This is a guest post based on a paper that was presented at the 2023 Firearms Law Works-In-Progress Workshop. The Workshop is held each year on a home-and-away basis with the Duke Center for Firearms Law.

It was a great privilege to share my forthcoming article, The Gun Industry and the New Anti-Boycott Laws (forthcoming in Florida Law Review), at the 2023 Firearms Law Works-in-Progress Workshop in Fort Worth, Texas. I appreciated the comments and suggestions that other participants provided about the draft. I previously described the project after presenting it at a similar workshop last year, when it was still at the research stage. The project evolved over the last year, and some recent court decisions – since the workshop in June – are relevant and worth discussing.

By way of summary, after the horrific school shooting in Parkland, Florida in February 2018, a few of the largest financial institutions in the country announced various plans to back away from funding the firearms industry – or, at least, to back away from funding companies that make or sell assault rifles (the proposals varied).  In practice, this would mean a policy of not extending loans or credit to certain gun manufacturers or gun dealers. It could also mean that the bank would not invest its own holdings in the stock of gun corporations, even though only two such manufacturers in the US currently have publicly traded stocks (plus one or two ammunition companies). It is not clear that the banks ever followed through on these public pledges, or how consistent they were in their follow up.

Nevertheless, the pledges provoked retaliation from conservative state legislators and in Congress, and many legislators introduced bills designed to punish banks that do not lend to weapons manufacturers and gun dealers. Texas and Wyoming enacted such laws, and the Governor of South Dakota more recently adopted a similar policy via executive order. The Texas law is typical of the bills introduced in most states: it requires all corporations that receive government contracts (including, importantly, municipal contracts) to certify that they will not “discriminate” against gun companies or gun sellers through boycotts, divestment, or refusal to contract. The legislative history of the Texas enactment makes it clear that the law specifically targeted banks and was in response to their post-Parkland announcements. The statute itself, however, applies to all corporations, not just financial institutions.

The most significant government contracts affected by the law are contracts for underwriting municipal bond issues, which is a multi-billion-dollar industry in a large state like Texas. Most of the big banks responded to the Texas legislation by doubling down on their position and announcing they would no longer underwrite bond issues in the state, though one or two announced they will certify compliance with the law. The banks that abandoned Texas had been doing a lot of the municipal bond underwriting, so their departure made the bond underwriting market less competitive. A study by economists found that the Texas law, along with its companion statute that punished banks in the same way for divesting from the fossil fuel industry, cost Texas taxpayers nearly $500 million in the first year after enactment, because municipalities had to pay so much more for local banks to underwrite their bond issues.  This year, similar bills were introduced in many states, though, as far as I can determine, none were enacted.

Citigroup temporarily suspended bond work in Texas after the enactment of the 2021 law, but then resumed a few months later, certifying its compliance with the statute. According to Bloomberg Law, the National Shooting Sports Foundation objected to Citigroup’s certification, which prompted intervention by the Texas Attorney General. By January 2023, Citigroup learned it was banned from municipal bond work in Texas, despite certifying compliance (see also here and here).

A similar story played out this summer with Bank of America. After a two-year hiatus following the enactment of the Texas law, BoA attempted to reenter the Texas market in July 2023, winning a bid to underwrite a large bond issue for the city of Frisco. According to news reports, BoA claimed that it could now certify compliance with the Texas law regarding gun industry discrimination. As Bloomberg Law reported, attorneys for BoA informed the Office of the Texas Attorney General in May 2023 that the bank does not “discriminate against a firearm entity or firearm trade association,” even though the policy it adopted in 2018 remains in place. In addition, the letter from the bank’s lawyers acknowledged that the bank deems the firearms industry to be “high-risk, with clients subject to a heightened due diligence requirement,” and therefore the bank would avoid certain business transactions due to “traditional business reasons,” which the Texas law technically permits.  In response, the Texas Attorney General’s Office sent a long, ominous letter with dozens of questions to Bank of America, asking it to clarify exactly why it considers the firearms industry to be “high-risk,” which Bloomberg reports has now stalled BoA’s deals in the state.

On July 28, Bloomberg Law reported that the Texas AG’s office had also sent a letter to Wells Fargo informing the bank that state officials were studying whether the bank “discriminates against a firearm entity or firearm trade association.” Wells Fargo was one of the few national banks that claimed to be gun-friendly in recent years, and it has been underwriting bond issues in the state while other banks have stepped back. But, in 2021, Wells Fargo broke ties with the NRA due to ongoing high-profile scandals and multi-front litigation. Thus, it appears that not doing business with the NRA may preclude financial institutions from underwriting municipal bonds in Texas, which is currently the nation’s largest municipal bond market.

