When the owner of a business runs for public office, he or she has to be careful not to use the assets of the business for the campaign. In the past, this issue has come up when the business owner uses money from a business account, uses customer mailing lists, or business equipment in a campaign. Prepaying the company for services, renting lists at fair-market value, or taking an authorized distribution are some ways to avoid illegal corporate contributions.

wrestlingThe FEC recently dealt with a novel argument that a letter from a business to a newspaper asking for a retraction from the newspaper was an in-kind contribution to the candidate who was the owner of the business.

The newspaper ran two columns critical of Linda McMahon, the owner of World Wrestling Entertainment Inc. (“WWE”) and the 2012 candidate for Senate in Connecticut. The columns did not mention the WWE by name, but referred to the “pornography and mock violence of the wrestling business from which” the candidate had made her living and referred to her business of “violence, pornography, and raunch.” In response, WWE sent a letter demanding a retraction of the columns because WWE was not engaged in violence or pornography, and threatened a lawsuit against the paper if a retraction was not forthcoming.

In response to the letters, the newspaper filed a complaint with the FEC, alleging that the WWE letter was an attempt to support the campaign by silencing the newspaper. The FEC unanimously disagreed. The General Counsel’s report explains that the WWE had a clear business interest in defending its reputation and made no mention of the campaign in its letters. The FEC found that the letters were not for the purpose of influencing a federal election.

This is obviously a unique case, but it serves as a reminder of the need to erect high walls between a candidate’s business interests and the campaign.

With donors now allowed to give unlimited sums to Super PACs and other political advocacy groups, the biggest issue in campaign finance regulation is what such groups must disclose about their fundraising and spending, and when.  Some states have moved aggressively to bolster their disclosure rules, with a couple of states filing suit to force groups engaged in election spending to unmask their donors. 

The federal response has been a different story, with no consensus on a path forward, let alone agreement that new disclosure rules are necessary in a post-Citizens United world.  A little-noticed statement released by the three Republican Commissioners of the Federal Election Commission (“FEC”) suggests that groups active in 2014 may actually find it easier to avoid registering as Super PACs and disclosing their donors. 

The 26-page statement explains the Commission’s dismissal of a complaint charging that American Issues Project (“AIP”), a 501(c)(4), failed to register with the FEC and file reports as a federal political committee.  AIP spent over $2.8 million in the 2008 election on ads attacking then-candidate Barack Obama.  The two Democrats on the Commission found reason to believe a violation had occurred – the sixth seat on the Commission is vacant right now – but that left the matter short of the votes necessary to move forward. 

How does a group that spends almost $3 million on negative campaign ads avoid registering and filing reports as a federal political committee – or as it would be characterized if it registered today, a Super PAC?  Because, according to the three Republican Commissioners, AIP’s “major purpose” – the Constitutional test for determining when a group is acting as a political committee – was not influencing federal elections.

First, the Commissioners noted AIP’s self-described mission, as reflected in IRS and corporate filings, which was to advocate for conservative principles, including limited government, lower taxes, and a strong national defense.  Thus, the Commissioners reasoned, AIP’s “central organizational purpose” related to issues, not federal candidates.

Second, according to the three Commissioners, AIP’s spending showed that its major purpose was not to nominate or elect federal candidates.  In each of its fiscal years (which ran from May 1 to April 30), AIP reported combined spending on “management and general expenses,” “fundraising expenses,” “program services, and other activities in excess of the amount it spent on express electoral advocacy. Even looking only at “non-overhead” expenses, the Commissioners concluded that the $2.8 million ad buy represented slightly less than 45% of AIP’s total spending from the organization’s inception in 2007 until it ceased operating in 2010.  To determine a group’s major purpose, the Commissioners wrote, spending must be viewed over time, not within a single calendar year.

Where does this leave things for advocacy groups in 2014?  The AIP case may prompt more organizations to forgo registering and reporting as Super PACs, opting instead for the 501(c)(4) form that generally does not require disclosing donors.  Such groups will have to be careful in publicly describing their activities and ensure that over the long term their expenses for express electoral advocacy are exceeded by their combined expenses for everything else. While a future complaint will likely be considered by a new group of FEC Commissioners, the Commission has traditionally been reluctant to impose penalties for conduct that it found in a prior case did not violate the law. 

But even if an organization manages to skirt registration and reporting as a federal political committee, it cannot escape FEC rules entirely.  The organization must file 24- and 48-hour independent expenditure reports that itemize its spending on express electoral advocacy and must include disclaimers on such advertising.  Also, regardless of whether it operates as a Super PAC or 501(c)(4), a group must be careful to observe coordination rules that can treat certain spending as a prohibited in-kind contribution to a campaign or political party.  Finally, a 501(c)(4) group must navigate IRS rules that prohibit such organizations from making intervention in political campaigns its primary activity.  The IRS “primary activity” test is not the same as the FEC’s “major purpose” test and can be just as difficult to apply. 

