntherefore has the potential to change the com pany\xe2\x80\x99s behavior so that it may receive the city contract. The\nrefusal to invest in a com pany, particularly a com pany w ith a nationw ide market fo r its securities, has\nconsiderably less effect, because market forces will lead others to purchase the securities at the sam e or\nm arginally low er prices. B ecause a refusal to invest has such limited potential impact, it cannot seriously be\ncalled regulation even in a Figurative sense o f that term.\n17 The Foreign Com m erce C lause is discussed above. See supra Part I.\n\n59\n\n\x0cabsolutely necessary for executing its inspection Laws: and the\nnet Produce of all Duties and Imposts, laid by any State on\nImports or Exports, shall be for the Use of the Treasury of the\nUnited States; and all such Laws shall be subject to the Revision\nand Controul of the Congress.\nNo State shall, without the Consent of Congress, lay any Duty\nof Tonnage, keep Troops, or Ships of War in time of Peace,\nenter into any agreement or Compact with another State, or with\na foreign Power, or engage in War, unless actually invaded or in\nsuch imminent Danger as will not admit of delay.\nU.S. Const, art. I, \xc2\xa7 10, els. 1-3. None of these prohibitions puts any explicit\nlimit on the use of state regulatory or proprietary power that affects foreign\ngovernments and consequently the conduct of foreign affairs.\nNevertheless, the Supreme Court has recognized a general principle of\nfederal governmental power to conduct foreign affairs beyond the powers\nenumerated in the Constitution. This general power has been derived from the\nproposition that the power to regulate international affairs never resided in the\nstates and therefore was not transmitted to the federal government by the\nConstitution. Instead, the federal government inherited this general power as a\nsuccessor to Great Britain. United States v. Curtiss-Wright Export Corp., 299\nU.S. 304 (1936).18\n\n18 The C ourt explained its theory as follows:\nIt w ill co n trib u te to the elucidation o f th e question if we first consider the difference betw een the\npow ers o f the federal government in respect o f foreign o r external affairs and those in respect o f\ndom estic o r internal affairs. That there are differences betw een them, and that these differences\nare fundam ental, m ay not be doubted.\nT he tw o classes o f pow ers are different, both in respect o f their origin and their nature. The\nbroad statem ent that the federal governm ent can exercise no pow ers except those specifically\nenum erated in the C onstitution, and su ch im plied pow ers as are necessary and proper to carry\ninto effect the enum erated powers, is categorically true only in respect o f our internal affairs. In\nthat field, the prim ary purpose o f th e C onstitution w as to carve from the general mass of\nleg islativ e pow ers then possessed by the states such portions as it was thought desirable to vest m\nthe federal governm ent, leaving those n o t included in the enum eration still in the states. Carter v.\nCarter Coal Co., 298 U.S. 238, 294. T hat this doctrine applies only to powers which the states\nhad, is s e lf evident. And since the states severally never possessed international pow ers, such\npow ers could not have been carved fro m the mass o f state pow ers but obviously were transmitted\nto the U nited States from some o th er source. During the colonial period, those pow ers were\npossessed exclusively by and were en tirely under the control o f the C row n. By the D eclaration o f\nIndependence, \xe2\x80\x9cthe Representatives o f the U nited States o f A m erica" declared the U nited [not\nthe several] C olonies to be free and independent states, and as such to have \xe2\x80\x9cfull Pow er to levy\nW ar, conclude Peace, contract A lliances, establish C om m erce and to do all other Acts and Things\nw hich Independent States may o f rig h t d o .\xe2\x80\x9d\nCurtiss-Wright Corp., 299 U.S. at 315-16 (S utherland, J.) (em phasis m original).\nJustice S u th e rlan d \'s argum ent has been ju stly criticized as a m isreading o f the historical evidence. The\nfram ers seem to have believed that federal pow er in foreign affairs rested on explicit and im plicit constitu\xc2\xad\ntional g rants o f authority. See generally, C . Lofren, United States v. Curtiss-Wright Export Corporation: An\nHistorical Reassessment, 83 Y ale L. Rev. 1 (1973).\n\n60\n\n\x0cA. The Effect o f Zschemig v. Miller\n\nThe Court has only once employed this general power to strike down an\nexercise of state police power that affected foreign affairs. In Zschem ig v.\nMiller, 389 U.S. 429 (1968), the Court invalidated an Oregon statute as an\nunconstitutional intrusion into the federal field of foreign affairs, even though,\nas the federal government itself admitted, the statute did not conflict with any\nfederal treaty or statute. The state statute at issue provided that a nonresident\nalien could not inherit property from an Oregon decedent unless three condi\xc2\xad\ntions were satisfied: (1) the alien\xe2\x80\x99s government must accord Americans the\nright to inherit on equal terms with its citizens; (2) the alien\xe2\x80\x99s government must\ngive Americans the right to receive payment in the United States of funds from\nforeign estates; and (3) the nonresident alien must be able to receive \xe2\x80\x9cthe\nbenefit, use or control\xe2\x80\x9d of the proceeds of the Oregon estate \xe2\x80\x9cwithout confisca\xc2\xad\ntion\xe2\x80\x9d by his government. The Court concluded that this type of probate law as\nenforced in the Oregon courts had \xe2\x80\x9ca direct impact on foreign relations and\nmay well adversely affect the power of the central government to deal with\nthose problems.\xe2\x80\x9d Id. at 441. Justice Douglas stressed that the federal\ngovernment\xe2\x80\x99s foreign policy prerogatives were offended because the state\ncourts made persistent inquiries into the actual administration of foreign laws\nand in doing so questioned the credibility of foreign officials and made ad hoc\ndecisions based on \xe2\x80\x9cforeign policy attitudes\xe2\x80\x9d toward particular governments.\nSee 389 U.S. at 437 (\xe2\x80\x9cAs one reads the Oregon decisions, it seems that foreign\npolicy attitudes, the freezing or thawing of the \xe2\x80\x98cold war,\xe2\x80\x99 and the like are the\nreal desiderata\xe2\x80\x9d).\nZschemig stands for the proposition that the Court will scrutinize state\nstatutes to determine whether such statutes have a direct impact on foreign\nrelations; the case may not fairly be interpreted to mean that the court will\nstrike down any state exercise of authority that has some indirect impact on\nforeign affairs or that is intended to affect the behavior of foreign governments.