The bills protecting the gun industry from boycotts and divestment are a subset of a larger trend of anti-boycott laws. Anti-ESG laws (Environment, Social, and Governance) are more common, but many ESG investors or funds would include divesting from the weapons industry as part of the “S” in ESG, so laws styled as anti-ESG statutes often cover the gun industry in addition to the fossil fuel industry. The gun-specific statutes and the anti-ESG laws together are based on a previous wave of anti-BDS statutes, which were enacted in more than 30 states in the last two decades. Anti-BDS laws punish those who boycott the nation of Israel. Because the anti-BDS laws have been around longer and are more prevalent, they have generated more litigation and court decisions.  These include a decision from the Eighth Circuit that the Supreme Court this past term declined to review, to which I will return below.  My article is critical of all these anti-boycott laws; I argue that they violate the rights of freedom of expression for the affected entities and for socially conscious investors. I also argue that the laws function as a coerced subsidy of the firearms industry, in violation of free market principles, and that the monopsony power of the government in hiring certain types of contractors (like bond underwriters) makes the laws unduly oppressive.

At the workshop in Fort Worth, one comment from the participants referred to an important related issue that was not in the draft I had circulated – Operation Choke Point, an Obama-era initiative by the DOJ and certain individuals at the FDIC and the OCC to pressure financial institutions to stop servicing certain businesses whose activities were suspicious or illegal (mostly payday loan companies). I address this issue in great detail in a recent article in the Administrative Law Review, Operation Choke Point: Myths and Reality. As the draft about the anti-boycott laws grew too long and unwieldy, I decided to break it up and publish the section on Operation Choke Point as a separate piece.  Operation Choke Point has certainly been a talking point in the legislative hearings about the anti-boycott laws, and I attempt to show that the gun industry’s claims about it are largely untrue.

Many of the comments at the workshop focused on the special status of financial institutions – that they have a type of privileged status due to their federal charters, which gives them oligopoly power, and that they exert unique power and influence in the economy that is subject to abuse. These are valid points, also raised in the ESG context. Part of the answer, I believe, is to let the federal agencies entrusted by Congress to oversee the financial sector (the OCC, the Federal Reserve, the FDIC, and the CFPB) regulate how the national banks should navigate controversial social issues, rather than allowing regulation to occur through red-state-blue-state politics. It is also worth noting that some or most of the pressure for the banks to divest from the gun industry and fossil fuel companies is coming from activist investors and shareholders, as opposed to “corporate elites” with a personal progressive agenda – the some of the push is coming from the bottom up, rather than the top down. So, even if banks should be in a special category for public accommodations law, that still leaves the issue that individual investors have the right to invest their money as they like, and should not have to invest in industries they find objectionable.

In addition, it is important to note that the Texas statute protecting the gun industry from boycotts does not mention banks specifically (though that was the focus of the legislative hearings), but rather applies to any corporation. To use an example from a recent Supreme Court decision, a designer like the plaintiff in 303 Creative LLC v. Elenis could not refuse to design a website for a gun store in Uvalde because it sold assault rifles to the school shooter there – without becoming ineligible to do any contract work for a municipality, a community college, a state-owned social service organization, or a school district anywhere in Texas. In fact, in order to get a contract to design posters or ads for a back-to-school donation drive at the local elementary school, the designer would have to certify in her contract that she would not refuse to do business with any customers or vendors who were part of the gun industry for reasons related to their sales of guns. The decisions in 303 Creative produced widely varied responses among constitutional law experts, so opinions also vary about whether it would apply to anti-boycott laws that purport to prohibit discrimination against gun dealers and manufacturers.

On the subject of analogous laws and court decisions, in the same term that the Supreme Court held in 303 Creative that states may not punish a company for refusing to do business with customers that the business owner found morally objectionable, the Court denied certiorari in a case in which the 8th Circuit upheld a state law that punishes a company for refusing to do business with customers or vendors because the business owner disapproved of their behavior – in Arkansas Times, LP v. Waldrip. There, the en banc court held that refusing to do business with someone is “non-expressive conduct” that has no protection under the First Amendment. I am not sure how to reconcile the Supreme Court’s denial of cert in Waldrip with its holding and rationale in 303 Creative. Waldrip involved a newspaper that regularly ran advertisements for state universities and community colleges, as well as some state agency outreach programs, and depended on this ad revenue. But the newspaper became ineligible to run these ads unless it certified, contractually, that it would not boycott Israel, which included refusing to run ads for the Israeli tourism industry or for Israeli companies.

