Federal Court Enjoins New Jersey Statute Sanctioning Russia

Following Russia’s full-scale invasion of Ukraine in 2022, New Jersey enacted a statute (the “Russia Act”) prohibiting state agencies and political subdivisions from doing business with entities engaged in “prohibited activities” in Russia. In Kyocera Document Sols. Am., Inc. v. Div. of Admin., district court judge Robert H. Kirsch held that the statute is preempted – at least as applied to a New Jersey office equipment and service company – because it conflicts with the federal government’s regime sanctioning Russia. The case raises interesting questions about whether federal preemption doctrines should be applied in different and more aggressive ways in cases involving foreign relations. Such questions are of growing significance as states ramp up efforts to curb foreign ownership of agricultural land, to tax or otherwise regulate foreign technology companies, to regulate immigration, and to intervene on other questions of foreign policy.

The New Jersey Statute and the Plaintiff

The statute requires the New Jersey Department of the Treasury to make a list of persons engaged in prohibited activities in Russia and Belarus. A company that wants to create or renew a contract with a New Jersey state agency must certify that it is not on the prohibited list.  As an alternative, it must provide a “detailed and precise description” of the prohibited activities.  The statute defines “person” broadly to include corporate entities and their parents, successors, subsidiaries, and any “entity under common ownership or control.”  The “prohibited activities” include having a headquarters or principal place of business in Russia or Belarus. Companies identified for inclusion on the list are afforded an opportunity to demonstrate that they are not engaged in prohibited activities. The Russia Act sunsets upon revocation of federal sanctions against Russia imposed pursuant to Executive Order 14,024.

New Jersey state officials notified Kyocera in July 2023 that it would be placed on the prohibited list and that its contract with the state would not be renewed. The company has 1,000 employees in the United States, 200 of which are employed in New Jersey, where the company has been headquartered for more than forty years. Kyocera is, however, wholly owned by a Japanese electronics manufacturing company that also, “directly or indirectly, owns 100% of a Russia-based subsidiary,” called “Kyocera Russia.” Kyocera itself, the plaintiff in the litigation, had no ownership interest in, or any business relationships with, Kyocera Russia and is “fully compliant with all federal laws and federal sanctions against Russia and Belarus.” Kyocera had secured a blanket purchase order contract with the state, which allowed agencies and political subdivisions across New Jersey to purchase devices, supplies, and office services from it.

Preemption

The court considered two forms of preemption that might invalidate the New Jersey statute. The first, “foreign affairs field preemption,” was controversially applied in Zschernig v. Miller, a 1968 case invalidating an Oregon probate statute. This form of preemption allows a court to strike down a state law as unconstitutional even if there is no federal law on the issue and no conflict between state and federal laws. Hence the name “field” preemption.

The judge in Kyocera did not rely on this precedent, but instead applied “conflict preemption,” pursuant to which state law is preempted if it serves as an obstacle to the accomplishment of the purposes of Congress. The Supreme Court applied this form of preemption in Crosby v. Nat’l Foreign Trade Council, a 2000 case that invalidated a Massachusetts procurement statute designed to sanction Myanmar for human rights abuses.

The Russia Law is similar in many ways to the Massachusetts law in Crosby. Both were state procurement statutes prohibiting purchases from companies listed for their connections to the sanctioned state (Russia and Myanmar, respectively). Both statutes had a broad definition of restricted conduct, but both regulated only purchases by the state itself – listed companies could sell goods and services to private actors in the state. New Jersey argued that the Russia Law is distinguishable from the Massachusetts law based on characteristics of the federal sanctioning regimes. In particular, the federal statute imposing sanctions on Myanmar were, according to the plaintiffs, more detailed and included more specific instructions to the President about how to force Myanmar to change its policies.

The district court disagreed, relying heavily on Crosby to invalidate the New Jersey statute. In both cases, the court reasoned, conflict was clear from the narrow and “considered” federal sanctions as opposed to the “far-reaching” state approaches. With respect to Russia, federal sanctions target specific industries that are culpable in the invasion of Ukraine, including financial services, the defense sectors, and metals and mining. They also target specific individuals and specific entities deemed responsible for Russia’s aggression. New Jersey’s law is not tailored in any of these ways, and it punishes persons and conduct that are not covered by the federal sanctions.

Because both federal and state law impose sanctions for the same reason – Russia’s conduct in Ukraine – why exactly does it matter that their reach is somewhat different?  The shared purposes of state and federal sanctions, as well as the expiration of New Jersey sanctions as soon as federal sanctions are lifted, might suggest that the preemption at work (if any) is better understood as field preemption. The district court reasoned, however, that Congress had determined the exact level of pressure to exert on Russia, and that the New Jersey statute undermined that careful calibration. The federal government needs to speak with “one voice” “both in cooperating with like-minded allies and in pressuring Russia to end its aggression and occupation,” which is “undercut when one state, let alone fifty different states, is able to set its own foreign policy by citing its procurement statutes.”

The New Jersey statute appears to present a somewhat weaker case for preemption than the Myanmar statute did. The federal statute at issue in Crosby directed the President to develop a “comprehensive, multilateral strategy to bring democracy to and improve human rights practices and the quality of life in [Myanmar],” called on the President to cooperate with ASEAN and other countries to develop that strategy, directed the President to foster “dialogue between the Government of [Myanmar] and the democratic opposition,” and required reporting to Congress on “the progress of his diplomatic efforts.” This level of detail and focus by Congress on negotiations is largely (although not wholly) absent in the context of the Russian sanctions.  These differences weaken the “one voice” reasoning in Kyocera.

Conclusion

The district court may have applied an aggressive approach to conflict preemption in Kyocera in order to invalidate the statute while avoiding the more controversial basis for foreign relations “field preemption” in Zschernig. If so, the district court arguably replicated the dynamic in Crosby in which the Supreme Court also found statutory pre-emption in an effort to avoid relying on Zschernig.  Kyocera, however, may have taken that approach a small step forward. More broadly, the “one-voice” doctrine has been vigorously criticized as unnecessary and incoherent, and the general reliance on “exceptionalist” reasoning in foreign relations cases has also been questioned.  Both lines of reasoning suggest that Kyocera raises more complicated issues than the opinion itself suggests.