The Federal Election Commission has fined a federal contractor for making $200,000 in contributions to a Super PAC that supported a candidate in the 2016 presidential election. This is the first time the FEC has fined a government contractor for contributing to a Super PAC.

Federal contractors are prohibited from making contributions to federal candidates and PACs, though there has been debate since the Supreme Court ruling in Citizens United as to whether government contractors have the same constitutional right as other corporations to make independent expenditures – or to contribute to Super PACs that do the same.

According to settlement documents released last week, a Boston-based construction company made two $100,000 contributions to a pro-Hillary Clinton Super PAC in June and December of 2015, which the Super PAC refunded in June 2016. The refunds were made after a press report disclosed that the company’s portfolio included federal government facilities and that the company had been awarded more than $168 million in federal contracts since 2008. In paying a $34,000 fine, the company acknowledged that at the time it made the Super PAC contributions, it had a contract with the U.S. Army Corps of Engineers. The FEC found no reason to believe that the Super PAC knowingly solicited the contributions at issue.

The fine is a departure from the gridlock that has plagued the six-member Commission in recent years on a number of major issues. It is particularly surprising given the constitutional uncertainty over the right of federal contractors to make Super PAC contributions. Nonetheless, the fine does not settle the constitutional question, which can only be resolved by the courts.

In the last few years, the FEC and the courts have grappled with the federal contractor ban in other contexts. In 2014, the Commission dodged the issue of whether a federal contractor may contribute to a Super PAC by finding that federal contractor status was not attributable to a corporate parent that had made a Super PAC contribution merely because one of its subsidiaries was a government contractor. A federal appeals court in June 2015 upheld the federal contractor ban in a case filed by individual government contractors but did not comment on whether federal contractors may give to Super PACs.

What lessons does this settlement offer for government contractors?

  • Conduct training, and implement policies and procedures. The FEC settlement notes that after discovering the violations, the company implemented new internal controls, policies, and procedures. To avoid similar problems, government contractors should conduct regular training for key personnel, and implement appropriate policies and procedures regarding political activities, including employees’ use of work hours, corporate facilities, and mailing lists in connection with volunteer work on behalf of a campaign. Such training should also cover gifts to public officials and lobbying registration laws.
  • Vet contributions through experienced campaign finance counsel. The FEC settlement also notes that the construction company is now vetting certain political contributions with outside counsel. This is something all corporations should be doing. Even in states and localities that permit corporate contributions, a wide range of special rules may apply, including rules governing which political committees may accept corporate contributions; blackout periods during legislative sessions; restrictions on contributions by lobbying entities and on assistance from individual lobbyists in delivering or suggesting contributions; contribution thresholds for registering the corporation as a political committee; and in a few states, a requirement of board approval. Experienced counsel can also help flag recipient committees that may present reputational problems for the company and identify risks that can accompany the earmarking of a contribution for a particular use.
  • Beware of state and local pay-to-play laws. The risks are even greater for government contractors. Many states and municipalities have pay-to-play laws that prohibit government contractors, as well as their principal owners, officers, and certain employees from making political contributions. Other states require contractors to register and file disclosure reports with state election boards. Violations of pay-to-play laws strike at the bottom line by disqualifying bids and voiding contracts and can cause significant reputational harm.
  • Consider ways to contribute that do not violate the contractor ban. While state and local laws may restrict political contributions from a contractor’s owners, officers, and employees, the executives of a corporate contractor (though not an individual consultant doing work for the federal government) may make personal contributions to federal candidates. A corporate contractor may also form a federal PAC, which may be funded by donations from employees.

Sound political law and pay-to-play compliance policies are essential for government contractors to avoid serious risks. The starting place is a baseline assessment to help identify major risk areas and develop a compliance plan tailored to the company’s objectives and needs. When violations are discovered, it is critical to assess whether the conduct is isolated or systemic, and consider taking prompt, corrective measures to mitigate possible penalties and help reduce reputational harm.

