On Wednesday, a federal court in Texas permanently enjoined Texas Senate Bill 13 (SB 13), as unconstitutional under the First and Fourteenth Amendments.
Requirements under Texas' SB 13
SB 13 had two core features: a divestment provision and a procurement provision, both anchored to a statewide “blacklist” of financial firms deemed to “boycott energy companies.”
Under the divestment provision, certain Texas state investment funds were required to divest from financial companies that boycott energy companies, unless such divestment would “likely result in a loss in value or benchmark deviation.”
The statute directed the Texas comptroller to compile and circulate a “blacklist” of financial firms that “boycott energy companies,” permitting reliance on publicly available information and third-party sources. The comptroller could also “request written verification” from financial companies that they do not boycott energy companies, and firms that failed to provide requested written verification within 60 days would be presumed to be boycotting. Once notified, covered state funds generally had to divest from listed companies if they did not “cease boycotting” within 90 days.
Under the procurement provision, vendors with 10+ employees seeking contracts over $100,000 funded by public money had to verify they would not boycott fossil-fuel companies during the contract term.
The law defined “boycott energy company” as “refusing to deal with,” “terminating business activities with,” or “taking any action that is intended to penalize, inflict economic harm on, or limit commercial relations with” fossil-fuel businesses or their partners; subject to an “ordinary business purpose” exception.
The American Sustainable Business Council (ASBC) challenged SB 13 after member companies were blacklisted, alleging First Amendment and due process violations and seeking declaratory and injunctive relief. The court granted ASBC’s motion for partial summary judgment on counts one, two, and three and enjoined enforcement of SB 13.
First Amendment: Overbreadth
The court found SB 13 facially overbroad because it reached a substantial amount of constitutionally protected expression. The “any action” clause allowed the state to penalize companies for advocacy, association, and speech regarding fossil fuels; for example, speaking about risks of fossil fuels, advocating reduced reliance, and affiliating with like-minded organizations. The court analogized SB 13 to Texas’ “boycott Israel” law, which was found to burden expressive activity, the court there noting that it was “difficult, if not impossible” to read a similar “any action” provision as limited to conduct outside the purview of the First Amendment.
Due Process: Vagueness
The court also found SB 13 to be unconstitutionally vague because key terms like “refusing to deal,” “terminating business activities,” and “any action … to penalize” lack clear, objective meaning; especially where speech is involved. Ambiguous phrases like “penalize” and “limit commercial relations” could sweep in ordinary advocacy, while inconsistent application of the “ordinary business purpose” exception could open the door to arbitrary, speech-chilling enforcement.
Takeaways
More than a dozen states have adopted anti-environmental, social, and governance (ESG) investment restrictions, contractor certifications, or blacklists focused on fossil fuels, firearms, or “boycotts” of certain industries.
The court in this case found that SB 13’s “any action” formulation and other indeterminate standards unlawfully burdened protected expression and failed to provide clear, non-arbitrary criteria for compliance.
Last year, the same judge issued a preliminary injunction enjoining the Texas attorney general from enforcing Texas SB 2337, another ESG-targeted law, which would require proxy advisory firms, like Glass Lewis and Institutional Shareholder Services (ISS), to provide detailed disclosures when their voting recommendations respecting Texas corporations are based on non-financial factors, such as ESG and diversity, equity, and inclusion (DEI) considerations. Notably, the injunction only applies to ISS and Glass Lewis and does not bar enforcement actions by private plaintiffs.
The injunctions from the Texas court blocking enforcement of SB 13 and SB 2337 may signal an emerging judicial skepticism toward state-level “boycott” laws aimed at punishing disfavored business stances, especially when those stances involve political or policy questions such as climate change. States may need to rethink their approaches to these laws if they want them to survive constitutional scrutiny (e.g., focusing on conduct, not declared beliefs or expressions, and avoiding content-based mandates).