Still Awash in Cash

Legal Times
June 23, 2003

Awash in Cash
By Adam Morse

Last Monday, the Supreme Court reaffirmed a bedrock principle of federal campaign finance law: Corporate and union money should not be allowed to influence candidate elections. In Federal Election Commission v. Beaumont, seven justices agreed that the ban on corporate contributions to federal candidates is constitutional, even when applied to nonprofit advocacy corporations. The Supreme Court’s firm rejection of a loophole created by the U.S. Court of Appeals for the 4th Circuit provides an important defense for the basic rules of federal campaign finance. Despite being technically about money from nonprofit organizations, the decision helps defend against the threat that money from corporations will undermine bedrock values of democracy.

Strong policy reasons support restricting corporate involvement in elections, and there is a long history of such regulations dating back nearly a century. Congress banned contributions to federal candidates by corporations in 1907. It extended and broadened that ban 40 years later to include contributions by unions and expenditures by both unions and corporations on advertising intended to influence federal elections. Congress was right to impose those restrictions.

Corporate donations are particularly likely to be intended to curry support with officeholders. Indeed, if corporate donations did not buy political influence, it would be hard to see how corporate management could justify them. The common practice of giving to both parties eliminates any doubt about the purpose of corporate contributions. In addition, the very structure of corporations limited liability, perpetual existence, and easy access to capital markets are benefits derived from the government. Companies should not be allowed to use those benefits to gain political power.

And when corporations make political expenditures, they spend money that belongs to the shareholders. The government has a legitimate interest in protecting dissenting shareholders. Neither divestment nor corporate governance offers a meaningful safeguard in the real world of limited information and uncompetitive board elections. Corporations and unions remain free to use political action committee funds, solicited from their shareholders, executives, and members, to make contributions to candidates or expenditures on advertising supporting candidates.

The First Amendment limits the application of federal laws restricting corporate political speech in a few narrow circumstances. In particular, the Supreme Court held in FEC v. Massachusetts Citizens for Life Inc. (1986) that the government may not prevent certain nonprofit advocacy organizations that are organized as corporations from making independent expenditures to influence elections.

In order to qualify for the exception from the general rule against corporate expenditures, an advocacy organization must be formed for the express purpose of promoting political ideas, engage in no business activities, have no shareholders or other persons with a claim on its earnings, and have a policy against accepting any contributions from corporations or unions. Massachusetts Citizens protects the ability of small nonprofit groups, which would be overwhelmed by the burdens of establishing a PAC and are functionally very similar to unincorporated associations, to participate freely in the political debate.

The Supreme Court later clarified in Austin v. Michigan Chamber of Commerce (1990) that groups which receive financial support from corporations, or which offer benefits besides political advocacy to members, do not qualify for this exception, because they could serve as conduits for corporate money.

CLOSING ONE LOOPHOLE

Beaumont was a challenge by North Carolina Right to Life, an advocacy corporation that receives up to 8 percent of its annual revenue from corporate donations, which sought a declaratory judgment declaring the ban on corporate contributions unconstitutional as applied. The 4th Circuit agreed and held that Massachusetts Citizens advocacy organizations have a constitutional right to contribute directly to campaigns, in addition to making independent expenditures.

Although the FEC commissioners split 3–3 along party lines on whether to appeal, the solicitor general filed a petition for certiorari without the FEC’s support. Seven of the justices rejected the 4th Circuit’s position.

Justice David Souter wrote the majority opinion for six justices. His opinion emphasized the “deleterious influences on federal elections” that direct corporate political contributions can have. In addition, Justice Souter pointed out the danger that nonprofit corporations could be exploited to circumvent current contribution limits: Without the ban on corporate contributions, an individual who has already given the limit to a federal candidate, both directly and through a PAC, could give more money by routing it through nonprofit corporations.

In addition to Justice Souter’s majority, Justice Anthony Kennedy concurred in the judgment in a brief separate opinion stating that he adheres to his prior campaign finance dissents but feels bound by Massachusetts Citizens. Justice Clarence Thomas wrote a dissent, which Justice Antonin Scalia joined, arguing that the entire constitutional framework of campaign finance laws should be overturned by applying strict scrutiny. The dissent rejected the entire mode of constitutional analysis that the Supreme Court has consistently used since the first campaign finance laws were adopted.