By EFF (Own work) [CC BY 3.0], via Wikimedia Commons
This week, the U.S. Court of Appeals for the D.C. Circuit upheld the Federal Election Campaign Act’s long-standing ban on contributions from federal government contractors to federal candidates and parties. We have followed the case since the District Court’s decision in 2012.

The ban has been in a place since 1940. Pointing to a history of federal and state corruption scandals involving government contracts, the court ruled that the ban continues to further the government’s interest in preventing quid pro quo corruption and removes political pressure on government employees. Some of the most important things about the ruling for government contractors are:  Continue Reading Federal Appeals Court Upholds Contribution Ban on Government Contractors

A final ruling on the constitutionality of the long-standing ban on contributions by federal government contractors met a significant setback last week when the D.C. Circuit remanded the case to the trial court. In an opinion issued on May 31, 2013, about two weeks after oral arguments, a three judge panel of the D.C. Circuit concluded that the case, Wagner v. Federal Election Commission, must be heard en banc by the full panel of judges of the D.C. Circuit. 

The appellate court relied on an older provision of the Federal Election Campaign Act (“FECA”), section 437h, which states that the national committee of any political party, the Federal Election Commission (“FEC”), or any voter in a Presidential election “may” file a claim that a portion of the FECA is unconstitutional in a district court, and the district court “immediately shall” certify the constitutional questions to a circuit court, which must then hear the matter en banc. Last fall, a lower federal court heard the case and upheld the contractor ban, finding that it does not violate the First and Fifth Amendment rights of government contractors and concluding in two sentences that section 437h did not require certification of the constitutional questions. 

Despite arguments from both the FEC and the plaintiffs that the three judge panel could hear the case, the court stated that section 437h is a mandatory procedure for this type of claim, based on its reading of the language, and that an en banc hearing was required. The court cited the legislative history behind the section as support for its reading, including the need to have questions about the constitutionality of FECA provisions resolved quickly by circuit courts to enable these questions to reach the Supreme Court as soon as possible.    

The court’s decision, however, will actually result in considerable delays in Wagner’s path to the Supreme Court, as it imposes a new set of procedural hurdles. The district court must first identify and certify the constitutional questions in the case, thereby sending the case back to the D.C. Circuit. Scheduling and holding additional oral arguments on the merits of the case in front of the en banc D.C. Circuit may take several weeks or even months, and the issuance of an opinion on the constitutionality of the ban could be some time after that. A possible appeal to the Supreme Court, at this point, may not be completed until after the 2014 midterm elections.

On May 16, 2013, the U.S. Court of Appeals for the D.C. Circuit held oral arguments in the case challenging the long-standing ban on federal government contractor political contributions, Wagner v. Federal Election Commission.  Last fall, a lower federal court upheld the ban, in section 441c of the Federal Election Campaign Act (“FECA”), finding that it does not violate the First and Fifth Amendment rights of government contractors.  That order was quickly appealed to the D.C. Circuit in November.

A ruling is likely to be delayed, however, if the oral arguments held today are any indication.  In a last-minute round of activity in early May, the court ordered the plaintiffs and the Federal Election Commission (“FEC”) to submit briefs addressing whether the FECA requires that the case be heard en banc by the D.C. Circuit.

Typically, cases at the federal appeals court level are heard by a panel of three judges, but an en banc hearing, which includes all of the judges of the court, may be used according to civil procedure rules or statutory requirements.  A provision of the FECA dating back to the 1940s, section 437h, states that the national committee of any political party, the FEC, or any voter in a Presidential election “may” file a claim that a portion of the FECA is unconstitutional in a district court, and the district court “immediately shall” certify the constitutional questions to a circuit court, which must then hear the matter en banc.

Both parties agreed today that nothing in the language of the section or its history indicates that a circuit court must always hear these constitutional questions en banc.  However, the oral argument was consumed with this procedural issue, leaving no time for detailed arguments about the federal contractor ban itself.

In the coming weeks, the court may decide to send the case back to the district court to properly certify the constitutional issues for an en banc hearing, or the court may find that it can hear the case with a three judge panel and could potentially order additional arguments on the merits.  Under either scenario, it seems a decision on the constitutionality of the federal contractor contribution ban may be some time coming.