In speaking for the Supreme Court’s majority in Citizens United, Justice Kennedy lauded the benefits of prompt disclosure, noting that it enables shareholders to make informed decisions and “citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.”  While these general principles are widely accepted, the stakes as to how disclosure should work, and when anonymity is permissible, are much higher now that groups may raise unlimited sums from individuals and corporations. The AIP case suggests that it may be some time before disclosure meets Justice Kennedy’s ideal.

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.

Harvard Law School Professor Lawrence Lessig is well known for his work on intellectual property issues, having developed the Creative Commons licensing system. For the past several years, however, he has been focused on political corruption and the role of money in politics.

Professor Lessig recently gave a TED Talk, in which he described a country called Lesterland, where there are two elections for every position. One, in which only those named Lester get to vote, and the other, where all citizens are eligible to vote. The Lesters make up just .05 percent of the electorate, and so have a disproportionate power to pick the leaders of Lesterland.

Who are these Lesters? They are political donors, whom Professor Lessig thinks have an undue influence on our electoral process (as he puts it USA=Lesterland). It is an interesting, and very well done, talk, although it is focused more on Professor Lessig’s view of the problem than on offering any specific solutions.

Since most of our readers are probably Lesters, work for Lesters, or try to get people to become Lesters, it is worth a few minutes of your time to see what he thinks. Remember, this is not just a random academic delivering a lecture in the ivory tower, but a man who has introduced proposals for major changes in other areas—and gotten them implemented—so understanding his position on money in politics is important.

What affect will Professor Lessig have on your ability to participate in the process as a Lester?

A federal court last week ruled that a small nonprofit, formed under Wyoming law to advocate positions on various political issues, may have to include certain federally-mandated disclosures on its ads and fundraising appeals, and may even have to register and report as a federal political committee.

The ruling is an important reminder that advocacy groups cannot always avoid Federal Election Commission rules merely by organizing themselves as a 501(c)(4), 527, or nonprofit established under state law.

The suit was filed by a group called “Free Speech,” which challenged the FEC’s policies for determining when fundraising appeals are subject to FEC rules and when an entity is a federal political committee, requiring it to register and file reports. The suit also challenged an FEC rule defining when an ad “expressly advocates” the election or defeat of a federal candidate, in which case the ad must contain certain disclosures and the ad’s sponsor must file an independent expenditure report. The court rejected each of Free Speech’s constitutional challenges and dismissed the suit.

Disclosures on Fundraising Appeals

The court agreed with the FEC that a federally-mandated disclosure statement must be included on a request for donations that clearly indicates the funds raised will be targeted to the election or defeat of a candidate for federal office. Before the suit, Free Speech had asked the FEC to rule on specific donation requests, but the FEC Commissioners were split over some of the requests and were unable to issue the requested Advisory Opinion. The court disagreed with Free Speech that the FEC deadlock showed that the test is unconstitutionally vague.

Disclosure and Reporting for Ads “Expressly Advocating” the Election or Defeat of Federal Candidates

The court upheld the FEC rule that draws a line between unregulated issue advocacy and express advocacy. Ads that “expressly advocate” for or against a federal candidate must contain a specified disclaimer and must be reported to the FEC through independent expenditure reports.

Free Speech argued that the concept of express advocacy should be limited to communications containing words such as “vote for,” “defeat,” or “elect.” The FEC rule, however, also treats as express advocacy a communication that “could only be interpreted by a reasonable person as containing advocacy of the election or defeat of one or more clearly identified candidates,” and that has an “unmistakable” and “unambiguous” “electoral portion.” The court concluded that this latter test is similar to (and perhaps even narrower than) the “functional equivalent of express advocacy” test, which the Supreme Court has ruled is a proper basis for federal regulation.

When is a Group Considered a Federal Political Committee? 

Finally, the court upheld the FEC’s case-by-case approach to determining when an organization must register and file reports as a federal “political committee.” Under the FEC’s approach, a group making over $1,000 in “expenditures” or raising over $1,000 in “contributions” must register and file reports as a federal political committee whenever its “major purpose” is engaging in federal campaign activity. The FEC looks at various factors in evaluating a group’s major purpose, including its public statements, fundraising solicitations, government filings, and organizational documents. Free Speech argued that this multi-factor test is too nebulous to regulate First Amendment activity and chills political speech. But the court rejected this argument, too, concluding that this loose set of factors meets constitutional muster.

