California recently expanded its pay-to-play law to prohibit a company seeking a license, permit, or non-competitively bid contract, along with certain of the company’s affiliates, agents, and employees, from contributing more than $250 to a local elected official of the agency in question. This will include city councils and county boards of supervisors, and their committees. The new law extends the contribution ban from three to 12 months after a final award is made and requires broader disclosure from a company and its agents. The new law goes into effect January 1, 2023.

What is the current state of the law?

Under current law, a party or participant in an agency proceeding involving a license, permit, or non-competitively bid contract is prohibited from contributing more than $250 to an officer of that agency during the proceeding and for three months after a final decision is rendered. Additionally, an officer of that agency is prohibited from participating in a decision if he or she received a contribution exceeding $250 from a party or participant in the proceeding. However, because an “agency” is defined to exclude the legislature, state constitutional officers, city councils, and county boards of supervisors, the law has a narrow effect and tends to apply only when an elected official is appointed to serve on a local board or planning commission. The law also requires parties to disclose contributions made in the preceding 12 months to an officer of that agency.

How has the law changed?

There are three important changes.

First, the law repeals the exemption for local agencies whose members are directly elected by the voters. This change alone captures a broad swath of local proceedings before city councils and county boards, ranging from zoning variances and development permits to cable television franchises and professional license revocations.

Second, contributions will be prohibited for a longer period after a decision is rendered. Parties and participants to an agency proceeding will be prohibited from contributing more than $250 to an officer of that agency—and agency officers will be prohibited from accepting, soliciting, or directing such contributions—during the proceeding and for 12 months after a decision is rendered.

Third, the new law requires parties involved in a covered proceeding to disclose contributions of more than $250 made in the preceding 12 months in all federal, state, and local elections held in California —not just contributions made to agency officers.

Who does the law apply to?

Unchanged from existing law, the pay-to-play law applies to proceedings for a “license, permit, or other entitlement for use,” which means all business, professional trade, and land use licenses, permits, and other entitlements for use, including entitlements for land use, franchises, and certain contracts. Competitively bid, labor, and personal employment contracts are not covered.

A covered “party” includes the entity that files an application for, or is the subject of, a proceeding involving a license, permit, or non-competitively bid contract. A covered “participant” is a person who actively supports or opposes a particular decision in a proceeding and who has a financial interest in the decision. When a privately held corporation is a party or participant in a proceeding, the majority shareholder of the corporation is also subject to the above prohibition and disclosure requirements.

In addition, a party’s or principal’s contributions are aggregated with those made by their “agents,” meaning individuals or firms that represent a party or participant in a proceeding. If an individual agent is an employee or member of a law, architectural, engineering, or consulting firm, both the entity and the individual are considered agents.

What are the implications for a company’s compliance program?

Violators are subject to fines and reputational harm. Accordingly, companies that seek to do or currently do business in California should track contributions made by the company and those made by covered individuals. Compliance protocols should be modified to account for changes in the new law. Covered employees and agents should be informed of the potential implications of making a prohibited personal contribution.

In addition to this state law covering local elected officials, many California cities and counties have adopted their own pay-to-play laws that may impose additional contribution restrictions and disclosure requirements. For example, earlier this year Los Angeles moved to ban contributions by developers and property owners. Pay-to-play laws are often a trap for the unwary, with serious consequences ranging from fines to disqualified bids, voided contracts, and reputational damage.

If you need help in determining your obligations under pay-to-play laws or developing a compliance program, please contact Venable’s Political Law Practice.

As we previously blogged, the District of Columbia’s pay-to-play law will go into effect on November 9, 2022. The law prohibits businesses doing or seeking to do business with the DC government from making certain political contributions if the contracts involved are worth an aggregate value of $250,000 or more. The contribution ban also applies to the company’s senior officers. Violations may result in termination of a contract or disqualification from seeking future contracts (including extensions of existing contracts) for up to four years.

The law applies to contracts sought, entered into, or executed after November 9, 2022.

The District of Columbia joins twenty-eight states and numerous municipalities with laws restricting contributions from government contractors and their principals and imposing special reporting requirements.

Please contact Venable’s Political Law Group if you have questions about establishing a pay-to-play compliance program. For more information on developments in federal and state campaign finance, lobbying, and ethics laws, please visit Venable’s political law blog at PoliticalLawBriefing.com.

