As discussed in Bibek Pandey’s previous post, the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) authorizes states to enact laws: (i) requiring state public funds to divest from companies doing certain types of business in Iran; and (ii) prohibiting states from entering into procurement contracts with such companies.  To date, nearly half of the states have enacted various forms of these divestment laws and procurement bans.

The Iran nuclear agreement (JCPOA) does not lift this provision of CISADA.  Furthermore, because it is an Executive Agreement instead of a treaty, it cannot supersede state laws and bind the states to its terms.  Therefore, it will likely take another act of Congress to compel states to rescind these laws.  The relevant section of the JCPOA merely calls on the U.S. to “actively encourag[e]” state and local officials to avoid taking measures inconsistent with the shift in U.S. sanctions policy toward Iran.  In a recent congressional hearing, Secretary of State John Kerry confirmed that the JCPOA does not impact these state laws, but emphasized that “if Iran is fully complying with this agreement, we will take steps to urge [the states] not to interfere with that.”  However, Sen. Ted Cruz (R-Tex.) and other opponents of the deal have encouraged states to continue enforcing their Iran sanctions laws.

However, an official in California, one of the first states to enact an Iran divestment law, has signaled that his state has no current plans to follow the Obama administration’s example.  Los Angeles City Attorney Mike Feuer, who successfully sponsored Iran procurement ban legislation while serving in the California State Assembly, circulated a letter on July 20, 2015 explaining:

I have been asked whether sanctions imposed on certain companies doing business with Iran by California and Los Angeles are in effect.  The answer is yes.

California – which has the world’s eighth largest economy and the country’s two largest public pension funds – has been enforcing its divestment law since 2007, resulting in divestments of over $500 million from companies that do business with Iran.  The California State Teachers’ Retirement System (CalSTRS) has divested from nine companies and regularly updates a public list of approximately twenty other companies it actively monitors.  The California Public Employees’ Retirement System (CalPERS) has divested from four companies and initiated inquiries with regard to seven others.

A CalSTRS spokesman confirmed that “[u]nless the law is changed, then we continue to be under the same restrictions we were under before this deal was announced.”  California’s laws do not sunset until the President removes Iran from the State Sponsors of Terrorism List maintained by the State Department, which is unlikely to occur anytime soon.  Moreover, the Obama administration is unlikely to be able to convince a Republican-controlled Congress – with majorities in both chambers seemingly opposing the JCPOA – to enact legislation forcing states to rescind their Iran divestment laws and procurement bans.  Therefore, it may need to make its case state-by-state, which may be difficult because Republicans also control most governorships and state assembly chambers.

What does this mean for foreign companies that are eying a possible opening in the Iranian market?  They should be cognizant of the potential impact of state sanctions laws as long as they are in effect.  Practically, this means that companies with significant or planned investments in Iran should know which states have divestment laws and monitor whether their names appear on any state pension funds’ public “monitoring lists.”  Similarly, companies seeking to bid for state public contracts should be aware of which states have enacted procurement bans targeting companies doing business in Iran.