The case in Murray v. Geithner, and here's an excerpt:

A motion brought pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief may be granted tests the legal sufficiency of Plaintiff's claims. The Court must accept as true all factual allegations in the pleadings, and any ambiguities must be resolved in Plaintiff's favor. While this standard is decidedly liberal, it requires more than the bare assertion of legal conclusions. Thus, a plaintiff must make "a showing, rather than a blanket assertion of entitlement to relief" and "[f]actual allegations must be enough to raise a right to relief above the speculative level." ...

The Establishment Clause of the First Amendment provides that "Congress shall make no law respecting an establishment of religion.". The clause has been construed as preventing the government "from enacting laws that have the purpose or effect of advancing or inhibiting religion." The Court examines Establishment Clause challenges under the test delineated in Lemon v. Kurtzman, 403 U.S. 602, 612--13 (1971): "First, the statute must have a secular legislative purpose; second, its principal or primary effect must be one that neither advances nor inhibits religion; finally, the statute must not foster 'an excessive government entanglement with religion.'" Recent Supreme Court decisions have modified the test slightly by "fold[ing] entanglement analysis into the effect analysis because 'entanglement is . . . an aspect of the inquiry into a statute's effect.'" Establishment Clause queries are conducted under the objective reasonable observer standard.

It is beyond question that the EESA [the Emergency Economic Stabilization Act of 2008] does not violate the Establishment Clause on its face. Congress enacted the EESA in response to what the parties portray as a monumental economic crisis for the sole purpose of restoring stability to financial institutions. The statute makes no mention of religion or religious institutions. Instead it focuses entirely on institutions that are primarily, and in most cases entirely, secular. Nothing from the plain text of the statute hints at an improper relationship between the government and religion.

It is the application of the EESA as it relates to AIG, however, that Plaintiff challenges. The Supreme Court has previously permitted as-applied challenges to facially constitutional statutes. ...

The circumstances of this case are historic, and the pressure upon the government to navigate this financial crisis is unfathomable. Times of crisis, however, do not justify departure from the Constitution. In this case, the United States government has a majority interest in AIG. AIG utilizes consolidated financing whereby all funds flow through a single port to support all of its activities, including Sharia-compliant financing. Pursuant to the EESA, the government has injected AIG with tens of billions of dollars, without restricting or tracking how this considerable sum of money is spent. At least two of AIG's subsidiary companies practice Sharia-compliant financing, one of which was unveiled after the influx of government cash. After using the $40 billion from the government to pay down the $85 billion credit facility, the credit facility retained $60 billion in available credit, suggesting that AIG did not use all $40 billion consistent with its press release. Finally, after the government acquired a majority interest in AIG and contributed substantial funds to AIG for operational purposes, the government co-sponsored a forum entitled "Islamic Finance 101." These facts, taken together, raise a question of whether the government's involvement with AIG has created the effect of promoting religion and sufficiently raise Plaintiff's claim beyond the speculative level, warranting dismissal inappropriate at this stage in the proceedings.

I'm surprised that the court has allowed the case to go forward, for reasons I described when the case was filed. At the same time, I continue to expect that the case will be thrown out, either on summary judgment or on appeal, for those very reasons. As I noted earlier, the theory is apparently that the government may not invest in any company that, in part of its operations, provides products that are tailored to a particular religious faith, and that may be accompanied by donations to religious charities. But lots of companies do this, for the simple reason that religious consumers have their religious tastes such as consumers have other ethical or esthetic tastes.

For instance, a food processing company might have a division that produces kosher products and donates some money to Jewish-specific charities (as a way of better wooing Jewish buyers). An investment company might seek to attract conservative Christian investors by offering a fund that doesn't invest in (say) hospital chains that perform abortions, and by donating some share of its profits to religious causes. Other companies might provide funds that don't invest in munitions manufacturers, to satisfy the desires of Quaker investors. A store might sell, among other products, religiously significant garments or religious symbols. A bookstore might sell religious books alongside other books.

