A growing number of states have enacted laws targeting companies that "boycott" a given industry that the state wants to protect. These laws are not well known throughout the equipment finance industry but are applicable to originators of equipment finance transactions. This article highlights why this matters to our industry and some practical considerations to keep in mind when operationalizing these laws.

The anti-boycott laws vary from state to state but at their core prohibit state governments and state governmental entities from entering into contracts for goods or services in excess of a specified amount (commonly $100,000) with companies (including equipment funders) that engage in boycotts of, or discriminate against, one or more specified industries. These specified industries include energy, fossil fuel, firearms, ammunition and/or any other industry the state wants to protect. By way of example, Texas was one of the first states to prohibit state and local government agencies from doing business with financial firms that Texas viewed as “boycotting” the gun and fossil fuel industries. 

Anti-boycott laws are often directed at Environmental, Social and Governance (ESG) policies. The companies who create such policies take the position that these policies are good for business and worthwhile because they address risks such as climate change and school mass shootings. On the other hand, the states that enact such anti-boycott laws take the position that such policies discriminate against the specified industry and are employed by such companies to use their economic influence to advance a social and/or political agenda.

Under such anti-boycott laws, any contract subject to such laws must include a verification or attestation that the company, including an equipment funder, does not, and during the full term of the contract will not, engage in the prohibited boycott.

The status of these laws is still evolving. For illustrative purposes only, the following states currently have enacted the below types of anti-boycott laws. Please consult your own advisors and counsel for state-specific information, applicability, requirements, and the current status of the laws.

Examples:

• Arkansas: Applies to the firearms and energy industries, with a threshold of $75,000 or more, by a state agency or political subdivision.
• Kentucky: Applies to the energy industry, with a threshold of $100,000 or more, by executive branch entities (i.e., state board, bureau, cabinet, commission, department, authority, officer or other entity in the executive branch of state government).
• Montana: Applies to the firearms industry, with a threshold of $100,000 or more, by a state agency or political subdivision.
• Texas: Applies to the firearms and energy industries, with a threshold of $100,000 or more, by a state agency or political subdivision.
• Utah: Applies to the firearms and energy industries, industries that do not meet or refuse to commit to environmental standards and industries that do not facilitate access to abortion/sex characteristic surgical procedures industries, with a threshold of $100,000 or more, by a state agency or political subdivision.

Note that Oklahoma previously enacted an anti-boycott law (the Oklahoma Energy Discrimination Elimination Act of 2022) applicable to the energy industry, with a threshold of $100,000 or more, by a state agency or political subdivision. However, as of the date of this article, a permanent injunction has been issued prohibiting the enforcement of such anti-boycott law in Oklahoma.

The following are some practical considerations when operationalizing how to approach these anti-boycott laws.

• The anti-boycott laws only apply to transactions that meet or exceed the applicable threshold. The applicable attestation would therefore not be applicable for contracts that are below such threshold.
• Notwithstanding the above, if the original transaction amount is in excess of the applicable threshold, the transaction should not be divided into two or more smaller transactions for purposes of avoiding the applicable anti-boycott law.
• These anti-boycott laws require the originating entity to attest that when dealing with the state government or state governmental lessees, such entity does not discriminate against the identified industry. Such attestation must also speak to not discriminating for the entire term of the underlying contract. It is important to highlight that this is not merely effective as of the point of origination.
• These anti-boycott laws apply to both tax-exempt state and local governmental transactions as well as state and local governmental taxable transactions. In other words, the attestations are not limited to leases with state and local governmental entities that qualify for special tax treatment under Internal Revenue Code Section 103.
• Although this article is not intended to provide specific legal advice, the essence of the various state anti-boycott laws is that any non-compliant transaction may be voidable by the applicable governmental lessee, and possibly also subject to disgorgement. Therefore, it is important to remember that although some of the state laws are not well known, the consequences for failing to comply with such laws can be economically significant.
• To date, these anti-boycott laws have not expressly been made applicable to subsequent syndications or sales of the underlying leases.
• In the highly politicized times that we live in, it is very likely that more states will enact similar laws. Therefore, even if a given equipment funder’s footprint does not currently include the above states, this is an area that will need to be watched closely.

Conclusion

The above types of anti-boycott laws are here to stay and are likely to increase in number. The laws may not have been primarily focused on the equipment finance industry when proposed and enacted, but they will impact the equipment finance industry and most or all of its member companies for years to come. The industry will need to closely monitor these laws and be on the look-out for new laws in additional states.