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Citizens United and Its Impact on the 2012 Elections, Contributed by Thomas J. Spulak and Claudia A. Hrvatin, King & Spalding LLP

Friday, February 24, 2012

Corporate executives today are faced with a question that they did not have to consider in the last presidential election—should the corporation use its funds to support candidates for federal office? The question arises due to the now-two-year-old famous—or infamous, depending on your perspective—Supreme Court decision in Citizens United v. Federal Election Comm’n.1 On January 21, 2010, the U.S. Supreme Court issued its landmark decision overturning prior precedent in the area of campaign finance. In Citizens United, the Court struck down restrictions on the ability of corporations and unions to make expenditures supporting or opposing federal candidates. None who have commented on the decision are lukewarm—there is either rousing support or invective-laced opposition. Those who oppose the decision have vowed to reverse it through a constitutional amendment or, less effectively, through legislation designed to discourage corporations from engaging in political speech.

Long Standing Ban on Corporate Spending Overturned

Provisions to limit the influence of corporations in federal elections have been in place since the turn of the 20th century. In 1907, Congress passed the Tillman Act2 which prohibited corporations and national banks from contributing money to federal campaigns. In 1947, the Taft-Hartley Act3 was enacted which barred corporations and labor unions from making both expenditures and contributions in federal elections. Neither of these laws was very effective and they were replete with loopholes. In 1971, the Federal Election Campaign Act (FECA)4 was enacted and formed the framework for campaign finance law today. FECA included restrictions on contributions and expenditures by corporations,5 but permitted corporations to establish and administer political action committees (PACs) funded by voluntary contributions by certain employees and other eligible individuals, and created the Federal Election Commission (FEC) to enforce these campaign finance laws. While numerous provisions of FECA have been tested in the courts, Buckley v. Valeo6 was possibly the most contentious constitutional challenge until Citizens United. Among other issues, Buckley is noted for establishing the fundamental principle that political expenditures are a form of speech that cannot be abridged absent a compelling interest. The Court reasoned that while contributions may be limited to promote the compelling interest of avoiding corruption, that interest did not extend to expenditures.

The Citizens United Decision

In January 2008, a non-profit corporation, Citizens United, produced a film casting then-presidential candidate Hillary Clinton in a largely unfavorable light. It was the intention of Citizens United to make the film available on cable television, and the organization produced ads to promote the film. FECA prohibited corporations—for-profit and non-profit alike—from underwriting independent expenditures, including “electioneering communications”—a term created in the Bipartisan Campaign Reform Act of 20027 (better known as “BCRA” or “McCain-Feingold”)—in an attempt to reach otherwise First Amendment-protected issue advertisements. Generally, an electioneering communication is a broadcast communication that refers to a candidate within 30 days of a primary election, or 60 days of a general election. Concerned that the timing of the release of and ads for the film within 30 days of a primary election would subject Citizens United to civil and criminal penalties under FECA, the organization filed for declaratory and injunctive relief from the FEC in the U.S. District Court for the District of Columbia. In seeking relief, Citizens United argued that the ban on corporate independent expenditures, including electioneering communications, and associated disclosure and disclaimer requirements, was unconstitutional. The district court denied Citizens United a preliminary injunction and granted the FEC’s motion for summary judgment. Citizens United appealed to the Supreme Court and was granted certiorari. The Supreme Court issued two holdings in the Citizens United case. First, the Court invalidated the part of BCRA that prohibited corporations and unions from engaging in electioneering communications. This aspect of the case was not particularly unusual as it was consistent with a previous decision by the Court to limit the law’s scope. In Federal Election Comm’n v. Wisconsin Right to Life, Inc.,8 the Supreme Court ruled that the BCRA ban on corporate-sponsored electioneering communications would only apply if the communication was “susceptible of no reasonable interpretation other than as an appeal to vote for or against a specific candidate.”9 The Court could have stopped there and limited its decision to the narrow issue of electioneering communications. But Justice Kennedy, writing for the majority, went further—much further—and visited the general question of whether corporations enjoyed the same First Amendment protection as individuals in the area of political speech. The Court answered in the affirmative, indicating that corporations and unions—like individuals—were entitled under the First Amendment to engage in political speech by making independent expenditures to finance communications that expressly advocate the election or defeat of a federal candidate. The Court noted, however, that these expenditures must be independent and not coordinated with the candidates who benefit from them. (This concept of coordination is discussed below.) The Court also ruled that electioneering communications and independent expenditures could be subject to robust reporting and disclaimer requirements. Further, the Court stated that corporations, unlike individuals, were still prohibited from making direct contributions to federal parties and candidates.

Corporate Political Activity after Citizens United

In light of Citizens United, there are generally three types of political communications that corporations may now finance: issue advocacy, independent expenditures, and electioneering communications.

