Finally, a constitutional reckoning for the Texas anti-boycott statute

Texas adopted SB 13, its energy company “anti-boycott” statute, nearly five years ago, in 2021.  This legislation was one of the earliest concrete shots across on the bow in the then-burgeoning anti-ESG movement.

Many alarm bells were sounded at the time about whether the statute was unconstitutional.  These questions grew even louder based on how Texas applied the statute in practice:  the state Comptroller exercised his delegated authority to publish lists of financial firms and investment funds he deemed to be “boycotting” energy companies.  The lists appeared to be built on arbitrary criteria and to ignore the objective information provided by the firms about their energy company investment practices.  

Why then hasn’t a court weighed in during all this time?  It is a frustrating truth that litigation can often be slower than politics, so it can take a while for court challenges to catch up with the actions of legislatures and other government actors.

On February 4, after extensive briefing and argument, SB 13 finally had its day of reckoning with a constitutional challenge in a Texas federal court.  Judge Alan Albright, who was appointed to the bench by President Trump, found the statute to be unconstitutional under the First and Fourteenth Amendments and entered an injunction against its enforcement.

The judge concluded that the statute was on its face both improperly overbroad and unconstitutionally vague.  Overbreadth arises when a law can be read to prohibit such a wide swath of conduct that it loops in actions that are undeniably protected by the First Amendment, even if the provision may also reach unprotected conduct that could otherwise be made illegal.  Relatedly, statutes are rendered void for vagueness when they are written in a way that leaves people unable to reasonably determine what conduct is intended to be illegal.  

Judge Albright ruled that SB 13, and in particular its definition of what it means to “boycott” an energy company, easily failed both constitutional tests.  Firms and funds could find themselves on the “boycotter” restricted list for “refusing to deal with, terminating business activities with, or otherwise taking any action that is intended to penalize, inflict economic harm on, or limit commercial relations with a company” because of its fossil fuel business. 

While this definition might in theory reach conduct that could be seen as illegal boycotting, it plainly could also sweep in activities at the heart of the First Amendment’s speech and assembly protections.  The judge reasoned, that “[t]he plain meaning of the phrase ‘taking any action that is intended to penalize’ fossil fuels includes, for example, speaking about the risks posed by fossil fuels, advocating against reliance on fossil fuels, and associating with like-minded organizations” – all forms of constitutionally protected expression.  

Similarly, Judge Albright held the statute violates the vagueness doctrine because the “boycott” definition “fails to provide a reasonable opportunity to know what conduct is prohibited” and because “the definition invites – and has in fact already led to – discriminatory enforcement.”  In finding discriminatory enforcement, the court pointed to the fact that the Comptroller appears to have simply ignored (without providing any reason) the statements from firms explaining why their investment actions towards energy companies were taken with an “ordinary business purpose,” which is an express exception to the “boycott” definition.  

The “ordinary business purpose” finding should be of particular interest to asset managers, given its broader implications for challenging other anti-ESG measures.  The plaintiffs who brought the successful SB 13 challenge pointed to their explicit climate-related advocacy efforts to reduce emissions as constitutionally protected expression that would be chilled by the statute.  

But what about the many fiduciary managers whose climate focus is grounded in the traditional goals of assessing all material risks and maximizing client financial returns?  The court helpfully rejected Texas’ discriminatory application of SB 13, which hinged on the faulty premise that any consideration of climate risks must be motivated by a social agenda rather than material risks and financial returns (i.e., an “ordinary business purpose”).  Many anti-ESG initiatives are built on the same flawed premise, and another clear ruling rejecting that premise should prove valuable ammunition for future challenges on behalf of the industry.  

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