\nZschemig did not overrule Clark v. Allen, 331 U.S. 503 (1947), in which the\nCourt, in an opinion also written by Justice Douglas, upheld the facial validity\nof a California statute similar to the first two sections of the Oregon law.19\nAlthough the California statute was clearly designed to influence foreign\ncountries to change their laws to allow Americans to inherit, the Court dis\xc2\xad\nmissed the challenge to the statute as \xe2\x80\x9cfarfetched.\xe2\x80\x9d Id. at 517.20 Emphasizing\nthat \xe2\x80\x9crights of succession\xe2\x80\x9d were peculiarly a matter of local law, the Court\nagreed that \xe2\x80\x9cwhat California has done will have some incidental or indirect\neffect on foreign countries,\xe2\x80\x9d but concluded \xe2\x80\x9cthat is true of many state laws\nwhich none would claim cross the forbidden line.\xe2\x80\x9d Id.\n19The C alifornia statute requires (1) that the a lie n \'s governm ent must accord Americans the right to inherit\non equal term s with its citizens; and (2) that the a lie n \'s governm ent must give Americans the right to receive\npaym ent in the United States o f funds from foreign estates.\n20The C ourt analogized the case to Blythe v Hinckley , J80 U.S. 333 (1901), which rejected the claim that\na statute granting aliens an unqualified n g b t to inherit property constituted, in the absence of a treaty, a\nforbidden intrusion into foreign affairs.\n\n61\n\n\x0cRead together, Zschemig and Clark suggest that even in scrutinizing state\nstatutes that have an impact on foreign affairs, the Court will balance the degree\nto which the statute intrudes on foreign affairs against the degree to which the\nexercise of the state power falls within traditional state powers. In both Clark\nand Zschem ig, states were performing a traditional state function in establish\xc2\xad\ning a rule of inheritance. What distinguished the cases was that the California\nstatute had only an indirect influence on foreign affairs because the state\nlegislature\xe2\x80\x99s judgment could be implemented simply through the \xe2\x80\x9croutine\nreading of foreign law.\xe2\x80\x9d Zschemig, 389 U.S. at 433. The Oregon statute, on the\nother hand, by forcing state courts to assess the actual operation of foreign laws\nallowed state courts to evaluate the credibility of foreign representatives and engage\nin persistent \xe2\x80\x9cjudicial criticism\xe2\x80\x9d of foreign states \xe2\x80\x94 actions that are outside the state\ncourt\xe2\x80\x99s ordinary competence and which have a direct impact on foreign relations.\nApplication of such a balancing test to divestment statutes yields the conclu\xc2\xad\nsion that they do not impermissibly encroach into the realm of foreign affairs.\nFirst, like the statute at issue in Clark, and unlike the statute at issue in\nZschem ig, the implementation of the South African divestment statute would\nrequire no investigation by state officials into the operation of South African\nlaw and require no assessment of the credibility of South African officials.\nSecond, the statute would fall directly on American companies and only\nindirectly on South Africa. Moreover, in deciding how it will invest funds\nunder its control, a state acts as \xe2\x80\x9cguardian and trustee of its people,\xe2\x80\x9d see Reeves,\n447 U.S. at 438, and therefore the state should be given greater latitude to\nexpress its citizens\xe2\x80\x99 views than in regulatory measures.\nFinally, in evaluating the impact of state investment decisions on foreign\npolicy, it should be noted that a state is necessarily involved in the investment\nof state funds. States do not have to put reciprocity clauses in their probate\nstatutes, but a state must decide to invest state funds on some basis. A state for\ninstance, may decide not to invest in a company doing business in South Africa\nbecause it believes that there is a large risk of revolution and, thus, of expro\xc2\xad\npriation in that country. The decision would have an impact on South Africa\nand on national policy toward that country identical to a decision to divest on\nthe basis of moral opposition to South Africa\xe2\x80\x99s system of apartheid.21 But\nsurely no one would suggest that states are constitutionally forbidden from\nmaking such investment decisions. We therefore question the proposition that\nstate divestment statutes should be subject to challenge simply because they\nhave some impact on South Africa and our foreign policy toward that country.\nIf state investment decisions are subject to invalidation for intrusion into\nforeign policy, we perceive no limiting principle to prevent constant judicial\nscrutiny of those decisions for consistency with some perceived foreign policy.\n21 It m ight be argued that a decision to d iv est based on moral grounds had a greater stigm atizing effect than\nsuch a decision based on purely economic g rounds. W e b elieve, how ever, that a refusal to invest on econom ic\ngrounds rep resen ts a vote o f no>confidence in South A frica \'s future and therefore has a stigm atizing effect. In\nany 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\nto the state \xe2\x80\x99s investm ent practices o r its b usiness dealings. See supra note 6.\n\n62\n\n\x0cB. Zschemig v. M iller and the Market Participant Doctrine\n\nAlthough we believe that South African divestment statutes should and\nwould survive application of the principle embodied in Zschemig v. Miller, we\ndo not think the principle should be extended to state proprietorial action.\nWe believe that the reasoning underlying the market participant doctrine in\nthe area of the dormant Commerce Clause has general applicability.22 Any\nconstitutional principle or privilege relied on to preempt state exercise of\nproprietary power must be analyzed to determine whether the principle or\nprivilege was specifically aimed at constraining proprietary power.23 In the\nabsence of any such intent, it is inappropriate to strike down a state\xe2\x80\x99s exercise\nof proprietary power unless the federal government affirmatively invokes its\nauthority to regulate the state\xe2\x80\x99s market dealings to the extent and in the same\nmanner that it may regulate any other participant.24\nThe historical rationale for the general federal power over foreign affairs\ndoes not imply the displacement of state proprietary power. Although, accord\xc2\xad\ning to Curtiss-Wright, the states never had any power to conduct foreign\nrelations and consequently the federal government received such powers as\n22 Gould , 475 U.S. 282, is not to the contrary. There the C ourt rejected the extension o f the m arket\nparticipant doctrine to preem ption analysis under the NLRA, reasoning that the NLRA\xe2\x80\x99s com prehensive\nregulatory scheme reflects an intent to prevent state action that supplem ents the penalties prescribed by the\nAct. The C ourt specifically contrasted the NLRA with the C om m erce C lause, w hich does not interfere in and\no f itself with the pow er o f the states to contract freely in the open market. Therefore the m arket participation\ndoctrine may be extended to legal provisions o r principles that are not intended to constrain state proprietary\nas opposed to regulatory power.