Ten days after the Supreme Court’s decision in 303 Creative, the Fifth Circuit released its long-awaited opinion in A & R Engineering and Testing, Inc. v. Scott (July 10, 2023), a case involving an anti-BDS statute almost identical to the Arkansas law challenged in Waldrip. The Fifth Circuit dismissed the case for lack of standing, without reaching the merits (this opinion is somewhat difficult to reconcile with the holding on standing in 303 Creative).  The district court in A & R Engineering and Testing had ruled that the Texas anti-boycott law was unconstitutional as applied to the plaintiff in the case, enabling the plaintiff to obtain a contract with the City of Houston. Texas Attorney General Ken Paxton publicly denounced the decision and announced his intention to challenge it, so the prevailing plaintiffs appealed the case themselves, basically asking the Fifth Circuit for a declaratory judgment that the statute was unconstitutional. The circuit court panel found there was no imminent injury-in-fact because the Texas Attorney General had not, in fact, taken any steps yet to enforce the law beyond threatening to do so. Interestingly, the Fifth Circuit also opined that the statute itself lacked any enforcement mechanism, so it was “textually unenforceable.” The same is true of the Texas law protecting the gun industry, so perhaps in a future challenge to the statute, the courts would find that it was similarly unenforceable. For a thoughtful and very recent discussion of laws that lack enforcement provisions, see Hortatory Mandates by Nathan Cortez and Lindsay F. Wiley.

A final point about the anti-boycott laws protecting the gun industry is that most of the proposed bills follow the Texas statute in containing an exception for “traditional business or financial reasons.” In other words, a bank could legitimately certify that it is not “discriminating” against the gun industry if it happens to deny a loan to an individual gun dealer who has a bad credit history. Of course, from a law and economics perspective, this type of law is likely to have a chilling effect on banks’ risk assessment for the protected industry, because, if challenged, the bank could have the burden of proving that it had a valid non-discriminatory reason to reject certain gun-related customers, which may prompt banks to reject such customers only in the most extreme cases. On the other hand, the core message of the ESG movement has been that socially-conscious investing – including divesting from weapons manufacturers – yields equal or higher long-term revenues compared to traditional profit-only investing.  Some ESG proponents would attribute this to the growing regulatory pressure, especially in industrialized nations outside the United States, for companies to pursue environmental sustainability, social consciousness, and better corporate governance (avoiding conflicts of interest in boardrooms, etc.). During Operation Choke Point, the pressure on the banks was framed as a concern about “reputational risk” – that bank clients who skate on the edge of legality generate bad publicity, expensive civil litigation, regulatory enforcement liability, consumer boycotts, and so on.

In terms of the special “risks” that financial institutions associating with the gun industry may face, there are three recurring themes apart from the public outcry that follows the most horrific mass shootings. First, as Stephen Gutowski recently wrote on The Reload, many observers recognize the “boom-and-bust cycle of gun sales.” For a commercial lender or provider of other banking services, this inherent instability is a risk factor. The industry as a whole tends to recover from busts, but individual companies – especially local gun shop owners – face the typical pressures of a small independent retailer compounded by an industry whose sales cycles are a rollercoaster ride. Second, in spite of the immunity provided by the PLCAA, there is still active litigation against manufacturers and dealers, such as Soto v. Bushmaster (which settled for $73 million), and there is currently a new wave of such cases. In addition to tort actions, gun dealers can face periodic crackdowns for regulatory violations that result in fines and license revocation. These types of civil and regulatory liability must factor into a commercial lender’s risk assessment for customers in the gun industry.  Finally, and most controversially, during the Obama era, there were concerns among some federal regulators and enforcement officials that gun stores were likely locations for money laundering, due to the prevalence of trade-ins and cash purchases for certain items – some prosecutions of gun dealers for money laundering in 2011 may have fueled such concerns. Federal bank regulators expect banks to be vigilant with regard to money laundering risks, and the rigorous approach banks take to screening for money laundering could prompt them to de-bank customers in the gun industry.