When Does A State's Regulation of Private Companies Interfere with Foreign Affairs?
A Recent Supreme Court Ruling Gives the Wrong Answer

By ANITA RAMASASTRY

Wednesday, Jul. 02, 2003

Under the U.S. Constitution, the federal government has the sole authority to conduct foreign policy. Conflicting state statutes thus may be unconstitutional.

But what if there is no direct conflict? Can a state statute still be struck down?

A recent, 5-4 Supreme Court decision - American Insurance Association, et al. v. Garamendi - says the answer is yes. But I believe it is wrongly decided. Indeed, the dissenters' argument is far more persuasive than that of the majority.

The Holding of Garamendi

In Garamendi, the state statute at issue was the California Holocaust Victim Insurance Relief Act ("HVIRA"). California's Holocaust survivors are estimated as numbering between 5,600 and 22,000. The statute aimed to give them, and other California citizens, access to information about Holocaust-era insurance policies issued by California insurers' foreign affiliates.

Specifically, HVIRA compelled every California insurer to provide information to citizens about any insurance policy issued in Nazi-dominated Europe between 1920 and 1945 by that company, or any of its affiliates. (Given the interlocking ownership of insurance companies, the potential reach of the law was broad.) Those insurers who refused would no longer be permitted to operate in California.

The Supreme Court struck down the statute, on the ground that it could undermine negotiations between the United States, Germany, Austria and France relating to Holocaust-era insurance claims. In so doing, the Court stressed that "war time claims against even nominally private entities have become issues in international diplomacy."

No settlement has actually been reached as a result of these negotiations, and many Holocaust survivors, even now, have yet to receive payment on their insurance policies. However, the U.S. government has stated a continuing preference for settlement over litigation.

The federal government and HVIRA apparently have the same goal: to get the claims paid. But the Court noted that "California seeks to use an iron fist where the President has consistently chosen kid gloves." This conflict in the choice of means, it held, rendered California's statute unconstitutional.

The Background: Holocaust Era Insurance Claims and Related Agreements

To see why HVIRA was necessary in the first place, it's important to set forth some background.

As the Court noted, the Nazis stole "Jewish assets, including the value of insurance policies, and in particular policies of life insurance, a form of savings held by many Jews in Europe before the Second World War." During the War, many policyholders lost their records due to confiscation, forced displacement, or internment in concentration camps.

Then, after the war, when survivors or their families tried to collect on, or at least find out about, pre-war policies, they were met with closed doors. Some were even told that the policy benefits had been collected by the Nazis and therefore deemed to have already been paid.

In the 1990s, the United States became a venue for litigation relating to Holocaust era assets and restitution claims - including claims based on insurance policies. Meanwhile, in 1998, with the help of the U.S. State Department, the International Commission on Holocaust Era Insurance Claims ("ICHEIC") was created.

But ICHEIC proved unable to get insurance companies to turn over the names of policyholders so that family members could find out who had what policy, issued by what company. As a result, individual states, such as California, enacted disclosure laws like the one at issue in Garamendi. (California's was enacted in 1999.)

Then, in July 2000, President Clinton signed an executive agreement with Germany, the German Foundation Agreement. Under the agreement, Germany agreed to enact legislation and to establish a foundation to compensate persons who suffered at the hands of German companies during the Second World War. On the insurance issue, it was agree that the Foundation would cooperate with the ICHEIC.

In exchange, the U.S. agreed to submit a statement in any litigation that it "would be in the interests of the United States for the Foundation to be the exclusive forum and remedy for the resolution of all asserted claims against German companies." The U.S. government also agreed to use its "best efforts" to get state and local governments to respect the Foundation as the exclusive mechanism for resolving these claims.

The German Foundation pact served as a model for similar pacts with Austria and France. None of the agreements specifically precludes enforcement of state disclosure laws such as California's HVIRA.

The "Dormant Foreign Affairs Clause": What Kind of Conflicts Trigger It?

The 1968 Supreme Court case of Zschernig v. Miller provided part of the basis for the Garamendi ruling, for it created the doctrine referred to as the "dormant foreign affairs clause." (The word "dormant" is used because the Constitution implies, but does not expressly say, that if the federal government has the sole authority to control foreign policy, then the states cannot pass laws inconsistent with that authority.)