\n23 We do not believe, o f course, that the regulatory/proprietary distinction should be applied to dim inish the\nconstitutional protections that apply directly to the states. A state could not, for instance, grant contracts on\nthe basis o f racial preference simply because it was exercising proprietary rather than regulatory pow ers.\nSim ilarly, because m ost o f the protections o f the Bill o f Rights have been applied directly to states by the\nSupreme C ourt, state action o f w hatever kind \xe2\x80\x94 proprietary or regulatory \xe2\x80\x94 is subordinate to those rights. In\ncontrast, the legal provisions at issue here \xe2\x80\x94 the Commerce C lause, the general federal pow er over foreign\naffairs, and E xecutive O rder No. 12532 \xe2\x80\x94 impose no explicit prohibition on the states\xe2\x80\x99 exercise o f power. In\nattem pting to determ ine the extent to which the negative im plications o f these provisions should forestall the\nexercise o f state power, the proprietary /regulatory distinction is useful because it bears both on the strength o f\nthe state interest in exercising pow er and the federal interest in constraining that pow er. See W ells &\nH ellerstein, The Governmental-Proprietary Distinction in Constitutional Law , 66 Va. L. Rev. 1073, 1134\xe2\x80\x9435\n(1980)\n24 Garcia v. San Antonio Metropolitan Transit Authority , 469 U.S. 528 ( 1985), is not inconsistent w ith the\napplication o f the proprietary/regulatory distinction to lim it the use o f negative implications o f constitutional\nprinciples to prohibit state action. In Garcia , the Suprem e C ourt held that notions o f state sovereignty did not\nprevent the federal governm ent from imposing m inim um wage and overtime provisions on em ployees o f state\nmass transit system s. The Garcia C ourt explicitly overruled National League o f Cities v. Usery , 426 U.S. 833\n(1976), which held that \xe2\x80\x9ctraditional governm ental functions o f the state\xe2\x80\x9d w ere immune from federal regula\xc2\xad\ntion. In arguing that state divestm ent statutes are not preem pted by the federal foreign affairs power, the\nC om m erce C lause, o r any federal statute, we do not argue that a state\xe2\x80\x99s actions as a market participant cannot\nbe regulated o r prohibited if C ongress chooses to do so.\nIndeed, the underlying rationale o f Garcia supports the argum ent that the representative branches o f the\nfederal governm ent rather than the courts should decide w hether the state m ay divest from or refuse to\ncontract with com panies which do business in South Africa. In Garcia, the C ourt reasoned that there w as no\nneed for the judiciary to protect state sovereignty because \xe2\x80\x9cthe [national] political process ensures that laws\nthat unduly burden the states will not be prom ulgated.\xe2\x80\x9d 469 U.S. at 556. The protection o f national political\nprocess is rendered illusory, however, if the state proprietorial actions are struck down by the negative\nim plications o f unexercised federal pow ers rather than affirm ative action o f the federal governm ent.\n\n63\n\n\x0csuccessor to Great Britain, the states have always possessed proprietary pow\xc2\xad\ners. As the Supreme Court has emphasized, the power to impose conditions on\nstate contractors derives from the power of any corporate entity, private or\npublic, to deal with whomever it chooses. See, e.g., Perkins v. Lukens Steel Co.,\n310 U.S. 113, 127 (1940) (\xe2\x80\x9cLike private individuals and businesses, the gov\xc2\xad\nernment enjoys the unrestricted power to produce its own supplies and to\ndetermine with whom it will deal and to fix the terms and conditions upon\nwhich it will make the needed purchases\xe2\x80\x9d). Because states, like any corporate\nentity, possessed proprietary powers at the time of the Constitution, these\npowers should not be displaced unless they are prohibited by a specific limita\xc2\xad\ntion imposed by the Constitution or federal legislation passed pursuant to a\nconstitutional grant of power to the federal government.25\nMoreover, the functional rationale for displacing state regulatory power does\nnot apply fully to a state\xe2\x80\x99s exercise of proprietary power. A state regulation\nprohibiting certain corporations (e.g., those organized under the state\xe2\x80\x99s laws, or\nthose doing business within the state\xe2\x80\x99s borders) from undertaking business in a\nforeign country would directly affect that foreign country and might have a\nlarge potential influence on that country\xe2\x80\x99s attitudes toward the United States. In\ncontrast, the state\xe2\x80\x99s power to refuse to deal locally with companies doing\nbusiness in a foreign country is by its nature limited, because it leaves the\nultimate decisions whether to continue to do business in the foreign country\nwith the corporations themselves.\nIV. Preemption!\nThe final ground on which the divestment statutes may be attacked is that of\npreemption. It has been suggested that both the Export Administration Act and\nExecutive Order No. 12532 demonstrate an intent by the federal government to\npreempt any exercise of state power that affects companies doing business with\nSouth Africa. Neither Executive Order No. 12532 nor the Act, however,\nrepresents a comprehensive regulation of trade or investment with South Af\xc2\xad\nrica, nor do they display any intent to displace the traditional power of the state\nto make investment and contracting decisions.\nThe touchstone of a preemption claim is the intent of Congress. See Malone\nv. White M otor Corp., 435 U.S. 497, 504 (1978). When the state law at issue in\na preemption case is enacted \xe2\x80\x9cin a field which the states have traditionally . . .\noccupied we start with the assumption that historic . .. powers of the states\n[are] not to be [ousted] by the Federal Act unless that were the clear and\nmanifest purpose of Congress.\xe2\x80\x9d Rice v. Santa Fe Elevator Corp., 331 U.S. 218,\n230 (1947). The exercise of proprietary powers to contract with and invest in\ncompanies of their choice is, to say the least, a field traditionally occupied by\n23 As w e h ave discu ssed above, see supra notes 12, 13, w hen the Fram ers discussed the danger o f state\nintervention in foreign affairs, the danger to which they specifically referred invariably arose from an\nexercise o f state regulatory pow er, usually in the form o f tariffs. O ur research has revealed no evidence that\nFram ers w ere concerned w ith th e effects o f decisions by states as market participants.