Next Step for the Litigation

On May 7, the U.S. Court of Appeals for the Tenth Circuit is scheduled to hear arguments on the lower court’s earlier denial of a preliminary injunction. Free Speech has also appealed the final dismissal of the case, discussed above. The same issues are at stake in both appeals and therefore are likely to be resolved based on the May hearing. A ruling is likely to come sometime this Summer or Fall.

The Supreme Court announced today that it will not hear a case challenging the longstanding federal ban on corporate contributions. The case involved promises by a CEO that his corporation would reimburse employees for contributing to Hillary Clinton’s 2008 Presidential campaign. The trial court held that the ban on corporate contributions was unconstitutional in the wake of the Supreme Court’s ruling in Citizens United. A federal appeals court reversed, concluding that while Citizens United allows corporations to make unlimited independent expenditures, it did not open the door to corporate contributions or corporate facilitation of contributions. The Supreme Court’s announcement today means that the appeals court ruling stands.

Because this case was being considered at the same time as the McCutcheon case (dealing with aggregate contribution limits), some had speculated that the Court would consider these issues together.

At the end of the day, it is not surprising that the Court declined to consider this case:

  • The McCutcheon case came to the Court in a way that required the Court to hear the case (or summarily affirm the lower court without a hearing), whereas this case was a discretionary petition for review.
  • All of the federal courts of appeals to consider the issue had upheld the ban on corporate contributions, so no circuit split existed.
  • Overturning a longstanding federal ban on direct corporate contributions would have been a high-profile and hotly-contested decision.
  • Even if the Court were to rule against the FEC in the aggregate contribution limit case, it could have still upheld the corporate contribution ban, so the decision in one did not dictate the outcome of the other.

Interestingly, a number of states allow corporate contributions (shown in green below). Some, such as Virginia, do not place any limits on the amount that may be contributed, while others, such as New York, have fairly low limits. It will be interesting to see whether, after the aggregate contribution limit case is decided, new challenges are mounted to the federal and state bans.

Map (2)

While the landmark Citizens United case concerned only the federal ban on the financing of election ads by corporations, the Supreme Court’s ruling implicitly struck down a host of similar state laws. That’s because the Court decided that a ban on political expenditures that are not coordinated with candidates or parties violates the U.S. Constitution.

States face similar fallout if the Supreme Court invalidates the two-year federal limit on aggregate contributions by individuals—a case we have written about here. At least 12 states impose aggregate (though often much lower) contribution limits on political contributions:

  • Arizona: individuals may give no more than $6,390 to all candidates or committees that give to candidates per calendar year.
  • Connecticut: individuals may give no more than $15,000 to all candidates for the primary and general elections together.
  • District of Columbia: individuals may give no more than $8,500 to all candidates per election cycle.
  • Louisiana: individuals may give no more than $100,000 to all non-candidate committee in a four-year cycle.
  • Maine: individuals may give no more than $25,000 to all candidate committees in Maine per year.
  • Maryland: individuals may give no more than $10,000 to all Maryland political committees in a four-year cycle.
  • Massachusetts: individuals may give no more than $12,500 to all state, county, and local candidates per year.
  • New York: individuals may give no more than $150,000 per calendar year to all registered New York political committees. Although corporations are allowed to contribute to non-federal candidates in New York State, they are subject to a yearly aggregate cap of $5,000.
  • Rhode Island: individuals may give no more than $10,000 per calendar year to all political committees.
  • Washington: during the 21 days before an election, there is an aggregate limit on individual contributions of $50,000 to statewide candidates and $5,000 in the aggregate to any other candidate or political committee.
  • Wisconsin: individuals may give no more than $10,000 per calendar year to all political committees.
  • Wyoming: individuals may give no more than $25,000 to all political committees during the year of the general election and the preceding calendar year.

Relatively few donors presently give the maximum allowed under the two-year federal limit. But if the far more modest limits imposed by state laws are overturned, the implications for state elections could be quite dramatic.

The Federal Election Commission not only limits how much an individual can give to a particular candidate, PAC, or party committee, it also limits the aggregate amount an individual can give to all federal political committees during a two-year period (the aggregate biennial limit).

Earlier this week, the Supreme Court accepted a case challenging the biennial limits. The lower court upheld the limits as necessary to prevent circumvention of the contribution limits to any one candidate, PAC, or party. Under the court’s theory, an individual could give a large amount to a party committee, which could then use that money to contribute to a candidate or make coordinated expenditures for that candidate. This would be true even if the individual had “maxed out” to the candidate in direct contributions. The plaintiffs argue that the aggregate limits do nothing to prevent quid pro quo corruption – which the Supreme Court has said is the only basis for restricting contributions – since there are already limits on how much an individual can give to any one candidate.