On November 2, 2012, the District Court for the District of Columbia, two days after oral argument, upheld the long-standing ban on political contributions from federal government contractors. In Wagner v. Federal Election Commission, three independent contractors with various federal agencies argued that the ban on federal contractor contributions in section 441c of the Federal Election Campaign Act (“FECA”) violated their First and Fifth Amendment rights.

The ruling keeps federal contractors outside the bounds of the Supreme Court’s decision in Citizens United. Unlike other corporations, federal contractors may not make contributions, either directly or in-kind, to independent expenditure-only committees, commonly known as Super PACs. In addition, while officers and employees of federal contractors are free to make personal political contributions, and to establish and donate to federal PACs, an individual who IS the federal contractor may not make contributions to federal candidates, national political parties or federal Super PACs.

Background

The challenged FECA section prohibits any person who (a) enters into any contract with the United States for “personal services, or the furnishing of any materials, supplies, or equipment . . . or for selling any land or building [where] payment for the performance . . . is to be made in whole or in part from funds appropriated by the Congress” (b) from making or soliciting a contribution to “any political party, committee, or candidate for public office or to any person for any political purpose or use.” Section 441c is thus a federal-level “pay-to-play” ban: it seeks to guard against federal contractors using political donations to help secure more business. The plaintiffs in Wagner have limited duration consulting contracts with federal agencies. All want to make contributions to federal races during the current election cycle but are subject to the ban.

Analysis

First Amendment Claim

While political contributions are protected by the First Amendment, here the court concluded that preventing corruption is a sufficiently important government interest to justify the ban. The court noted that section 441c was originally passed in the 1940s in response to federal contractors being required to buy campaign books at higher prices to obtain government business. The court also pointed to more recent examples, such as a 2005 Connecticut contractor contribution ban passed after the governor awarded over $100 million in state contracts to a large donor.

The plaintiffs argued that the ban is too broad, as it applies to persons at low risk for corruption, including those who do not receive their contracts through a bidding process. The court, however, held that Congress has considerable flexibility in deciding how to address corruption given the importance of the government interest in preventing it.

Equal Protection Claim

The plaintiffs argued that section 441c violates their rights under the Equal Protection clause of the Fifth Amendment because they are treated more harshly with respect to political contributions than are federal employees and the officers, directors, shareholders, and employees of corporations that contract with the government.

Applying an “intermediate” standard of scrutiny, the court found that government contractors are different from federal employees and from corporate government contractors in significant ways that justify the ban. Federal contractors are reasonably treated differently but not necessarily more harshly than federal employees, who may (generally) make contributions, but not solicit them. The plaintiffs also argued that section 441c unfairly penalizes holders of personal services contracts.  Corporate federal contractors are subject to the 441c ban, but directors, officers, employees, and shareholders are not. Corporate contractors may also form political action committees (“PACs”). The court found that employees, stockholders, directors, officers, and corporate PACs that make contributions are acting as individuals or as different entities, and thus it is acceptable to treat them differently.

Impacts of Wagner and Effects on Contributions to Super PACs

Following Wagner, the 441c ban still applies to all funds under the dominion and control of the individual government contractor, not just to payments received from the government.

On the corporate side, a government contractor may still create a federal PAC, and its directors, officers, employees, and shareholders may make contributions  to the PAC and directly to federal candidate campaigns and other political committees. But if the federal contractor is an individual, such individual may not make contributions in connection with federal elections. Moreover, the FEC’s position, confirmed in this case, is that while Citizens United permits corporations to make independent expenditures in support of or in opposition to candidates, the ruling does not apply to corporate federal contractors because of section 441c. This means that a corporate government
contractor, while it can still form its own PAC:

  • Cannot donate to a PAC that makes only independent expenditures (i.e., a super PAC). In Wagner, the court noted that there is “substantial doubt” about whether this position is constitutional after Citizens United and SpeechNow.org v. Federal Election Commission.  However, the FEC’s position is that federal contractor contributions to super PACs are prohibited.
  • Must avoid in-kind contributions to Super PACs (and Super PACs must be careful not to accept such contributions). This means, for example, that a federal contractor should not allow use of its office space, employees or other resources (such as a mailing list) by a federal candidate committee, political party or even a Super PAC.
  • Must still be careful to comply with state and local “pay-to-play” laws. This case addresses only contributions made by federal government contractors to federal candidates and PACs, and national political parties. As a separate matter, many states and localities restrict or prohibit political contributions by government contractors and their principals, or require such persons and entities to file public reports disclosing their political contributions.

