Political Activity Law Alert: Important Recent Developments, January 25, 2010
In an historic Constitutional development, a divided Supreme
Court last Thursday invalidated the decades-old federal prohibition
against independent expenditures by corporations in federal
political campaigns, holding that corporations have the same First
Amendment speech rights as individuals. This decision overrules
portions of the Court's 2003 opinion in McConnell v.
FEC, in which the Court previously upheld McCain-Feingold
provisions regulating political advertising by corporations and
unions. The immediate practical impact of the 5-4 decision in
Citizens United is that both non-profit and for-profit
corporations can now fund independent public communications
expressly advocating the election or defeat of political
candidates.
By a broader 8-1 margin, however, the Citizens United
Court also upheld the disclosure obligations attached to such ads,
meaning that the resulting ads themselves will still need to carry
a disclaimer identifying the entity responsible for them, and
broader disclosures will still need to be filed with the Federal
Election Commission by the person or legal entity making the
communication listing anyone who gave money to the filer for the
purpose of paying for such ads.1 Further, the
Court's majority opinion utilized a broad definition of
"electioneering communication" to conclude that the movie
at issue was regulated by the statute even though it was to be
distributed via video-on-demand. This determination confirms that
disclosures must be filed for a broader swath of paid
communications than some might have thought prior to this decision.
The Court also noted that disclosure might not be required where it
would place the speaker in actual personal danger.
The decision does not address the legal prohibition against
corporate contributions to candidates, meaning that corporations
and labor unions must still undertake their federal campaign
contribution activity solely through connected political action
committees, and must use only funds voluntarily contributed to
those committees by corporate executives and shareholders (or, for
labor unions, by members) to make contributions to candidates. It
also does not address how this new First Amendment right for
corporations will apply to numerous state and local statutes that
more narrowly restrict political spending by particular classes of
corporations (regulated utilities, government contractors,
etc).
Some of the lawyers who represented Citizens United have
already signaled that they will bring a follow-on suit challenging
the remaining prohibition on contributing corporate funds directly
to candidates. Since the Court found no difference between the
speech rights of corporations and of individuals, this new suit
likely will request that corporations be allowed to make
contributions in the same amounts as individuals. The government
likely will argue in response that under Buckley v. Valeo
regulation of contributions is subject to a different and more
lenient standard of review than regulation of expenditures, that
many corporations control their own connected PACs, and that
allowing corporations to make direct contributions will provide
opportunities for corporate owners and managers to evade individual
contribution limits. If a business owner can contribute through
each of a string of subsidiary corporations, for example, alongside
his or her personal contribution, the per donor limit on
contributions to candidates will be effectively mooted. This is
likely to be the next major case initiated in the wake of
Citizens United.
Contribution/Expenditure Distinction in Public
Communications
There are numerous thorny legal issues that are raised by this
decision, and like all landmark cases the full effect will only be
clear after other cases have explored areas left unresolved by this
one. For the last eight years, the courts and the Federal Election
Commission have been struggling to settle on a legally sufficient
definition for an "independent expenditure" rather than a
"coordinated" one - in other words, those activities and
factual predicates which turn an otherwise "independent"
corporate expenditure for or against a federal candidate into an
"in-kind" corporate contribution to the benefiting
candidate. Since independent expenditures by corporations or labor
unions are now permissible under Citizens United, but
in-kind contributions from those entities are not, the rules on
coordination have taken on singular importance for groups funding
advertising campaigns about candidates or elected officials. Issues
to be resolved include whether any discussion between candidates
and corporations about the election and/or a public communication
can ever occur if a communication is to be considered
"independent" (,and if so what and when), and the use of
common vendors. The bad news is that the FEC has not yet finalized
a definition of coordinated expenditures, despite these eight years
of effort and several court decisions on the subject.
To define coordination for these purposes, the FEC has promulgated
a multi-factor test that considers the content of the communication
and the conduct of the advertisers, candidates, and/or party
committees involved. In many circumstances, like the coordination
of express advocacy, the application of the FEC's standards is
non-controversial – and in fact, in some regards the
Court's opinion in Citizens United may serve to
strengthen those applications. All five justices in the majority,
without objection from those who dissented, concluded that
"Hillary: The Movie" constitutes the functional
equivalent of express advocacy, a conclusion that was not obvious
under the Court's prior interpretations. Consequently, this
part of the Citizens United majority opinion may serve to
clarify that content like "Hillary: The Movie" is among
the range of communications which the FEC can consider to be
in-kind contributions.
Nevertheless, the outer boundaries of the types of communications
beyond express advocacy that can be treated as in-kind
contributions have been hotly litigated between the FEC and the
Congressional sponsors of McCain-Feingold. The current state of
play in that litigation is that the FEC is currently undertaking a
rulemaking to reconsider which types of content beyond express
advocacy, and which types of conduct besides outright agreements,
requests, or substantive discussions about particular ads, can
constitute coordination. Ironically, the comment period on the
FEC's currently-proposed regulations closed the day before the
decision in Citizens United was released, but given the
breadth of this decision the FEC may consider re-opening the
comment period to solicit additional perspectives.
Contribution/Expenditure Distinction in Corporate
Fundraising
Even aside from the definition of "coordination" in the
advertising context, the breadth of the Court's decision on
such a fundamental building block of the nation's campaign
finance laws presents other vexing challenges for the FEC. Not
least among these is the degree to which the Commission's
regulations governing corporate fundraising for federal candidates
and party committees are premised on the corporate expenditure
prohibition that the Supreme Court just overturned.
