Fifth Circuit: Texas SB 13 First Amendment Challenge Allowed to Proceed

• The Fifth Circuit Court of Appeals has granted a stay, allowing Texas to enforce Senate Bill 13 while the appeal of a federal judge's injunction proceeds.
• SB 13 prohibits Texas state funds from investing in, and state entities from contracting with, firms deemed to boycott fossil fuel companies.
• A federal judge previously blocked the law, citing First Amendment violations for punishing companies based on anti-oil and gas rhetoric.
• The core legal dispute centers on the law's definition of 'boycotting' as 'any action that is intended to penalize' fossil fuel companies, which plaintiffs argue includes speech.
• Texas officials contend the law targets actions that apply different standards to fossil fuel investments, not speech, and that environmental concerns are not an 'ordinary business purpose' for divestment.

The Fifth Circuit's ultimate decision will clarify the permissible scope of state power to regulate investment decisions based on perceived boycotts, particularly when those boycotts are linked to climate-related advocacy or corporate responsibility.

A federal appellate court recently heard arguments regarding the constitutionality of Texas Senate Bill 13, a 2021 statute designed to penalize companies perceived as boycotting fossil fuel industries. This law, which marked a significant early legislative effort to counter corporate climate initiatives, prohibits state retirement and school funds from investing in financial firms that engage in such boycotts. Furthermore, it bars Texas state contracts valued at $100,000 or more with companies found to be boycotting fossil fuels.

The state of Texas is appealing a federal judge's decision that had previously blocked the implementation of SB 13. Former U.S. District Judge Alan Albright, a Trump appointee who retired from the Western District of Texas on August 31, 2026, issued an injunction in February, concluding that the law infringed upon First Amendment rights by punishing companies for expressing views critical of the oil and gas sector. While a separate panel of the Fifth Circuit Court of Appeals temporarily stayed this injunction, the current panel, also composed of Trump appointees, granted a stay on May 29, 2026, allowing Texas to enforce Senate Bill 13 while the appeal of the district court's injunction proceeds on its merits.

The central point of contention in the legal battle over Texas SB 13 revolves around a specific phrase within the statute, which defines boycotting fossil fuels as taking "any action that is intended to penalize" such companies. The American Sustainable Business Council, a coalition of organizations advocating for sustainable business practices and the plaintiff in this case, contends that this definition encompasses speech critical of the fossil fuel industry.

Their argument is bolstered by instances where the Texas Comptroller of Public Accounts allegedly used the law to blacklist companies, including major investment firm BlackRock, for speech perceived as anti-fossil fuel, even though BlackRock continued to invest in these companies. BlackRock was initially added to the Texas Comptroller's blacklist in 2022 but was subsequently removed after it withdrew from environmental initiatives, such as Climate Action 100+, which aim to reduce corporate greenhouse gas emissions.

Representing the Texas Attorney General's Office, lawyer Beth Klusmann presented the state's defense to the Fifth Circuit panel. She argued that a company could still be considered to be boycotting fossil fuels under the law's definition even if it maintains investments in the sector, provided it applies different standards to those investments. Klusmann drew an analogy to Title VII discrimination cases, explaining that one could hire women yet still discriminate against them by imposing higher standards or offering lower pay.

Klusmann clarified that the law targets penalizing actions, not speech. She addressed concerns raised by U.S. Circuit Judge Cory Wilson regarding the vagueness of the law's exemption for actions taken for "an ordinary business purpose," especially since some firms were blacklisted despite citing commercial justifications for their investment decisions. Klusmann asserted that refusing to invest in a fossil fuel company due to environmental concerns, rather than its financial viability, would not qualify as an "ordinary business purpose." She further illustrated this point with another Title VII comparison, distinguishing between a bona fide occupational qualification for a sex-segregated locker room attendant and an unsubstantiated claim about women's work attendance.

The ongoing legal challenge to Texas Senate Bill 13 carries significant implications for corporate free speech, environmental, social, and governance (ESG) investment strategies, and the broader landscape of state-mandated investment restrictions. The Fifth Circuit's ultimate decision will clarify the permissible scope of state power to regulate investment decisions based on perceived boycotts, particularly when those boycotts are linked to climate-related advocacy or corporate responsibility.

This case highlights the tension between state economic policy and corporate autonomy, especially for firms operating across multiple jurisdictions with varying legislative priorities. The ruling will provide crucial guidance for financial institutions and companies contracting with Texas, as it will define what constitutes 'boycotting fossil fuels' under the law and how the 'ordinary business purpose' exemption is interpreted, directly impacting potential blacklisting risks and the future of anti-ESG investment laws.

Lawyers and compliance officers advising financial institutions or companies contracting with Texas should closely monitor the Fifth Circuit's decision on SB 13. The ruling will clarify the permissible scope of state-mandated investment restrictions and the interpretation of 'boycotting fossil fuels' under the First Amendment, directly impacting ESG strategies and potential blacklisting risks for firms operating in or with Texas.

Source: Original reporting via Courthouse News Service