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Vendor restriction ruling yields to feds

Robert J. Sherry

Federal expectations, and state and local expectations, are always caught in a delicate balance. A recent federal court decision tips the scales toward the feds and makes it more difficult for state and local entities'especially those of the activist variety'to impose restrictions on vendors that have some sort of socioeconomic or political basis.

The case, National Foreign Trade Council vs. Natsios, concerned enforcement of the so-called Massachusetts Burma Law.

The law restricts the ability of the Commonwealth of Massachusetts and many of its authorities and agencies to buy goods or services from individuals or companies that engage in commerce with the country of Myanmar, formerly known as Burma.

Under the law, a state official maintains a restricted purchase list of companies known to do business with Myanmar. Unless a company on the list can show that it is not engaged in commerce with Myanmar, Massachusetts may hold a contract with the entity only if the procurement is an essential sole-source action'when the contract is for medical supplies or if the entity's bid is 10 percent less than that provided by companies that are not on the restricted purchase list.

Massachusetts enacted this law in 1996, apparently to acknowledge what the court termed deplorable human rights conditions in Myanmar.

A nonprofit association representing several companies engaged in foreign trade sued Massachusetts to prevent it from enforcing the law. The federal trial court upheld the complaint and issued an injunction against enforcement of the law in November 1998. Massachusetts appealed the injunction, and the federal court of appeals sided with the lower court and against Massachusetts.

The First Circuit Court gave three principal reasons for its decision. First, relying on a 1968 Supreme Court case, the court concluded that the law interfered with the foreign affairs powers constitutionally reserved for the federal government. The court reasoned that the law was 'aimed at a specific foreign state and has more than incidental effects' on the federal government's power over foreign affairs.

Second, the court concluded the law on its face discriminated against foreign commerce. Third, the court pointed to recent federal sanctions as evidence that the federal government clearly had intended to pre-empt state legislative activity in the area.

The ramifications of this decision will be far-reaching.

Robert J. Sherry is a partner at the law firm McKenna & Cuneo LLP. He heads the government contracts practice in its San Francisco office, counseling information technology companies on federal, state and local issues.

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