\n\n64\n\n\x0cthe states. Therefore, it should be inferred that Congress or the President\nintended to preempt state proprietary powers only when such an intent is\nexplicit or \xe2\x80\x9cwhere the scheme of federal regulation [is] so pervasive as to make\nreasonable the inference that Congress [or the President] left no room to\nsupplement it.\xe2\x80\x9d Id.\nHere, however, neither Executive Order No. 12532 nor the Export Adminis\xc2\xad\ntration Act explicitly prevents the state from investing or contracting with\ncompanies it chooses, even if those choices are based on its views toward South\nAfrica. Nor does either Executive Order No. 12532 or the Export Administra\xc2\xad\ntion Act demonstrate an intent to occupy the field of investment or contractual\ndecisions so as to raise any inference that the state divestment statutes are\npreempted.26\nThe Export Administration Act permits the President to control exports for\nreasons of national security, foreign policy and short supply. See 50 U.S.C.\napp. \xc2\xa7\xc2\xa7 2404-2406. The Act outlines the factors governing invocation of the\nAct and establishes various procedures for reporting to Congress. The legisla\xc2\xad\ntion is thus principally designed to authorize the President to curtail trade in a\nnational emergency. Although the Export Administration Act does state that it\nis the policy of the United States to encourage free trade, see 50 U.S.C. app.\n\xc2\xa7 2401, it does not purport generally to regulate the proprietary decisions of\nentities \xe2\x80\x94 public or private \xe2\x80\x94 with respect to companies doing business in any\nparticular nation.27 Therefore, whatever the preemptive effect of the statute on\nstate regulation of companies doing business in South Africa, the Export\nAdministration Act cannot be deemed to preempt state divestment statutes.\nThe recent case of Wisconsin D ep\xe2\x80\x99t o f Industry v. Gould, Inc., supra, does\nnot strengthen the case for preemption by the Export Administration Act. The\nNLRA represents a \xe2\x80\x98\xe2\x80\x9ccomplex and interrelated federal scheme of law, remedy\n26 Hines v. Davidowitz, 312 U.S. 20 (1941) is therefore inapposite. In that case, the Suprem e Court struck\ndown a Pennsylvania law that required aliens living in the state to register on the grounds that Congress had\nalready passes a \xe2\x80\x9ccom plete system for alien registration." Id. at 51. Here C ongress has passed no legislation\ncom prehensively regulating investm ent or contractual decisions.\n27 The Export A dm inistration Act forbids corporations from joining a boycott against one foreign nation\ninitiated by another foreign nation. Section 2407 o f the Export A dm inistration Act authonzes the President to\nissue regulations prohibiting entities from\ntaking o r know ingly agreeing to take . . . [certain] actions with intent to comply w ith, further, or\nsupport any boycott fostered o r imposed by a foreign country against a country that is fnendly to\nthe U nited States and which is not itself the object o f any form o f boycott pursuant to United\nStates law and regulations.\nThese boycott provisions are inapplicable here, however, because the states in enacting the divestm ent\nstatutes are not joining a boycott initiated by another country, but are acting either to safeguard their\ninvestm ents or to reflect the m oral view s o f their citizens tow ard South A frica\xe2\x80\x99s racial policies.\nIndeed, the boycott provisions support the proposition that other provisions in general do not preempt state\nlaw. Section 2407(c) specifically declares:\n[Section] 2407 and the regulations issued pursuant to it, shall preem pt any law, rule, o r regula\xc2\xad\ntions 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\nsubdivision thereof, which law, rule, o r regulation pertains to participation in, com pliance with,\nim plem entation of, or the furnishing o f inform ation regarding, restrictive trade practices, or\nboycotts fostered o r imposed by foreign countries against other countries.\nThe inference through the principle o f inclusio unius est exclusio alterius is therefore that the other\nprovisions o f the A ct are not intended to preem pt state law.\n\n65\n\n\x0cand administration.\xe2\x80\x99\xe2\x80\x9d 475 U.S. at 286; see San Diego Building Trade Council\nv. Garmon, 359 U.S. 236 (1969). As a result the NLRA occupies the field of\nindustrial relations and the preemptive effect of labor law has always been\ngiven extraordinarily broad scope. As the Gould Court itself noted, \xe2\x80\x9cit is by\nnow a commonplace that in passing the NLRA, Congress largely displaced\nstate regulation of industrial relations.\xe2\x80\x9d 475 U.S. at 286. In contrast, the Export\nAdministration Act does not represent a complex scheme of regulation: its\nessential function is simply to permit the President under certain conditions to\nregulate trade with certain countries.\nMoreover, the essential premise of Gould was that the Wisconsin statute\nacted as a supplemental remedy to the NLRA because it specifically condi\xc2\xad\ntioned the suspension of state business dealings on a violation of the NLRA.\nBecause the NLRA already provided a comprehensive and integrated set of\nremedies, Wisconsin\xe2\x80\x99s debarment statute, viewed as an additional sanction,\nwas preempted. See Gamer v. Teamsters, 346 U.S. 485,498-99 (1953) (stating\nthat the \xe2\x80\x9cconflict [between state and federal law] is imminent\xe2\x80\x9d whenever \xe2\x80\x9ctwo\nremedies are brought to bear on the activity\xe2\x80\x9d). State divestment statutes,\nhowever, do not provide remedies for violations of a federal statute which itself\nprovides a comprehensive remedial scheme.\nIn our view, Executive Order No. 12532 is an even weaker reed on which to\nrest a preemption claim. Executive Order No. 12532 declared a national emer\xc2\xad\ngency pursuant to the International Emergency Economic Powers Act of 1977\n(50 U.S.C. \xc2\xa7\xc2\xa7 1701 et seq.) (IEEPA). Using authority granted under IEEPA,\nthe President imposed certain economic sanctions on South Africa. He also\nrequired United States companies operating in South Africa to conduct their\nbusiness there according to certain principles. Nothing in Executive Order No.\n12532, however, purported to require entities to continue to do business with\nSouth Africa or with companies doing business in South Africa. Nor does it\nrepresent a comprehensive scheme which is designed to regulate contractual or\ninvestment decisions relating to South Africa.