Under the plaintiffs' theory, either Islam is subject to special constitutional constraints, or — once that constitutionally forbidden legal rule is rejected — all of these companies would somehow be forbidden as targets of government investments. The government couldn't bail them out. It presumably couldn't invest public employee retirement funds in them. It couldn't sell religious books alongside other books in public university bookstores, or serve kosher food alongside other food in public university cafeterias.

Likewise, a state-run liquor store wouldn't be able to stock kosher wine. (Visit this site, search for "kosher," and you'll see how much kosher wine the apparently Establishment-Clause-violating New Hampshire State Liquor Commission does indeed sell.) That's plainly wrong, under any sound theory of the Establishment Clause, or even under the broadest theories suggested by Justice Brennan and other Establishment Clause maximalists. (UPDATE: A state-run liquor store might be more restricted than a state-bailed-out company; for instance, it might not be able to make donations to religious causes, even to attract Jewish customers. But it would at the least be able to buy kosher wines, even from companies that themselves donate part of the proceeds to religious causes. And I think the state should be free to invest pension funds -- or bailout funds -- in a privately-owned liquor store that donates to religious causes as a means of attracting religious customers.)

The government investment decisions don't have a "primary religious purpose," because the obvious purpose is to prop up important companies — and have them continue making as much money as possible — and not to advance Islam. The government no more cares about advancing Sharia through the AIG bailout than my local Ralphs supermarket (or the New Hampshire State Liquor Commission) cares about advancing kosher laws by selling products that are certified kosher. The "primary religious effect" inquiry has always been extremely vague, but none of the precedents applying that inquiry would treat the continued provision by AIG of products that some religious customers like as a "primary religious effect."

The "endorsement" argument doesn't make sense here, because reasonable observers wouldn't treat the government's decision to bail out AIG, including its subdivision that sells financial products that Muslims prefer for religious reasons, as an endorsement of Islam. Again, the "endorsement" test is quite vague, but this is a pretty clear example: Making money by satisfying some customers' religious preferences (and lots of other customers' nonreligious preferences) isn't an endorsement of religion. Nor does the allegation that some of the money that is raised is donated to Muslim charities affect the analysis. That donating money to religious charities is good business for AIG doesn't make it impermissible for the government — which after all wants AIG to make as much money as possible, so the government isn't left paying the bill — to invest in AIG.

The only even theoretically plausible objection in such cases, I think, arises if the government becomes too entangled in the religious decisions of the company, for instance if government officials end up supervising the programs and deciding what Sharia law truly requires, or what really is or isn't kosher. But on the facts this just doesn't seem to be so: The operational decisions related to these religiously themed products and programs are made by the company (or perhaps even by the company's subcontractors), not by government officials. There seems to be no danger that some government officer would have to engage in quintessentially religious activities. And it is government decisionmaking, not government stock ownership, that triggers the Establishment Clause, which is one reason that government employee retirement plans can invest in companies without making them state actors governed by the Free Speech Clause, the Establishment Clause, the Due Process Clause, and so on. (This distinguishes the hypothetical of a government-chartered school, which remains a government actor, engaging in religious education.)

It's not exactly clear from the court's opinion what sort of facts the judge envisions might be enough to prove an Establishment Clause violation. If the judge believes that there'd be an Establishment Clause violation simply if it were proven at trial that government money is flowing to "Sharia-compliant financing," or that the government is cosponsoring an "Islamic Finance 101" forum, then the plaintiffs will win — but they shouldn't, and I'm pretty confident that such a decision would be reversed on appeal. Such catering to consumer preferences is no more an Establishment Clause violation than a state-owned liquor store's stocking kosher wine in order to satisfy its kosher-observing customers, plus educating its employees and contractors on which wines kosher-observing customers prefer.

On the other hand, perhaps the judge is waiting to see whether there's evidence of some other alleged misbehavior — maybe what I mentioned in the paragraph beginning "The only even theoretically plausible objection" (though again it's hard to tell, because the opinion is so terse on the subject). In that case, I'd expect that absent evidence of some such misbehavior, the case will be thrown out on summary judgment, as I think it should be.