The Iran nuclear deal (JCPOA) does not say much about Iran sanctions imposed by US state governments.  Almost two dozen states (including New York, California and Florida) have passed laws that in some form (i) ban the awarding of government contracts to companies tied to Iran, and/or (ii) prohibit public funds from investing in companies doing certain types of business in Iran.  These state restrictions can be more extensive in scope than US federal sanctions.  For example, some state restrictions (e.g. in Florida) attach automatically to the parent entity of the company who engages in certain Iran activities.  Laws in many states provide for the lifting of Iran sanctions when the President removes Iran from the list of countries that support terrorism; but the JCPOA does not do that, and, as a result, Iran sanction laws in most states will remain intact.

Under US law, the constitutionality of these non-federal sanctions remains uncertain.  The Supreme Court found Massachusetts’s Burma sanctions law to be unconstitutional in 2000 on implied preemption grounds.  But in the case of Iran, Congress has authorized states to pass divestment laws under the Comprehensive Iran Sanctions, Accountability, and Divestment Act.  How Congress reacts legislatively to the JCPOA will bear upon the constitutionality of these state sanctions that remain in place against Iran.

Companies considering engaging in activity authorized under the JCPOA need to be still mindful of non-federal Iran sanctions.  In particular, state government contractors with Iran links should review state procurement laws before engaging in activities permitted by the JCPOA.  Furthermore, contractors can face civil penalties in many states for providing false certifications related to their Iran activities.  The bar for Iran-related disqualification in some states is relatively low, and the JCPOA does not change that.

Companies should also pay attention to laws applicable to public funds that may affect their investors.  As noted above, certain state sanctions laws authorize divestment from companies doing certain types of business with Iran.  Among these, some states (like Michigan) have “look-through” provisions such that state laws applicable to public funds (e.g., state employees’ retirement funds) would apply with equal force to pooled funds in which the public fund invests – that is, the pooled funds would be subject to state law restrictions.  This could potentially steer significant investments away from targeted companies.

Notably, the JCPOA provides that where state or local laws hinder the implementation of the agreement, the United States will take “appropriate steps” to achieve implementation including ”actively encouraging” state and local officials to refrain from actions inconsistent with the JCPOA.  In the wake of the announcement of the JCPOA, some opponents to the deal have urged states to impose existing and new Iran sanctions.  How the politics and law of this will unfold – and whether we will eventually witness the phenomenon of the federal government suing states to compel compliance with the JCPOA – remains unclear.  What is clear, however, is that companies relying on US sanctions relief provided in the JCPOA still need to consider state and local sanctions in making Iran-related decisions.

In the coming days, my colleague Alexis Early will follow up with a post discussing this issue further.