The Zschernig case arose because, during the Cold War, Oregon had enacted a reciprocity statute preventing heirs living in Communist countries from claiming property rights in Oregon, unless Oregonians had the same rights in Communist countries. Of course, they didn't.

The Oregon law didn't conflict with any federal statute or treaty. Still, the Supreme Court struck it down. The Court held, in essence, that Oregon could not make an official practice of criticizing Communist countries, for such a practice could interfere with the federal government's ability to conduct foreign relations with those nations.

In Zschernig, the Court did not seem to require any conflict with federal law or practice - since there was none. In Garamendi, the Court found a conflict, but only with a federal policy - not with an existing law, or even an existing settlement.

It suggested that the Executive Branch had the right to speak on matters subject to international negotiations "with one voice," and that California, thus, shouldn't have chimed in to add its opinion through its law.

Justice Ginsburg's Impassioned Dissent

In dissent, Justice Ruth Bader Ginsburg (joined by justices Stevens, Scalia and Thomas), strongly disagreed. She referred to a "half century of silence" against which Holocaust survivors and their heirs have struggled. And she insisted that there had to be an actual conflict between the terms of an Executive Agreement, and those of a state law for the "dormant foreign affairs clause" to be invoked.

Seeing no such conflict, Justice Ginsburg would have upheld the California statute. She also noted that she found the claim of any conflict particularly weak given that the sole concern of California's HVIRA is public disclosure - mere access to information.

Reading from the bench - a practice the Justices use when they feel particularly strongly about an opinion - Ginsburg said, "Never before has this court relied on an executive agreement to preempt a state law when the agreement itself did not so specify. The Judiciary has no warrant to serve as an expositor of the nation's foreign policy by filling in a blank so large." (Emphasis added.)

What about Zschernig? Ginsburg suggested it was a mistaken decision that had fallen by the wayside: "We have not relied on Zschernig since it was decided, and I would not resurrect that decision here." (Readers may recall that, in 2000, the Court struck down a Massachusetts law that barred state companies from doing business with Burma. But that ruling was not based on Zschernig.)

Justice Ginsburg also indicated that, if Zschernig had any validity, it ought to apply only when a state statute involves "sitting in judgement" on foreign governments. In contrast, HVIRA takes no position on a foreign regime; instead, it focuses on private insurers choosing to do business in California, and requires them to disclose information about themselves and their affiliates.

Why the Court Was Wrong - and Justice Ginsburg, and California, Are Correct

I agree with Justice Ginsburg's dissent, for a number of reasons.

First, the statute is not attempting to influence the conduct of governments, but that of private economic actors. Accordingly, the measures called for - disclosure of information - did not contradict the agreements that established the ICHEIC.

Second, the information gathered through disclosure could have actually aided the ICHEIC settlement process, and thus dovetailed with U.S. government policy, rather than conflicting with it. The disclosure of this information did not inherently have to fuel litigation; it could have fueled settlement instead. Indeed, without a full accounting of all policies, it is difficult to see how an ICHEIC settlement could have validity. How could it possibly validly settle claims about which the living beneficiaries did not, and could not, know?

Third, California was entitled to make the insurance policy information available not only to Holocaust survivors and their families, but also to all citizens - for any citizen may want to make informed decisions about with which insurance companies he will do business.

Certainly a California ought to be able to decide not to do business with a California company whose affiliates' practices it considers unethical - and to have access to enough information to know what those practices are.

Fourth, some commentators have rightfully worried that Garamendi may give the federal government veto power over state laws that applies to foreign companies. I agree that this is a huge concern in our globalized economy.

Finally, the ICHEIC's efforts, so far, are - as Justice Ginsburg notes - disappointingly meager. The ICHEIC has thus far settled only a tiny proportion of the claims it has received. Its directive to its members to publish lists of unpaid Holocaust-era insurance policies is non-binding. Unsurprisingly, the directive has not yielded significant compliance.

Tactics aside, these insurance policies have yet to be paid. California's HVIRA might have highlighted the injustice of unpaid policies, and expedited the process. Sadly, the Court's decision striking it down only foreshadows yet more delay in claims that should have been paid long, long ago.


Anita Ramasastry is an Assistant Professor of Law at the University of Washington School of Law in Seattle and the Associate Director of the Shidler Center for Law, Commerce & Technology.

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