The District of Columbia has adopted a “pay-to-play” law that bans political contributions from city contractors, as well as personal political contributions from their senior officers. Violators may forfeit contracts, face disqualification on bidding for up to four years, and pay civil penalties. The law takes effect on November 4, 2020.

Other major municipalities, such as Chicago, New York City, and Philadelphia have similar laws that either restrict political contributions from contractors and their principals, require the contractor to file reports with the relevant election board, or both. A number of states also have pay-to-play laws, including Maryland, New Jersey, and Illinois.

Continue Reading New DC “Pay-to-Play” Law Bans Contributions by Government Contractors and their Officers

Federal campaign finance law restricts incorporated associations’ expenditure of association funds or resources to host a federal campaign-related event such as a fundraiser. This White Paper discusses four permissible means of hosting a fundraiser on association property.

Permissible Campaign-Related Events

Association-Paid “Restricted Class” Event

Federal campaign finance law permits an incorporated association to host a

This memorandum summarizes the rules of the road for setting up and operating federal Super PACs, which are groups formed primarily to make “independent expenditures” in connection with federal elections, and which register and file reports with the Federal Election Commission (“FEC”). An “independent expenditure” is an expenditure for a communication expressly advocating the success

Companies that do business with state and local governments are subject to a wide array of laws restricting their political contributions, as well as the personal political contributions of their owners, officers, and some employees. These laws are known as pay-to-play laws because they are aimed at severing the relationship — or the appearance of a relationship — between a contribution (the “pay”) and the award of a government contract (the “play”).

Violations of pay-to-play laws — even a single, inadvertent political contribution — can result in costly bid disqualifications, voided contracts, and damaging publicity.

In approaching compliance, government contractors should do a risk assessment that takes into account where the company does business with government agencies, whether its contracts are covered by relevant laws, and where its employees live. For many companies, pre-clearing contributions and political fundraising (which some laws also cover) and training affected personnel are essential elements of an effective compliance plan. Also, companies should adopt protocols for registration and reporting to state election boards, as there are some pay-to-play laws that impose such requirements instead of, or on top of, contribution restrictions.

Pay-to-play laws vary across jurisdictions; we have outlined the broad requirements and highlighted certain relevant updates but encourage consultation with our political law attorneys to customize a compliance plan for your particular needs.

Continue Reading Pay-to-Play Laws Remain in the Spotlight: Government Contract Eligibility Hinges on Awareness and Compliance

Overview

Pay-to-play laws restrict or prohibit businesses, as well as their owners, officers, and in some cases, their employees, from making political contributions (the “pay”) if they have been awarded or are trying to obtain government contracts (the “play”). These laws, which are found at the federal, state and local levels, are an outgrowth of government contracting scandals and can strike at a company’s bottom line by disqualifying bids and voiding contracts. Violations also can result in fines, damaging publicity, and even jail.

Government contractors should have a pay-to-play compliance plan that takes into account the jurisdictions where covered owners, officers, and employees are located, and where the company does or seeks to obtain business with government agencies. In addition, contractors should have a process for training covered employees, a mechanism for pre-clearing contributions, and protocols for meeting registration and ongoing reporting requirements.

Here are a few questions to help determine whether pay-to-play laws pose a risk to your business:

  • Do pay-to-play laws apply to my business activities?
  • If so, which affiliated individuals and entities are subject to the law?
  • What are the consequences for covered individuals and entities (prohibitions, reduced contributions limits, reporting, other)?
  • What are the penalties for violating applicable pay-to-play laws?

Continue Reading Pay-to-Play Law Update: Political Activity Can Put Government Contracts at Risk