A new law took effect in the city of Los Angeles on June 8 that prohibits developers, property owners, and their respective principals from making local political contributions while certain planning applications are pending with the City and for 12 months thereafter.

Who does the law apply to?

Any applicant or property owner associated with a “significant planning entitlement” filing in the city of Los Angeles qualifies as a “restricted developer” and is subject to the new restriction. “Significant planning entitlement” is defined broadly, capturing many discretionary applications filed with the Los Angeles Department of City Planning, including zoning issues and general plan amendments.

Continue Reading Los Angeles Bans Political Contributions by Developers and Property Owners

New York recently adopted regulations impacting charitable organizations that are registered and required to file annual financial reports (the CHAR 500) with the New York Attorney General’s Charities Bureau.[1] These regulations, which became effective March 16, 2022, clarify that the names and street addresses of donors to public charities are no longer required to be disclosed to the Charities Bureau with the CHAR 500.

The regulations were proposed in response to the U.S. Supreme Court’s 2021 decision in Americans for Prosperity Foundation v. Bonta, which found California’s donor disclosure law requiring charities to submit an unredacted copy of IRS Form 990 Schedule B to be unconstitutional under the First Amendment. Following the Court’s decision, California, New York, and New Jersey suspended collection of Schedule B donor information, which is typically filed on a confidential basis with the IRS as part of the otherwise public Form 990. Six months later, the New York Attorney General’s Office proposed regulations to eliminate the requirement that charitable organizations provide the state with the names and addresses of donors on Schedule B. The final regulations remain unchanged from those proposed by the AG’s Office.[2]

Continue Reading New York Adopts Regulations Amending Its Donor Disclosure Rules

U.S. companies are allowed to make contributions to super PACs, which is exactly what Wheatland Tube, LLC did in this case. However, the decision to contribute involved conversations with a foreign national, and that led to a $975,000 fine to settle charges that the contribution by a U.S. company violated the ban on contributions made by foreign nationals. The fine is the third-largest in the agency’s history and provides an important lesson about the limits of foreign national involvement in decisions by U.S. companies to be involved in the political process.

The complaint concerned contributions totaling $1.75 million to a federal super PAC by U.S. company Wheatland Tube, LLC. Wheatland Tube is wholly owned by a U.S. corporation, Zekelman Industries, Inc. Canadian citizen, Barry Zekelman, is the CEO (as well as an owner) of Zekelman Industries.

Mr. Zekelman acknowledged that he discussed the contributions with Wheatland Tube’s president, a U.S. citizen who also served as general counsel of Zekelman Industries. But Wheatland’s president said that he exercised independent judgment in making the decision to contribute. The FEC rejected this defense, concluding that even if a U.S. citizen has “final decision-making authority or final say” over the making of a contribution, a foreign national – an individual who is not a U.S. citizen or lawfully admitted for permanent residence – may not participate, directly or indirectly, in a decision-making process regarding U.S. election-related spending. The FEC made clear that none of the funds involved appeared to have come from non-U.S. sources; the only violation was Mr. Zekelman’s involvement in the decision to contribute. To that end, the settlement also involved Zekelman Industries, because, even though it is a U.S. company, its executives were involved in the decision to contribute, and they were acting at Mr. Zekelman’s direction.

Continue Reading FEC Imposes Record Fine for Foreign Individual’s Role in U.S. Company’s Otherwise Lawful Contribution to a Super PAC

Pay-to-play laws present a minefield for compliance because they can be found not only at the state level, but also the local level. As one of the most recent examples, beginning on April 1, 2022, Delaware County Pennsylvania, just outside of Philadelphia, will require disclosure of certain political contributions by county contractors and subcontractors anticipating receiving $50,000 or more under a covered contract required to be approved by the county council. Contributions made by the contractor’s and subcontractor’s corporate affiliates, officers, directors, partners, and their spouses are also subject to disclosure. Violations may result in the loss of contracts and a contract ban.

What contributions must be disclosed

Contributions of any amount made in the 24 months prior to the date the county council will consider the contract:

Continue Reading Remember Local Pay-to-Play Laws: Delaware County, Pennsylvania Imposes New Disclosure Requirements

A flurry of recent advisory opinions from the Department of Justice’s FARA unit raise new questions about how the Foreign Agents Registration Act (FARA) might apply to the nonprofit community. Adding to the uncertainty, these opinions arrive just as momentum is increasing for DOJ to adopt new regulations to clarify and update the pre-World War II law that has seen aggressive enforcement in the last decade.

