On January 21, 2010, the U.S. Supreme Court handed down a historic decision in Citizens United v. Federal Election Commission that may have a dramatic effect on the level of spending by corporations in U.S. political campaigns. In a 5-4 decision, the Court declared that a “prohibition on corporate independent expenditures is a ban on speech.” With that declaration the Court effectively eliminated any limit on independent expenditures by corporations on advertisements to support or oppose the election of a candidate for public office.[1] The decision further erodes the central provisions of the Bipartisan Campaign Reform Act, (BCRA, known as McCain-Feingold). Only a portion of BCRA was at issue in the Citizens United case, but the majority chose to address broader First Amendment issues with regard to limitations on political speech by corporations. Citizens United will create some additional options for corporations,[2] trade associations, and labor unions to use corporate treasury funds to engage in political activity, but leaders of those organizations should consider several prudential and corporate governance issues before proceeding. For further analysis from McGuireWoods LLP regarding the corporate governance issues raised by the Citizens United case, click here.
The Decision
In Citizens United the Court declared that restrictions on independent expenditures by corporations amount to a ban on political speech, which cannot be sustained under the strict scrutiny that must be applied to limitations on speech. Notably, the Court found that this burden on political speech by corporations was not mitigated by a corporation’s ability to form a political action committee (PAC), because a PAC, whatever its practical connection to a corporation, is a separate entity. The majority decision appears not to affect PACs directly, but dramatically affects the context in which they will operate. Businesses and trade associations that have PACs or who spend money on lobbying now have the additional option of using corporate treasury funds for independent expenditures to support their political and policy objectives. They will need to consider how best to distribute their resources for political activity among the options now available to them. The Citizens United decision also seems to ensure that state law prohibitions on political independent expenditures by corporations also will fall if they are challenged.
The majority in Citizens United struck down a key portion of BCRA, but did not stop there. The case was brought by a political organization [3] as a challenge to the constitutionality and applicability of a provision of BCRA which restricted certain “electioneering communications” during the period just before an election.[4] In a development that surprised most observers, the majority declared that it could not limit its opinion to those narrow issues without “chilling political speech, speech that is central to the First Amendment’s meaning and purpose.” On that basis, the majority revisited the central holding in Austin v. Michigan Chamber of Commerce which had stood since 1990 for the proposition that political speech by a corporation may be restricted or even banned. Austin was struck down. The court dismissed Austin’s rationale that corporations gain an “unfair advantage in the political marketplace” by deploying funds “amassed in the economic marketplace.” In so doing, the Court erased a longstanding distinction between political speech by an individual and political speech by a corporation. The court also struck down a key holding of McConnell v. Federal Election Commission (2003) in which it had upheld BCRA’s ban on electioneering communications.
Issues for Business Leaders to Consider
Some are predicting that thousands of corporations will begin to make large independent expenditures in this election year. Perhaps, but there are a few factors that may induce corporate decision makers to proceed with caution:
- As in the past, advertisements paid for through independent expenditures will be required to include disclaimers identifying the entity that has funded them.
- Independent expenditures in federal campaigns will remain subject to disclosure with the Federal Election Commission.[5]
- Independent expenditures by corporations may not be coordinated in any way with any political campaign.
- Use of corporate treasury funds for overt political purposes may stir controversy among shareholders in publicly held companies.
- Some consumers may react negatively in the marketplace to direct advocacy by a corporation for or against a candidate in a race of concern to them.
- Individual companies may avoid grappling directly with these concerns by funding trade associations that will in turn make their own independent expenditures. Politically engaged trade associations are likely to solicit greater funding from their members to support independent expenditures.
- Even these existing rules are subject to change without Congressional action; the Federal Election Commission is likely to issue new regulations implementing Citizens United. That process is likely to take at least several months.
So what happens next? Some members of Congress (chiefly Democrats) and President Obama have strongly criticized this decision; many Republicans have praised it. It is too early to assess what the settled reaction of the general public will be. It is certain that hearings will be held in Congress to examine the likely effect of the decision. Campaign finance reform proponents in Congress will offer legislation intended to limit the effect of the decision. They are determined to limit the impact of the Citizens United decision not just because they object to it on the merits. Some of them fear it will drastically alter the balance of resources available to support candidates, in favor of Republicans. Some fear that the Court will now be emboldened to overturn the prohibition on direct contributions to campaigns by corporations, and BRCA’s ban on unlimited “soft money” contributions to political party committees by corporations. So while the Congress can’t stop the corporate independent expenditures at issue in the Citizens United case, it doesn’t mean they won’t try to make it more difficult to make those expenditures. Here are a few proposals we may see in the coming weeks and months:
- Strengthened Disclosure Requirements – Congress may seek to impose more thorough and prominent disclaimers, more thorough and frequent reporting requirements, possibly a “stand by your ad” provision requiring CEOs to appear in on-air disclaimers to ads they finance, as candidates are required to do.
- Trade Association transparency – Congress could increase disclosure requirements regarding contributors to trade associations who provide funds for independent expenditures.
- Shareholder consent – Some in Congress have called for requiring a majority vote of shareholders to authorize independent expenditures by publicly held companies.
- Tax provisions – Congress could revisit the tax status of trade associations and other non-profit organizations who engage in political activity by making independent expenditures.
- Targeting foreign sources of funding – The current definition of “foreign nationals” and “foreign corporations” who are prohibited from making independent expenditures could be broadened to include U.S. corporations with some foreign ownership.
- Broadening the definition of “coordination” – The longstanding and apparently simple prohibition on “coordination” between those who make independent expenditures and the candidates they support has in the past proved perilous for some organizations under the current definition. Congress could alter that definition to reach a broader array of communications.
McGuireWoods will continue to monitor developments in the wake of this important Supreme Court decision and will be happy to answer your questions.
NOTES:
1. Corporations which make independent expenditures in support of political campaigns still are prohibited from coordinating their effort with any political campaign, and will continue to be subject to disclosure and disclaimer requirements. The prohibition on direct corporate contributions to candidates will remain in place.
2. The decision applies to for-profit and non-profit corporations.
3. Citizens United is a 501(c)(4) non-profit corporation. It engages in a variety of political advocacy activities on behalf of conservative political causes.
4. The case initially examined whether a documentary film which criticized presidential candidate Hillary Clinton, and commercials promoting the film as a pay-per-view program on cable television were “electioneering communications” prohibited under BCRA, and whether that provision violated the First Amendment. After hearing arguments on the case, the Supreme Court, in a highly unusual move, summoned the parties back to the Court for a second round of arguments to address the constitutional soundness of restrictions on political speech by corporations generally.
5. Corporations that spend $10,000 or more on independent expenditures for political advertisements during any calendar year will be required to file a report with the FEC disclosing those expenditures and the name and address of any entity which contributed $1000 or more to fund the expenditure.