Specifically, the FEC has for many years prohibited corporate
"facilitation" of individual contributions to candidates.
These limitations prevent corporate executives from using their
staff employees and physical assets like telephones, photocopiers,
and computer services to help raise federal campaign contributions
in any ways which increase the cost or overhead expenses to the
corporation. Similarly, even use of capital assets like computers
or telephones in ways which incur no increased costs to the company
is restricted to "incidental use," typically less than an
hour per week or four hours per month.
If such fundraising activity is undertaken as an agent of the
recipients – as much of it is – those limits
and prohibitions on corporate facilitation clearly still apply.
However, not all such fundraising is so closely controlled or
coordinated with the ultimate recipients of the contributions, and
furthermore it is not obvious under remaining law how to tell which
is and which isn't. As noted above, the FEC has extensive
regulations on coordinated communications to the general public,
but the kind of corporate fundraising at issue in these regulations
is typically aimed at close friends, colleagues, customers and
vendors of the executives, and not to the general public at large.
Similarly, there are no advisory opinions or even enforcement
actions which look closely into whether facilitation violations are
based on a contribution or expenditure analysis, since prior to
Citizens United the distinction was irrelevant in this
context.
Finally, the statute provides that the cost of any solicitation
undertaken "in concert or cooperation with or at the request
or suggestion of" a candidate or party committee would be a
contribution, but it also isn't obvious how far back into
corporate operations that restriction would extend. For example,
does that provision only cover the actual solicitations, or does it
still prohibit corporate staff from helping with the administrative
and logistical sides of raising money while "on the
clock" of the corporation?
These are all only illustrations of the range of difficult
questions opened by Citizens United, and it will fall to
the FEC in the first instance to come up with answers for them. The
result could be a new minefield for corporations that wish to
aggressively engage in fundraising activities for federal
candidates, at least for the moment. All corporate fundraising
activities permitted under the old rules will still be completely
legal, but determining which additional ones will now be
permissible will require careful case by case analysis.
Other Issues: Tax Consequences and Bans on Expenditures by
National Banks
Any corporate funder of ads under this new constitutional regime
should take care to understand the tax consequences of their
independent expenditures. Political advocacy and lobbying expenses
are not deductible as business expenses under IRS rules.
Accordingly, any new spending which occurs as a result of this
decision will be done with non-deductible funds.
Finally, the breadth of the language in the majority opinion
suggests that potential future challenges to other similar
expenditure prohibitions may also succeed. Federal law currently
prohibits national banks from making independent expenditures, but
the validity of that ban is unclear under the language of the
Supreme Court's holding. The majority opinion concludes with
the holding that "[t]he judgment of the District Court is
reversed with respect to the constitutionality of 2 U.S.C.
§441b's restrictions on corporate independent
expenditures." Slip op. at 57. Given that the national bank
expenditure prohibition is part of 2 U.S.C. §441b, a strict
reading of this holding would suggest that banks are now as free as
other corporations to make independent expenditures. However, the
special characteristics of banks created under acts of Congress
could support arguments that national banks are closer akin to
government-sponsored enterprises like Fannie Mae or even the
Export-Import Bank, and thus should be left subject to broader
controls on their political activities to avoid having government
agencies themselves take sides in elections to government
office.
Election-Related Spending by Foreign Nationals or U.S.
Corporations with International Owners
Another area of interest is the possible effect of this decision on
foreign political spending in U.S. elections. It is important to
note (as much public comment on this decision does not) that under
current law, election spending by non-U.S. persons and entities is
prohibited under section 441e of the statute, and that prohibition
is unaffected by the ruling in Citizens United. Thus, the
existing restriction on expenditures by foreign corporations
remains in place not because they are corporations but because they
are foreign. Further, the U.S. subsidiaries of international
companies are already subject to FEC restrictions on spending
non-U.S. funds in U.S. elections, or allowing foreign nationals a
role in the decision-making process. 11 C.F.R. § 110.20.
However, the importance the majority places on the First
Amendment's protection of "speech" regardless of the
identity of the "speakers" suggests a strong argument
could be made that the prohibition on campaign expenditures by
foreign nationals could be vulnerable to challenge in a future
case. Such a result may not rest easily with Congress or the
public, however, to the extent that kind of First Amendment
absolutism would allow campaign expenditures to be made by foreign
governments or even foreign heads of state.
Possible Legislative Responses
Finally, there has been considerable speculation that the
Congressional leadership will propose legislation to regulate
corporate political expenditures to the extent this decision leaves
room to do so. President Obama has urged them
to do so
(http://www.whitehouse.gov/the-press-office/weekly-address-president-obama-vows-continue-standing-special-interests-behalf-amer)
. Reports have focused on possible new
disclosure requirements, shareholder approval mechanisms, and
limits because of potentially corrupting connections with Congress
(applying different treatment to corporations with lobbyists, for
example, or to government contractors). At this early stage, it is
too soon to know whether such measures will have sufficient support
in Congress, or could withstand Supreme Court review under the
standards established in Citizens United. Similarly,
Justice Stevens' dissent suggests that states could condition
their corporate charters on additional disclosure or shareholder
rights requirements. We will continue to follow these developments
closely and will provide further updates as the laws governing
these issues continue to evolve.
Footnote
1 These disclosures also name the custodian of
records for the entity running the ads, along with other
information such as a list of the people who exercise or share
control over that entity and an itemization of the disbursements
paid to create and distribute the ad. These reports must be filed
as soon as 24 hours after the ad is first distributed, depending on
how soon the ads run before an election and how much money the
reports will disclose.
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.