Although it is always difficult to predict what the Supreme Court will do, it seems to us that there are three different outcomes possible:

1.) The Court could affirm the district court and uphold the limits based on the anti-circumvention rationale.

2.) The Court could strike down the limits, using an intermediate level of scrutiny (there is much debate about how much deference a court should give to legislative decisions about contribution limits). This would do away with the aggregate biennial limits, but perhaps discourage further challenges to the individual limits or to prohibitions on corporate contributions.

3.) The Court could articulate a stricter level of scrutiny that would invite challenges to virtually all contribution limits.

If the Court were to apply a stricter level of scrutiny to contribution limits, it will not take long before we see challenges to the amount of the individual limits or the prohibitions on corporate contributions. In fact, the Court is currently considering whether to hear a separate case involving the constitutionality of the corporate contribution ban. Perhaps fearing the worst from the Court, and recognizing that in the wake of Citizens United independent groups are able to raise much larger amounts than candidates and parties, some reform advocates are suggesting it may be time to abandon contribution limits altogether in return for more rigorous disclosure rules. As Larry Norton said earlier in USA Today, “Any campaign-finance restriction that gets heard by the Supreme Court right now is vulnerable.”

If you’d like to hear more about this case, be sure to listen to The Inner Loop on Thursday, February 28 at 1:00, when Ron Jacobs will talk to longtime Washington hands Howard Marlowe and Michael Willis or sign up for the American League of Lobbyists’ presentation on the topic.

In the wake of the 2012 elections, questions linger about what kinds of relationships are permissible between a candidate and an independent-expenditure only group (i.e., a Super PAC). In planning their activities, Super PACs may consider using a photo of the candidate from a campaign ad or website, or even approaching candidates and current officeholders to help with fundraising efforts. The rules governing these activities, which restrict soft money fundraising by federal candidates and officeholders and coordination between campaigns and outside groups, are complex, still evolving, and often unclear. Several recent examples teach us that a misstep can land a group in hot water, not just with federal regulators but in the media as well.

Fundraising

Can a candidate help a Super PAC with fundraising? What about one Member of Congress asking another Member to contribute? The latter issue is raised by a recently released report from the Office of Congressional Ethics (“OCE”). OCE found substantial reason to believe that a Congressman violated restrictions on soft money fundraising when he asked other Members of Congress to contribute to a Super PAC. The report found that the Congressman specifically solicited several larger contributions, including one for $25,000.

The House Ethics Committee announced it will continue this investigation, although the likelihood of sanctions is small. But the legal issues involved highlight an area of concern for Super PACs and the candidates they support. Under current law, a federal candidate or officeholder, or his or her agents, can solicit contributions up to applicable limits: for contributions to a PAC, that limit is $5,000 a year per person. In 2011, the Federal Election Commission (“FEC”) issued an advisory opinion addressing how this restriction affects candidates asking for contributions to Super PACs, which can accept unlimited individual and corporate contributions. The FEC found that the same limit of $5,000 applies. Thus, a candidate appearing at a Super PAC fundraiser must say that he or she is only asking for contributions up to the $5,000 limit. The opinion is not clear on whether the same holds true when the person being asked to contribute is a fellow candidate, as was the case here.

Candidate Appearances

Super PACs may be particularly interested in having candidates appear in their advertisements or using photos used by the candidate in their communications. However, this can lead the Super PAC into the complicated realm of coordination and in-kind contributions. When a communication is “coordinated” under the FEC’s rules, the cost of the ad is an in-kind contribution to the candidate from the PAC, subject to contribution limits and source restrictions. A Super PAC making an in-kind contribution would also forfeit its right to accept unlimited contributions from individuals or corporate contributions.

A recent complaint filed with the FEC demonstrates how candidate appearances can become a tricky issue. In January, several Members of Congress appeared in an online video created by a friendly Super PAC. The ad celebrated each Member’s electoral victory and featured the Members thanking the Super PAC for its involvement in several critical races. The complaint argues that these appearances constitute coordination and that the Super PAC thus gave an in-kind contribution to the campaigns of these Members.

The FEC regulations use a three-part test to determine whether an expenditure counts as a “coordinated communication” and thus an in-kind contribution to a candidate. The first part, the payment prong, requires someone other than the candidate to pay for the ad. Another part, the conduct prong, focuses on how the candidate and the PAC have acted – whether they are having “substantial discussions” or using the same vendors, for example. When the appearance of a candidate is planned and organized, there are reasons to suspect that there have been substantial discussions.

