The problem is the Trump administration is pushing for this. They're saying schools can only allow students to play on teams based on their assigned gender at birth. The federal government is using coercion to force states to comply

There is no specific law to follow, since it's just based on the whims of the federal government. The punishment is withholding funding. There is to judge, jury, or courts of any kind involved. Simply the federal government refusing to release funding if they dislike what states are doing. The AZ law is comparatively toothless

The effect of this is the same as it always is with these types of capricious authoritarian governments: A chilling effect. Actors are overly cautious to avoid drawing the wrath of the powerful central government -- Trump in this case