A WIN FOR INTEGRITY

The Supreme Court’s decision in Beaumont is an important win for electoral integrity. First, the decision closes a major loophole that would have allowed for easy circumvention of campaign finance restrictions. The 4th Circuit’s decision would have potentially allowed hundreds of millions of dollars to flow from corporations to campaigns. The National Rifle Association, which has been granted Massachusetts Citizen advocacy status in some years, would be able to raise more than $10 million from corporations to give directly to candidates. This loophole would have effectively destroyed the ban on corporate contributions.

In addition to Beaumont’s direct importance, the decision makes it exceedingly unlikely that the Supreme Court will open the floodgates to corporate or union money in federal elections. The strong language of the majority opinion, especially its discussions of the importance of deferring to the political branch in these matters, shapes the background against which future campaign finance cases will be considered. Significantly, it cautions lower courts against striking down future campaign finance reforms designed to eliminate corporate money from elections.

Along the same lines, Beaumont strongly suggests that the Supreme Court’s jurisprudence in this area will be stable for years to come. Chief Justice William Rehnquist has been a strong supporter of the constitutionality of laws restricting corporate participation in elections. Many commentators have thought that his retirement, rumored to be imminent, might result in the Court allowing much more corporate money into elections. The 7–2 margin of the Beaumont decision should settle those doubts.

LOOKING AHEAD

While Beaumont’s reaffirmation of the ban on corporate contributions is important, other loopholes have also threatened the traditional wall preventing corporations and unions from engaging in election-related spending.

Two of the biggest ones were closed by the Bipartisan Campaign Reform Act (more commonly known as the McCain-Feingold law). Before McCain-Feingold, corporations could give unlimited soft-money donations to political parties, ostensibly for party building activities, but actually to finance ad campaigns in support of the very politicians who solicited the donations. Also, corporations could run ads that purported to be about political issues but that actually sought to sway votes.

The statute banned soft-money contributions and corporate spending on electioneering communications, which are carefully and unambiguously defined to cover sham issue ads that are actually meant to influence elections. The McCain-Feingold law is now being challenged in the Supreme Court, which has scheduled arguments on it for September. If the Court is true to the sentiments it expressed in Beaumont, it will uphold the McCain-Feingold law.

Also, the 4th Circuit has opened up another hole in the dam that Beaumont did not plug. The Supreme Court’s Massachusetts Citizens opinion states unambiguously that a policy against accepting corporate or union contributions was essential to the holding, a point that Beaumont notes in passing. However, the 4th Circuit in North Carolina Right to Life Inc. v. Bartlett (1999) interpreted what the Supreme Court meant to be a ban on corporate money20to allow a “modest percentage of revenue” from corporations.

But even small percentages can represent tens of millions of dollars when large budgets are concerned. Because corporations are not permitted to make independent expenditures with treasury funds, they should also not be permitted to underwrite independent expenditures by advocacy organizations. The Supreme Court should close this loophole by insisting that the circuit courts apply the Massachusetts Citizens decision precisely as it is written, rather than expand a carefully limited carve-out into a large loophole.

REFORMING THE FEC

Finally, the decision by the FEC to not seek Supreme Court review of Beaumont, despite the fact that its case was sufficiently strong that seven justices ultimately voted to reverse, illustrates an underlying problem. Campaign finance law is only as effective as its enforcement. The FEC needs to be aggressive in enforcing the law and in drafting regulations to implement the law. The commission cannot function properly with commissioners such as Bradley Smith, who openly opposes all campaign finance laws. And the commissioners frequently deadlock in party line votes because they have often been selected based on party loyalty, not on nonpartisanship and dedication to the fair enforcement of the laws. The FEC needs to move past partisan gridlock in order for campaign finance laws to be fully effective.

Beaumont closes one loophole that would have allowed corporate money20to flow into elections. The rest of the loopholes should also be closed. Elections should belong to the people, not to large corporations.

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ABOUT THE AUTHOR
Adam H. Morse is an associate counsel at the Brennan Center for Justice at the New York University School of Law. The Brennan Center filed an amicus brief in Beaumont and is part of the legal team defending the Bipartisan Campaign Reform Act’s constitutionality before the Supreme Court.