Yet there may still not be “coordination” because the final part of the test, the content prong, requires generally that the communication either “expressly advocate” the election or defeat of a candidate, republish campaign materials, or run during a certain time frame before an election. The content and timing of this Super PAC video does not clearly fit into any of these categories.

What the FEC will do with this complaint is unclear, as the Commissioners deadlocked on a similar request before the 2012 elections. In 2011, another Super PAC submitted a request asking whether it could produce ads featuring Members who were up for re-election reading from prepared scripts on particular issues. Three Commissioners agreed with the Super PAC that these ads were about issues, not about advocating for the candidates, and therefore did not meet the content requirement of the coordination test. The other three Commissioners disagreed, concluding that even if a communication does not meet all the requirements of the test for coordinated communications under FEC regulations, an expenditure may still be considered coordinated under the general statutory definition of coordination.

Republication of Candidate Materials

So can a Super PAC avoid this tangled web of coordinated communications by skipping a candidate appearance and just using an image or clip that is available to the public, like on a candidate’s web site or YouTube account? Again, clear guidance is lacking.

The FEC’s coordination rules generally allow independent groups to use “information material to the creation, production, or distribution of the communication” if it is “obtained from a publicly available source.” Thus, a conversation between the political director for a Super PAC and the campaign manager about why an ad about a candidate’s position on taxes would be helpful is considered coordination, but if the political director uses information derived from a news story about the candidate’s positions or plans, it is not coordination.

Some think this exemption allows Super PACs to use publicly available materials such as pictures, sound files, and video in their communications. Another part of the coordination rules, however, prohibits the “dissemination, distribution, or republication” of any “written, graphic, or other form of campaign materials.” The FEC has given varying guidance on how these rules relate to materials from candidate websites. In a 2006 enforcement decision, the FEC decided only to admonish an outside group for taking headshot photos from the website of a candidate and using them in mailers, concluding that the photos were of very little value. However, in 2012, the FEC deadlocked on an enforcement matter in which a Super PAC ran an ad using excerpts from campaign videos posted by a candidate on his official website. Three Commissioners found that the video footage was a major portion of the ad and that the lack of a clear exception in the republication rules for publicly available material meant that the ad was an in-kind contribution. The other three Commissioners concluded that only “several fleeting snippets” of the videos appeared in the ad and that using a small amount of material from a public source should not be considered republication.

Conclusions

Super PACs are subject to a high level of scrutiny in the media and at the FEC, even after the close of the first major election cycle in which they were active. Asking a candidate to appear in an ad or get involved in fundraising, or even just using an image from an official website, can raise challenging legal questions or risk drawing negative attention from the FEC and the public.  While some believe the post-Citizens United world is a version of the “Wild West,” there are still many unsettled issues to navigate.

Last week the FEC increased the reporting threshold for contributions bundled by lobbyists to $17,100 (up from $16,700).

These bundling reports are required of authorized federal candidate committees, leadership PACs, and political party committees if the “reporting committee” receives two or more bundled contributions that exceed the $17,100 threshold.

A bundled contribution is any contribution that is either (1) forwarded to a reporting committee by a lobbyist/registrant or lobbyist/registrant PAC, or (2) received by the reporting committee and credited to a lobbyist/registrant or lobbyist/registrant PAC through “records, designations, or other means of recognizing that a certain amount of money has been raised.” This second kind of bundled contribution is a far more common fundraising technique than the first, because it helps to avoid some of the legal risks associated with collecting contributions. The first type – where the bundler physically collects the checks – can result in impermissible corporate facilitation of contributions. Even if using a PAC to bundle contributions, there are complicated contribution limit issues that apply.

Thus, bundlers need to be concerned about how bundled contributions are reported. If a reporting committee credits a corporation with bundling, it can raise questions about whether corporate resources were used to conduct the fundraising (even if they were not, or if the fundraising was done in a permissible way). In other situations, the bundler may want to receive proper credit for his or her efforts (there is great flexibility in how multiple individuals can be credited for hosting joint events).

It is important to note that bundled contributions do not include a contribution from the personal funds of the lobbyist or the lobbyist’s spouse who forwards or gets credit for bundling the contributions. Likewise, contributions made from a lobbyist/registrant PAC that forwards or gets credit for the bundled contributions are not included in the bundled report. For example, if a lobbyist gives $2,600, and the PAC from his company gives $5,000, no report is required if he is credited with raising $17,000 from other sources.

Lobbyist bundling issues can be complicated, and in the rush that goes with raising funds for candidates or committees, it can be easy for a committee to inadvertently fail to report contributions or for a lobbyist to designate them improperly.