— Issue Advocacy

Issue advocacy is generally intended to educate the public on policy issues and is largely unregulated as being outside the ambit of election law. Issue ads may mention the name of a clearly-identified candidate but may not directly advocate for that candidate’s election or defeat. A simple example would be, Senator Smith supported legislation that would make it more difficult to buy hula hoops. Call Senator Smith and tell her that she is wrong. Corporations may freely finance such issue ads; there are neither limits on the amount that may be expended for such an ad, nor any reporting requirements. When done within 30 days of a primary election or 60 days of a general election, aired in a broadcast, cable, or satellite medium, and directed to the electorate of the candidate referenced, an issue ad is deemed to be an electioneering communication.10 While there is no limit to how much a corporation may expend on such communications, the expenditure must be reported to the FEC, as discussed below.

— Independent Expenditures

An independent expenditure is an expenditure used for a communication “expressly advocating the election or defeat of a clearly identified candidate that is not made in cooperation, consultation or concert with, or at the request or suggestion of, a candidate, a candidate’s authorized committee or their agents, or a political party committee or its agent.”11 Independent expenditure communications:

  • May utilize phrases such as “vote for,” “re-elect,” “support,” “vote against,” “defeat,” or “reject”; or
  • When taken as a whole, and with limited reference to external events, may only be interpreted by a reasonable person as containing advocacy of the election or defeat of one or more clearly identified candidate(s) because:
    • The electoral portion of the communications is unmistakable, unambiguous, and suggestive of only one meaning; and
    • Reasonable minds could not differ as to whether it encourages actions to elect or defeat one or more clearly identified candidate(s) or encourages some other kind of action.12

There are no limits on the amount that a corporation may spend on such communications, however, these communications must include a disclaimer—Paid for by X Corp. and not authorized by any candidate or candidate’s committee. Contact information. Reporting requirements apply once expenditures of more than $250 are made in a calendar year; 48-hour reports and 24-hour reports are required when more than $10,000 or $1,000, respectively, is spent in close proximity to an election.

— Electioneering Communications

Finally, as discussed previously, corporations may underwrite the cost of electioneering communications. There are no limits on the amount that a corporation may spend on such electioneering communications, however, these communications must also include a disclaimer just as required for independent expenditures—Paid for by X Corp. and not authorized by any candidate or candidate’s committee. Contact information. Reporting is required within 24 hours of having expended more than $10,000 in a calendar year.

— Donations to Third-Party Entities

Practically speaking, few corporations were ever expected to finance independent expenditures directly. For every candidate that a corporation might support, there potentially would be shareholders and customers who favored the opponent and therefore could be disgruntled by the corporation’s actions. To avoid that sensitivity, many corporations considered it wiser to support issues and candidates through third-party groups, such as trade associations, chambers of commerce, and other non-profit entities, which would in turn finance independent expenditures with corporate money. As a result of several court cases and advisory opinions issued by the FEC subsequent to Citizens United, the way was paved for them to do so. On March 26, 2010, the D.C. Circuit Court of Appeals in SpeechNow.org v. Federal Election Comm'n13 applied Citizens United to strike down limits on donations by individuals to entities established exclusively to make independent expenditures, such as SpeechNow.org, a non-profit corporation organized under section 527 of the Internal Revenue Code (IRC). The court also adhered to Citizens United by requiring that such entities register with and report their activities to the FEC. The FEC expanded upon this decision in two subsequent advisory opinions:

  • In Advisory Opinion 2010-09 (Club for Growth), the FEC confirmed that a non-profit corporation organized under section 501(c)(4) of the IRC could pay for the establishment, administrative, and solicitation expenses of an entity created exclusively to make independent expenditures, and that the entity could solicit donations from the general public for this purpose.
  • In Advisory Opinion 2010-11 (Commonsense Ten), the FEC confirmed that an independent expenditure-only political committee could accept unlimited contributions from individuals, as well as corporations and labor unions.

And thus the Super PAC was born. The following are the types of third-party entities to which corporations may donate.

527 Organizations

A “527 organization” is a political organization that is tax-exempt under section 527 of the IRC. If the organization avoids making expenditures or engaging in activity that involves express advocacy, it may avoid registration with and regulation by the FEC, and may accept unlimited contributions from individuals and corporations alike. These entities were very popular in the late 1990s—in fact, they were the Super PACs of that time. Like most non-profits regulated by the Internal Revenue Service, a 527 organization did not have to disclose its donors publicly. Thus, it was an excellent medium for those who wanted to engage in the political process anonymously. Congress thought better of this, however, and enacted an amendment to the IRC in 2000 that, among other things, required the disclosure of contributors who donated more than $200 to a 527 organization. Shortly thereafter, 527s lost their usefulness and today are all but moribund.