\nMoreover, as the President himself stated, Executive Order No. 12532\n\xe2\x80\x9creflected Congressional concerns\xe2\x80\x9d underlying proposed legislation designed\nto forbid certain transactions with South Africa. See Message of the President\nto the Congress of the United States: Transmitting Notification of a Declaration\nof a National Emergency with Respect to South Africa (Sept. 9, 1985). In the\ncourse of the congressional debate on the statutory proposals, many proponents\nstated that the legislation was not intended to preempt state divestment legisla\xc2\xad\ntion. See, e.g., 131 Cong. Rec. 18824 (1985) (remarks of Senator Cranston). In\nthe absence of language to the contrary, this background strongly suggests that\nExecutive Order No. 12532 was not intended to preempt state legislation.28\n28 G iven th at E xecutive O rder No. 12532 does not on its face regulate state contracts or state investments,\ncou rts iikely w ould not take a preemption claim seriously un less the A dm inistration filed a b rief stating that\nthe E xecutive O rder was intended to p reem p t state laws. Cf. Container Corp., 463 U.S. at 195 n.33 (absence\no f S olicitor G en eral\xe2\x80\x99s b rie f claiming th at C alifornia tax interfered w ith execution o f U nited States foreign\npolicy was facto r in c o u rt\xe2\x80\x99s decision n o t to strike down tax). Therefore, in filing a b rie f arguing for the\nC ontinued\n\n66\n\n\x0cConclusion\nFor the reasons stated, we believe that state divestment legislation is consti\xc2\xad\ntutional. We therefore do not believe that the United States should file suit to\ninvalidate these laws or file any amicus brief on behalf of those seeking to\ninvalidate them.\nC harles\n\nJ. C o o p e r\n\nAssistant Attorney General\nOffice o f Legal Counsel\n\n28 (. . . continued)\npreem ptive effect o f the Executive O rder and, to a lesser extent, in making other argum ents in favor o f the\npreem ption o f state divestm ent, the A dm inistration would inevitably be m aking a policy choice \xe2\x80\x94 one that\nw ould not com port w ith its general policy o f favoring federalism .\n\n67\n\n\x0c'


b"September 6 , 1978\n\n78-49\n\nMEMORANDUM OPINION FOR THE GENERAL\nCOUNSEL, UNITED STATES WATER\nRESOURCES COUNCIL\nWater Resources Council (42 U .S.C . \xc2\xa7 1962a)\xe2\x80\x94\nAuthority to Expend Carried-Over Funds\n\nThis responds to your request for our opinion regarding the existence and\nspending authority of the Water Resources Council after the end of fiscal year\n(FY) 1978.\nThe Council was created by \xc2\xa7 101 of the Water Resources Planning Act of\n1965 (the Act), as amended, 42 U.S.C. \xc2\xa7 1962a. Its membership consists of the\nheads of eight Federal Agencies. Section 401 of the Act contains the\nauthorization for the Council\xe2\x80\x99s appropriations. In 1977, \xc2\xa7 401 was amended,\nand the provisions authorizing \xe2\x80\x9c annual\xe2\x80\x9d appropriations were replaced with\nauthorizations limited to fiscal year 1978. See Pub. L. No. 95-41, 42 U.S.C.\n\xc2\xa7 1962d.\nThe Senate passed S. 2701, legislation that would continue the Council\xe2\x80\x99s\nauthorization for 1 year. The version passed by the House would have\nabolished the Council on September 30, 1978. A conference committee\xe2\x80\x99s\nreport recommended the Council to continue for 1 year. See H. Rept. No.\n95-1494, 95th Cong., 2d sess. (1978). The conference report has not yet\nreceived floor consideration.\nFor fiscal year 1978, a total of $13,696,000 was appropriated for the\nCouncil. (See Title IV of the Public Works for Water and Power Development\nand Energy Research Appropriation Act for Fiscal Year 1978, Pub. L. No.\n95-96.) The FY 1978 appropriation act (and its predecessors) expressly\nprovides that the funds appropriated for the Council are \xe2\x80\x9c to remain available\nuntil expended.\xe2\x80\x9d After September 30, 1978, the Council will have available\nfunds carried over from prior fiscal years.\nThe conference report on the FY 1979 appropriation bill, H. Rept. No.\n95-1490, 95th Cong., 2d sess. (1978), is now awaiting floor action. Under that\nreport, no funds would be appropriated for the Council.\nYou assume that, as of October 1, 1978, no statute will have been enacted\neither authorizing or appropriating FY 1979 funds for the Council.You ask\nwhether, in such circumstances, the Council would continue to exist and\n195\n\n\x0cwhether it would have authority to spend funds carried over from previous\nfiscal years. Our opinion is that the Council would continue and that it could\nproperly spend the carried-over funds.\nThe provision establishing the Council will still be in effect. Notwithstanding\nthe absence of an FY 1979 authorization or appropriation, the Commission as\nan entity will continue. The primary issue is whether funds appropriated in FY\n1978 or a prior year could be used in FY 1979, because the Commission\xe2\x80\x99s\nability to carry out its functions depends upon the availability of funds.\nSection 501 of the FY 1978 appropriation act states that: \xe2\x80\x9c No part of any\nappropriation contained in this Act shall remain available for obligation beyond\nthe current fiscal year unless expressly so provided herein.\xe2\x80\x9d See also 31\nU.S.C. \xc2\xa7\xc2\xa7 712a and 718. As noted above, the appropriation for the Council is\nsubject to such an express exception; that is, the funds are \xe2\x80\x9c to remain available\nuntil expended.\xe2\x80\x9d Thus the Council can use carried-over funds after October 1,\n1978.'\nNo contrary result is called for by the Supreme Court\xe2\x80\x99s decision in the\nTellico Dam case, TVA v. Hill, 437 U.S. 153 (1978). There, relying in part on\nthe rule that repeals by implication are not favored, the majority held that the\nrequirements of the Endangered Species Act were not overridden by Congress\xe2\x80\x99\naction in appropriating funds for TVA, some of which were intended to be used\nfor the Tellico Dam. There is no comparable question of implied repeal here.\nThe present issue involves reconciling an authorization provision that is\nsilent regarding FY 1979 and an appropriation statute that expressly provides\nfor the possibility of the Council\xe2\x80\x99s spending FY 1978 funds after October 1,\n1978. The purpose of the latter provision is to change the effect of authorization\nstatutes that \xe2\x80\x9c [do] not specifically authorize such extended availability.\xe2\x80\x9d H.\nRept. No. 95-379, 95th Cong., 1st sess. 105 (1977) (the House committee\nreport on the FY 1978 appropriation act). Accordingly, in order to give effect to\nCongress\xe2\x80\x99 intent, the authorization statute and the FY 1978 appropriation act\nmust be read together. The Council may properly rely upon the appropriation\nact\xe2\x80\x99s provision permitting extended availability of the funds. Cf. 40 Comp.\nGen. 694 (1961) (expenditure of \xe2\x80\x9c no-year appropriations\xe2\x80\x9d by the FAA).\nLarry A . Ham\n\nmond\n\nDeputy Assistant Attorney General\nOffice o f Legal Counsel\n\n'T he FY 1978 appropriation act allocates the C ouncil\xe2\x80\x99s appropriation am ong its various\nfunctions, e.g., $ 1 ,158,000 for adm inistration. If carried-over funds are used, these allocations\nm ust be observed. See 31 U .S .C . \xc2\xa7 628.\n\n\x0c"