FARA generally requires agents of foreign principals engaged in certain activities within the United States to influence domestic and foreign policy to register and publicly disclose the relationship and their activities to DOJ. In the last few years, enforcement has ramped up, with multiple indictments in the wake of investigations into foreign interference in the 2016 elections. As a result, organizations with international connections have called for greater guidance on the reach of what is a notoriously vague law. To this end, DOJ began releasing heavily redacted advisory opinions interpreting FARA and its regulations.

A common theme among opinions released in February 2022 is the scope of the so-called academic exemption, one of several exemptions to the law’s registration and reporting requirements. Under this exemption, an agent working on behalf of any kind of foreign principal need not register under FARA if the activity performed on behalf of the principal promotes bona fide religious, scholastic, academic, or scientific pursuits or the fine arts. Nonprofits, including universities and other educational organizations, religious groups, and other charitable organizations, have long relied on this exemption when engaging in activities that may cause them to be considered an “agent” of a foreign entity.

Continue Reading New FARA Advisory Opinions Put Nonprofits on Notice

The District of Columbia’s pay-to-play law will go into effect on November 9, 2022. The law was originally scheduled to take effect on November 4, 2020, but was postponed because of a lack of funding.

The law prohibits businesses seeking or holding contracts with the District government valued at $250,000 or more, and the business’s senior officers (e.g., president, executive director, chief executive officer, chief operating officer, or chief financial officer), from contributing to “covered officials.” Who is a covered official depends on who oversees the contract in question. For example, if a contractor is seeking or holding a contract overseen by a District agency that reports to the mayor, the prohibited recipients would be:

  • The mayor
  • Candidates for mayor
  • Political committees affiliated with the mayor and candidates
  • Constituent services fund of the mayor

Continue Reading DC Pay-to-Play Law Back on Track

The Federal Election Commission (FEC) recently announced a $16,000 civil penalty against a political campaign, to settle allegations that the campaign had inappropriately used FEC contributor data in an algorithm used to aid its fundraising. The settlement is the latest in a series of decisions this year cracking down on the practice of using the FEC’s public contribution data to facilitate fundraising operations.

Contributor Data Disclosure

Federal campaign finance laws require all federal political committees to disclose the name, address, occupation, employer, and contribution amounts from donors who have given more than $200 per cycle. When the law was first written in the mid-1970s, there was no internet, so access to the records was very limited. Moreover, $200 then was worth nearly $1,000 in current dollars (so in fact it was a much larger contribution than it may first appear). Today, the FEC makes these disclosures public in a searchable online database, a tempting trove in an age when data has become integral to improving the efficiency of organizations’ public outreach.

Continue Reading FEC Cracks Down on Use of Contributor Data

A federal government contractor has agreed to pay a civil penalty of $125,000 for making prohibited contributions to super PACs. The penalty is the largest the Federal Election Commission has obtained for violating the ban on federal contractor contributions.

According to settlement documents made public earlier this month, a Florida-based disaster response firm made contributions totaling $525,000 to two super PACs. The firm made a $500,000 contribution to a pro-Trump super PAC, which was refunded in 2021, after the FEC began its investigation. The firm also made a $25,000 contribution to a super PAC that supported the Senate candidacy of former Congressman Patrick Murphy (that entity had terminated with no funds remaining, and so no refund was issued). While corporations are permitted to make contributions to federal super PACs, the FEC’s view is that federal contractors and companies negotiating federal contracts may not. In the settlement agreement, the firm acknowledged that it was a federal contractor at the time the contributions were made, but claimed the contributions were made from an account holding the CEO’s personal funds. The penalty was paid by the firm’s CEO.

The settlement underscores the importance of effective political law and pay-to-play compliance policies for government contractors. Indeed, as a condition of the settlement, the contractor agreed to take steps to ensure that the violations do not recur, including having outside legal counsel vet future contributions.

In addition to prohibitions against federal contractors making contributions to super PACs, many states and localities restrict or prohibit contributions by government contractors and their key personnel or require public reporting of such contributions. Violations can result in the loss of contracts, voiding of bids, and civil or criminal penalties. Government contractors should understand the risks associated with political activity and implement appropriate compliance programs to manage and mitigate the risks.