Super PACs

A Super PAC is a political committee registered with the FEC that may only make independent expenditures. Unlike other PACs, a Super PAC does not make contributions to federal candidates. The organization may accept unlimited contributions from corporations but must regularly disclose all of its donors.14

501(c) Tax-Exempt Organizations

There are several forms of non-profit corporations under the IRC that are popular intermediaries for corporate-funded political activities. These include:

  • 501(c)(4)—Civic leagues and social welfare organizations such as the Sierra Club and Crossroads GPS. These may engage in express advocacy and other political activity provided that such activity is not their primary purpose.
  • 501(c)(6)—Trade associations and business leagues such as the U.S. Chamber of Commerce and the National Football League. These may also engage in express advocacy and other political activity, again, provided that such activity is not their primary purpose.

A key motivation in contributing to one of these organizations is the fact that under IRS regulations, a donor’s identity is not made available to the public. (An issue to be resolved at a later date is whether a contribution to a 501(c)(4) is subject to the federal gift tax. In 2011, the IRS examined this question but suspended its investigation at least through the 2012 election, perhaps due to concerns expressed by members of Congress.)

Avoiding Coordination Is Key to Corporate Speech

As the term “independent” expenditure suggests, corporations may now engage in advocating the election or defeat of federal candidates, but the expenditure must be made independently of the candidate(s) it seeks to benefit. In other words, to be independent, the expenditure must not be “coordinated.” A communication is coordinated “if it is made in cooperation, consultation, or concert with, or at the request or suggestion of, a candidate, candidate’s authorized committee, or their agents, or a political party committee or its agent.”15 FEC regulations use a three-pronged test to determine if a communication is coordinated. This test examines the payment for the communication, its content, and the conduct of the players involved. Each of these prongs must be satisfied in order to find coordination. The same rules apply to third-party groups that utilize corporate contributions to finance their political communications. Therefore, corporations should know something about the groups they support in order to avoid controversy, or worse, at a later date.

Citizens United and the Presidential Elections

There is no doubt that Super PACs are having a material influence in this presidential election. Because of their ability to accept unlimited contributions from corporations and individuals alike, they can provide an immediate boost to a candidate whose own campaign committee is limited to individual contributions of $2,500. Super PACs have already been responsible for communications such as television advertisements, mailings, and telephone banks at a cost approaching $60 million in the 2012 election season. To be sure, there is growing criticism of Super PACs for the vast amounts of money they spend, often from undisclosed sources. And candidates that benefit from Super PACs also have been criticized for the negative nature of most Super PAC advertisements which allow the candidate to remain “above the fray.” But recall that Super PACs must not coordinate their activities with a candidate. How does the Super PAC know then what would be helpful to its favored candidate? The reality is that most Super PACs are organized and operated by former associates or staff of their candidates, thus there is an affinity and, more importantly, an intimate knowledge of the candidate. President Obama—long a critic of Citizens United and Super PACs—has even jumped on the bandwagon, recently giving the go-ahead to encourage contributions to a Super PAC, Priorities USA Action, that seeks to benefit his campaign. As evidenced by their use so far, there is no doubt that Super PAC activity will grow as we move further into the Senate and House election cycle when these organizations are expected to play a major role.

A Problem in Search of a Solution?

Critics of Super PACs are examining a number of approaches to stem these entities’ proliferation and influence. Many believe that the courts will be the true final arbiter, having spurred the creation of Super PACs in the first place. Meanwhile, Congress, public interest groups, and candidates themselves are engaging in certain specific efforts, including:

  • Legislation that would require greater disclosures of donations and spending.16
  • The Center for Political Accountability, a non-profit, non-partisan organization created to bring transparency and accountability to corporate political spending, works to engage companies to improve disclosure and oversight of their political spending. Other legislative measures, such as the Shareholder Protection Act introduced most recently in the House, would give shareholders a voice in determining how corporate funds should be spent for political activities.
  • Finally, some candidates and their campaigns are making informal pacts to admonish, condemn, or repudiate participation by Super PACs. However, as discussed above, since Super PAC activity may not be conducted in coordination with the candidates that they seek to benefit, it is unclear what impact such pledges may have.

Conclusion

Corporations may engage in greater political activity than ever before through the sponsorship of independent expenditures. While they may do so directly, most will choose to influence elections through third-party entities, such as trade associations. Executives should be mindful of the potential for shareholder backlash, however, as some groups endeavor to cast corporate political activity in an unfavorable light. Thus, having some form of shareholder disclosure policy for political expenditures should be given careful consideration. Still, unless laws are enacted to limit the breadth of Citizens United, corporate political activity is legal and may be part of a sound corporate strategy. Thomas J. Spulak is partner and chair of the Government Advocacy and Public Policy Practice Group in the Washington DC office of King & Spalding. He can be reached at 202-661-7948 or tspulak@kslaw.com.Claudia Hrvatin is an associate in the Government Advocacy and Public Policy Practice Group in the Washington DC office of King & Spalding. She can be reached at 202-661-7950 or chrvatin@kslaw.com.

Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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