b'Applicability of APA Notice and Comment Procedures to\nRevocation of Delegation of Authority\nThe Secretary of Commerce may revoke a delegation to the Director of the Census without submitting\nthe revocation to the notice and comment procedures of the Administrative Procedure Act, notwithstanding the fact that the Secretary voluntarily elected to follow those procedures in issuing the\ndelegation.\n\nFebruary 14, 2001\n\nMEMORANDUM OPINION FOR THE ACTING GENERAL COUNSEL\nDEPARTMENT OF COMMERCE\nYou have asked whether the Secretary of Commerce (\xe2\x80\x9cSecretary\xe2\x80\x9d) must comply with the notice and comment provisions of the Administrative Procedure Act\n(\xe2\x80\x9cAPA\xe2\x80\x9d), 5 U.S.C. \xc2\xa7 553 (1994), in order to revoke his delegation of authority to\nthe Director of the Census to make the final determination on the methodology to\nbe used in calculating the tabulations of population reported to the States and\nlocalities under 13 U.S.C. \xc2\xa7 141(c) (1994). See 65 Fed. Reg. 59,713, 59,716\n(2000) (to be codified at 15 C.F.R. \xc2\xa7 101.1). The regulation at issue also establishes an executive steering committee, composed of employees of the Bureau of the\nCensus, which is to prepare a report to the Director of the Census recommending a\nmethodology. Id. \xc2\xa7 101.1(b). Although we have found no case definitively\nestablishing the proposition, we believe that the Secretary may revoke this\ndelegation of authority, including the establishment of a steering committee,\nwithout submitting the revocation to the notice and comment procedures of the\nAPA.\nSection 553(a)(2) of the APA, which generally requires rulemaking to provide\nfor notice and comment, \xe2\x80\x9capplies, according to the provisions thereof, except to\nthe extent that there is involved\xe2\x80\x94a matter relating to agency management or\npersonnel . . . .\xe2\x80\x9d An internal delegation of administrative authority, such as the one\nin 15 C.F.R. \xc2\xa7 101.1(a) vesting authority in the Director of the Census, does not\nadversely affect members of the public and involves an agency management\ndecision that is exempt from the notice and comment rulemaking procedures of the\nAPA. See United States v. Saunders, 951 F.2d 1065, 1068 (9th Cir. 1991)\n(delegations of authority have \xe2\x80\x9cno legal impact on, or significance for, the general\npublic,\xe2\x80\x9d and therefore \xe2\x80\x9csimply effect[] a shifting of responsibilities wholly internal\nto the Treasury Department\xe2\x80\x9d); Lonsdale v. United States, 919 F.2d 1440, 1446\n(10th Cir. 1990) (\xe2\x80\x9cAPA does not require publication of [rules] which internally\ndelegate authority to enforce the Internal Revenue laws\xe2\x80\x9d); United States v.\nGoodman, 605 F.2d 870, 887-88 (5th Cir. 1979) (unpublished delegation of\nauthority from Attorney General to Acting Administrator of the DEA did not\nviolate APA); Hogg v. United States, 428 F.2d 274, 280 (6th Cir. 1970) (where\n\n99\n\n227-329 VOL_25_PROOF.pdf 109\n\n10/22/12 11:10 AM\n\n\x0cOpinions of the Office of Legal Counsel in Volume 25\n\ntaxpayer would not be adversely affected by the internal delegations of authority\nfrom the Attorney General, APA does not require publication). The portion of the\nregulation that provides for a committee, composed of Census Bureau employees,\nwhich makes a recommendation to the Director of the Census, 15 C.F.R.\n\xc2\xa7 101.1(b), is also an internal delegation of the Secretary\xe2\x80\x99s statutory authority\nunder 13 U.S.C. \xc2\xa7 141(c) to determine the methodology to be used in calculating\nthe tabulations. Therefore, like subsection (a) of 15 C.F.R. \xc2\xa7 101.1, it is an internal\nrule relating to agency management, ordinarily exempt from the notice and\ncomment rulemaking procedures of the APA.\nDespite the statutory exemption in 5 U.S.C. \xc2\xa7 553(a)(2), the Secretary elected\nto comply with the notice and comment provisions of the APA in issuing this\ndelegation. See 65 Fed. Reg. 38,370-71 (2000) (proposed rule and commentary);\n65 Fed. Reg. 59,713-16 (2000) (comments and responses, final rule); 65 Fed. Reg.\n73,643 (2000) (final rule effective). The question here is whether the promulgation\nof a new rule revoking the Secretary\xe2\x80\x99s delegation must also comply with the notice\nand comment procedures of the APA. 1 Because a rule regarding the Secretary\xe2\x80\x99s\ndelegation or reservation of his authority is a matter of internal management that is\nexempt from the notice and comment provisions of the APA, the Secretary is not\nrequired to follow the notice and comment procedures for later delegations or\nrevocations of delegations, unless his decision to submit the original delegation of\nauthority to the APA process is a waiver of the applicability of the exemption to\nfuture delegations of this nature. 2\nWe have found no support for the proposition that the Secretary, having voluntarily complied with the APA notice and comment provisions in promulgating a\nparticular rule, but expressing no commitment to do so in the future, must continue\nto comply with those provisions in the issuance of later rules affecting the existing\none. To be sure, there is a line of cases holding that an agency that has waived the\nexemption found in section 553(a) of the APA is required to comply with the APA\nprocedures in rulemaking as long as the waiver is effective. See, e.g., Buschmann\nv. Schweiker, 676 F.2d 352, 356 n.4 (9th Cir. 1982) (policy statement requiring\nHHS to use notice and comment provisions of APA acts as a waiver of exemption); Rodway v. U.S. Dep\xe2\x80\x99t of Agriculture, 514 F.2d 809, 814 (D.C. Cir. 1975)\n(USDA regulation making procedural requirements of section 4 of the APA\n1\nWe note that, although validly promulgated regulations have the full force and effect of law,\nRodway v. United States Dep\xe2\x80\x99t of Agriculture, 514 F.2d 809, 814 (D.C. Cir. 1975), section 101.1 may\nnot even be enforceable as to the Secretary. 3 Jacob A. Stein et al., Administrative Law \xc2\xa7 13.03[2]\n(2000) (\xe2\x80\x9cThe rule [that a valid regulation has the force and effect of law] does not apply to agency\nviolations that are intended to regulate internal agency procedures rather than to protect any interest of\nthe objecting party.\xe2\x80\x9d). Cf. Garner v. Jones, 529 U.S. 244, 256 (2000) (court presumed, in a case\ninvolving an internal rule that affected the rights of prisoners, that an agency follows its internal\npolicies) (citing Accardi v. Shaughnessy, 347 U.S. 260, 266-68 (1954)).