Global Policy Forum

Washington - Multinational corporations have scored a major victory over US state and local governments which penalise companies doing business in repressive countries abroad. In a sweeping decision, a three-judge federal appeals court in Boston this week struck down as unconstitutional a Massachusetts law that imposed a 10-percent penalty on bids for state contracts by companies doing business in Burma. Massachusetts, which buys some two billion dollars in goods and services per year, enacted the law in 1996.

The judges' ruling, which may be appealed to the US Supreme Court, could invalidate dozens of similar 'selective purchasing' laws. "This is a major setback," said Simon Billenness, a leader in the international campaign to force Burma's military junta to improve its human-rights practices and recognise the winner of the aborted 1990 elections, the National League for Democracy led by Nobel Peace laureate Aung San Kuu Kyi. "If this ruling had been applied to anti-apartheid selective purchasing laws in the 1980's, then (former South African president) Nelson Mandela would still be in prison," he added.

While activists were despondent, the big US corporations which brought the lawsuit last year voiced jubilation. "We are delighted that the First Circuit (court) agreed that state and local sanctions laws are not allowable under our Constitution," said Frank Kittredge, president of the National Foreign Trade Council (NFTC), a coalition of some 580 major US and foreign-owned firms. "This ruling has broad, nationwide significance, and should help to put an end to local efforts to make foreign policy," said Kittredge, whose group opposed selective purchasing laws because these curbed companies' freedom to do business where they liked.

The court's opinion also vindicated the European Union (EU) which, in an extraordinary intervention, submitted a "friend of the court" brief to the judges arguing that the law should be overturned. The EU and Japan had previously complained to the World Trade Organisation (WTO) about the Massachusetts law, which they said violated the Geneva-based agency's 1995 Government Procurement Agreement (GPA). The GPA forbids states from using non-economic criteria in deciding contract bids.

The administration of President Bill Clinton, which normally would have been expected to file its own brief on such an important issue, declined to do so in this case - in major part because of internal differences of opinion. Deputy Treasury Secretary-designate Stuart Eizenstat argued for supporting the NFTC in the interests of promoting the WTO and economic globalisation. But trade officials contended that it would trigger a new backlash against the WTO in Congress and human rights officials warned that it would undermine the administration's own policy against Burma.

Selective purchasing laws are designed to force companies to choose between bidding on often-lucrative state and local government contracts and operating in target countries. They have served as a powerful tool for local human-rights activists since the anti-apartheid movement virtually invented them in the late 1970's. In the 1980s, scores of states, cities, and local jurisdications enacted laws that barred companies with investments in South Africa from bidding on contracts. The result was an exodus of big US companies - including such giants as Coca-Cola, IBM, and General Motors - from South Africa. Similar laws in New York, California, Pennsylvania and other states and cities prompted Swiss banks and insurance companies to reach a settlement with Nazi holocaust victims and their families last August. Other jurisdications have enacted laws against companies which do business in China and Cuba, purchase rare rain-forest wood products, or violate codes of conduct against discrimination in Northern Ireland. Some two dozen US states and cities have enacted selective purchasing laws against companies doing business in Burma. As in South Africa 15 years ago, the campaign has prompted many prominent US firms - including Eastman Kodak, Levi Strauss, Apple Computer, PepsiCo, and Liz Claiborne - to leave the Asian nation.

The NFTC's challenge to the law rested on three main constitutional arguments, all involving the relative powers of the federal government vis-a-vis local jurisdictions in conducting foreign affairs and commerce. Under the constitution, according to the business group, federal law and policy are supreme and automatically pre-empt and invalidate inconsistent local laws. Massachusetts - which was supported by two dozen members of Congress from both major parties, a plethora of human-rights, environment, and labour groups, 11 states, and more than a dozen cities - argued that local jurisdictions had the right to decide how they wished to spend their money and to use moral considerations in making those decisions.

The NFTC won the first round last November when a trial court ruled that the law "impermissibly infringes on the federal government's power to regulate foreign affairs." This week's appeals court ruling was even more sweeping in that it upheld each of the NFTC's three main arguments in favour of federal supremacy. "The conduct of this nation's foreign affairs cannot be effectively managed on behalf of all of the nation's citizens if each of the many state and local governments pursues its own foreign policy," the three judges stated in a 78-page opinion.

"This is a serious blow to local power over spending decisions," said Thomas Barnico, the lawyer who argued the case on behalf of the Massachusetts attorney-general. "It casts doubt on numerous other state and local laws." He added that the attorney-general had not yet decided whether to appeal the ruling to the Supreme Court.

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