\n2\nWe are aware of no law that otherwise requires regulations published in the Code of Federal\nRegulations to be repealed or revoked only by notice and comment.\n\n100\n\n227-329 VOL_25_PROOF.pdf 110\n\n10/22/12 11:10 AM\n\n\x0cApplicability of APA to Revocation of Delegation of Authority\n\napplicable to all of its rulemaking relating to benefits bound the agency to comply\nthereafter with the notice and comment procedures of the APA). However, in these\ncases, the agency had issued a valid rule committing itself to following the notice\nand comment provisions of the APA. Id. The courts\xe2\x80\x99 holdings, therefore, rest on\nthe principle that an agency is bound to follow validly issued administrative\nregulations. Id. Here, the Secretary has made no such commitment, either informally or formally. On the contrary, the regulation itself expressly provides that:\nNothing in this section diminishes the authority of the Secretary of\nCommerce to revoke or amend this delegation of authority or\nrelieves the Secretary of Commerce of responsibility for any decision made by the Director of the Census pursuant to this delegation.\n15 C.F.R. \xc2\xa7 101.1(a)(5).\nTo require the Secretary to use a notice and comment process in repealing or\namending section 101.1 plainly would \xe2\x80\x9cdiminish[]\xe2\x80\x9d his authority to dictate the\nmanagement processes of his Department. Subsection (a)(5) was added in\nresponse to a comment that expressed concern that section 101.1 would divest the\nSecretary of his statutory responsibility, and, in the words of the Secretary, was\nintended to \xe2\x80\x9cerase any doubt that the delegation of authority is not a divestiture of\nobligations or responsibility by the Secretary.\xe2\x80\x9d 65 Fed. Reg. at 59,715. The\nadditional text was intended to make explicit \xe2\x80\x9cthat nothing in the rule diminishes\nthe authority of the Secretary of Commerce to revoke this delegation of authority . . . .\xe2\x80\x9d Id. 3 Moreover, binding agencies to continue to comply with the APA\xe2\x80\x99s\nnotice and comment procedures with respect to rules for which they have voluntarily sought public comment, but which do not affect even the procedural rights of\npersons outside the agencies, might actually discourage them from seeking the\npublic\xe2\x80\x99s view because of a reluctance to limit their future flexibility to amend or\nrepeal such a rule. We believe, therefore, that the Secretary is free to issue a new\nrule revoking his prior delegation without subjecting that rule to the notice and\ncomment procedures of the APA. Cf. Nolan v. United States, 44 Fed. Cl. 49, 57\nn.5 (1999) (acknowledging that Secretary of Transportation\xe2\x80\x99s internal memorandum delegating authority to a subordinate without notice and comment may have\nsuperseded the regulation reserving that authority to the Secretary until the next\n3\nThe Secretary\xe2\x80\x99s response to this comment also states that: \xe2\x80\x9cIt is unassailable that a rule revoking\nthe delegation would be effective, if it satisfied the requirements of the Administrative Procedure Act\nand other applicable legal standards.\xe2\x80\x9d Id. In light of both the overall context of the Secretary\xe2\x80\x99s response\nand his addition of the language found in subsection (5), we do not read this statement as a waiver of\nthe exemption provided under subsection (a)(2) of section 553. Rather, it appears to be a general\nstatement of the law, which is that any rulemaking by the Secretary must be consistent with the\nprovisions of the APA and other provisions of law. In this case, the rule falls within the APA\xe2\x80\x99s\nexemption for internal rulemaking and therefore is not subject to the notice and comment provisions of\nthe APA.\n\n101\n\n227-329 VOL_25_PROOF.pdf 111\n\n10/22/12 11:10 AM\n\n\x0cOpinions of the Office of Legal Counsel in Volume 25\n\nannual issuance of that reservation in the Code of Federal Regulations). Although\nthe Secretary\xe2\x80\x99s delegation of authority is now embodied in a valid regulation, the\nAPA does not require the issuance of rules relating to delegations of this sort to be\nsubject to notice and comment. 4\nDANIEL L. KOFFSKY\nActing Assistant Attorney General\nOffice of Legal Counsel\n\n4\nAt least as a prudential matter, we would suggest that any rule revoking or amending section\n101.1 be published in the Federal Register. There is some authority for the proposition that a published\nregulation, even if it is a delegation that would not ordinarily be required to be published, can only be\nrevoked by a published revocation. See Nolan, 44 Fed. Cl. at 58-59. This view is based on 44 U.S.C.\n\xc2\xa7 1510(e) (1994), which provides that publication in the Federal Register and Code of Federal\nRegulations of codified documents is prima facie evidence that they are in effect on and after the date\nof publication, as well as the concept that a failure to publish notice of the change of policy could\nadversely affect members of the public. Id. Although we do not believe that failure to publish a\nrevocation here would have an adverse impact on the public, publication of the revocation would\npromote the notice function of the Federal Register and Code of Federal Regulations, upon which the\npublic relies.\n\n102\n\n227-329 VOL_25_PROOF.pdf 112\n\n10/22/12 11:10 AM\n\n\x0c'


b'May 16, 1978\n\n78-26\n\nMEMORANDUM OPINION FOR THE\nDIRECTOR, GENERAL GOVERNMENT\nDIVISION, PRESIDENT\xe2\x80\x99S REORGANIZATION\nPROJECT\nReorganization Act\xe2\x80\x94 Reorganization Plan\nDealing With More Than One Logically\nConsistent Subject Matter (5 U.S.C. \xc2\xa7 905(a)(7))\n\nThis responds to your request for our opinion concerning the interpretation to\nbe given the phrase \xe2\x80\x9c dealing with more than one logically consistent subject\nm atter\xe2\x80\x9d found in \xc2\xa7 905(a)(7) of title 5. This limitation on the content of\nreorganization plans was first introduced in 1971, see 85 Stat. 576, in order to\nprevent the submission o f plans which contain \xe2\x80\x9c a variety of miscellaneous\nactions, completely unrelated to one other. . . . \xe2\x80\x9d S. Rept. No. 485, 92d Cong.,\n1st sess. at 5 (1971); H. Rept. No. 146, 92d C ong., 1st sess. at 3 (1971). The\nlegislative history o f the 1977 version of the Reorganization Act sheds\nadditional light on the question:\nLogically consistent subject matter could include: a broad purpose of\ngovernment such as Economic Development or Natural Resources; a\nseries o f similar programs in different agencies, such as Income\nMaintenance; all functions of a single agency; or crosscutting but\nidentical functions, such as Adm inistration, Budget, legal counsel, et\ncetera. [H. Rept. No. 105, 95th C ong., 1st sess. at 20 (1977)].\nWhile this broad language may itself be indefinite, it provides at least some\nguidance concerning the phrase\xe2\x80\x99s intended meaning.\nL eon U lm an\n\nDeputy Assistant Attorney General\nOffice o f Legal Counsel\n\n106\n\n\x0c'


b'Authority of Executive Office of the President to Require\nIndependent Agencies to Conduct Background Checks of\nNoncareer SES Candidates\nNo office o r agency w ithin the Executive O ffice o f the P resident m ay require independent agencies\nto co n d u ct certain background checks o f candidates for noncareer S enior Executive Service posi\xc2\xad\ntions.\n\nApril 30, 1998\nM e m o r a n d u m O p in io n f o r t h e C o u n s e l t o t h e P r e s id e n t\n\nYou have asked whether the Office of Presidential Personnel ( \xe2\x80\x9c Presidential Per\xc2\xad\nsonnel\xe2\x80\x9d ) may require that so-called independent agencies ensure that candidates\nfor noncareer Senior Executive Service (\xe2\x80\x9c SES\xe2\x80\x9d ) positions undergo certain\nreviews regarding their personal backgrounds, such as a review of Internal Rev\xc2\xad\nenue Service records about any tax delinquency. In particular, you have asked\nwhether Presidential Personnel could prescribe such a rule for hiring noncareer\nSES personnel at the Merit Systems Protection Board. As we already have advised\norally, we do not believe that any office or agency within the Executive Office\nof the President (\xe2\x80\x9c EOP\xe2\x80\x9d ), including Presidential Personnel, may exercise that\nauthority.1\nInvolvement by the EOP in particular hiring decisions for SES positions at inde\xc2\xad\npendent agencies is specifically limited by 5 U.S.C. \xc2\xa7 3392(d):\nAppointment or removal o f a person to or from any Senior Execu\xc2\xad\ntive Service position in an independent regulatory commission shall\nnot be subject, directly or indirectly, to review or approval by any\nofficer or entity within the Executive Office of the President.\n5 U.S.C. \xc2\xa7 3392(d) (1994). The Report of the Senate Committee on Governmental\nAffairs expressly noted that subsection (d) was added \xe2\x80\x9c in order to ensure that\nindependent regulatory agencies are not subject to political control in the appoint\xc2\xad\nment of their top noncareer executives,\xe2\x80\x9d and that \xe2\x80\x9c this insulation from the White\nHouse in appointments is necessary to maintain the independence of these agen\xc2\xad\ncies, as intended by the Congress.\xe2\x80\x9d S. Rep. No. 95-969, at 76 (1978). Section\n3392(d) thus specifically prohibits the EOP from reviewing any particular hiring\ndecision for noncareer SES positions at independent agencies.\n1 Far more complicated questions would be presented if the President himself, using his constitutional authority\nas head o f the executive branch, U S Const art. II, \xc2\xa7 1 , and his statutory authonty over the civil service, see,\ne g , 5 U S .C \xc2\xa7\xc2\xa73301, 7301, directed independent agencies to follow the procedures in question You have not\nasked us to address these questions at this time If you wish us to do so, we would be happy to undertake that\nanalysis.\n\n76\n\n\x0cAuthority o f Executive Office o f the President to Require Independent Agencies to Conduct Background\nChecks o f Noncareer SES Candidates\n\nA related provision governing appointment of personnel at the Merit Systems\nProtection Board contains parallel limitations on EOP review of appointment\ndecisions. Section 1204 of title 5, which authorizes the Chairman of the Board\nto appoint personnel \xe2\x80\x9c as may be necessary to perform the functions of the\nBoard,\xe2\x80\x9d provides:\nAny appointment made under this subsection shall comply with the\nprovisions of this title, except that such appointment shall not be\nsubject to the approval or supervision of the Office of Personnel\nManagement or the Executive Office of the President (other than\napproval required under section 3324 or subchapter VIII of chapter\n33).\n5 U.S.C. \xc2\xa7 1204(j) (1994). The approval required by \xc2\xa73324, referred to in paren\xc2\xad\ntheses, pertains to the appointment to a position \xe2\x80\x9c classified above G S-15,\xe2\x80\x9d which\n(with certain exceptions) \xe2\x80\x9c may be made only on approval of the qualifications\nof the proposed appointee by the Office of Personnel Management.\xe2\x80\x9d 5 U.S.C.\n\xc2\xa7 3324(a) (1994). Subchapter VIII of chapter 33, in turn, refers to 5 U.S.C.\n\xc2\xa7\xc2\xa73391-3397, and therefore incorporates the limitations on EOP and OPM\napproval set forth in \xc2\xa73392. As the conference report explains, \xc2\xa7 1204(j) was\nintended \xe2\x80\x9c to prevent \xe2\x80\x98political clearance\xe2\x80\x99 of appointments.\xe2\x80\x9d S. Rep. No. 95-1272,\nat 133 (1978). It was thought to be \xe2\x80\x9c inappropriate for any unit of the White\nHouse or the Office of Personnel Management to screen such candidates.\xe2\x80\x9d Id.\nAs this statutory scheme makes clear, Presidential Personnel is specifically\nprohibited from directly or indirectly reviewing the appointment of any particular\nindividual to an SES position at an independent regulatory commission. These\nprohibitions apply with equal force to appointment or removal decisions regarding\nsuch positions at the Merit Systems Protection Board.\nThese provisions, while specifically applicable only to decisions about hiring\nor firing particular employees, also lead to the conclusion that Presidential Per\xc2\xad\nsonnel cannot impose a more general requirement for the procedures to be fol\xc2\xad\nlowed by independent agencies in selecting SES personnel. Presidential Personnel\ncould enforce such a requirement only by reviewing and. refusing to approve par\xc2\xad\nticular candidates that independent agencies wanted to hire without completing\nthe mandated procedures. But it is precisely such review and approval that 5\nU.S.C. \xc2\xa7\xc2\xa7 1204(j) and 3392(d) forbid.2\nFinally, neither 5 U.S.C. \xc2\xa7 1204(j) nor 5 U.S.C. \xc2\xa7 3392(d) would bar Presidential\nPersonnel from recommending to independent agencies that they conduct the back\xc2\xad\nground reviews at issue here. Such recommendations, unlike requirements, would\n2 We assume that the relevant question here is whether Presidential Personnel can \xe2\x80\x9c require\xe2\x80\x9d the general procedures\nin the sense of compelling obedience to them In concluding that Presidential Personnel may not compel obedience,\nwe do not mean to suggest that it would be unlawful to issue such a directive, but rather that the directive would\nbe legally ineffective unless Presidential Personnel took further steps that the law would forbid\n\n77\n\n\x0cOpinions o f the Office o f Legal Counsel in Volume 22\n\nnot involve review or approval o f particular candidates for hiring and therefore\nwould not be barred by those statutes.\nBETH NOLAN\nDeputy Assistant Attorney General\nOffice o f Legal Counsel\n\n78\n\n\x0c'