Focus. Feature Comment: Rules For Political Participation By Government Contractors In Flux

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1 Reprinted from The Government Contractor, with permission of Thomson Reuters. Copyright Further use without the permission of West is prohibited. For further information about this publication, please visit or call The Government Contractor Information and Analysis on Legal Aspects of Procurement Vol. 58, No. 10 March 9, 2016 Focus Feature Comment: Rules For Political Participation By Government Contractors In Flux Government contractors face a complex set of rules governing political participation generalized restrictions that govern all businesses overlap with constraints specifically targeted at Government contractors. These rules have been thrown into flux recently by the action, inaction and threatened action of both the federal courts and the Obama Administration. In light of these new developments, a review of where the law currently stands and where it is likely to go is in order. The regime governing political contributions by Government contractors rests on four key concepts: (1) the general ban on political contributions by corporations; (2) the ban on political contributions by Government contractors; (3) separate segregated funds, better known as corporate political action committees (corporate PACs); and (4) the recent expansion of the role of independent expenditure-only committees, better known as Super PACs. The Ban on Corporate Political Contributions Federal law has long prohibited corporations (and LLCs electing to be taxed as corporations) from making direct contributions to candidates for federal office (i.e., president, vice president, U.S. senator and U.S. representative). This ban was first enacted in 1907 and is known as the Tillman Act. 34 Stat. 864 (1907). According to contemporary reports, the ban was the culmination of efforts championed by President Teddy Roosevelt to lessen a very mean and sordid practice of blackmail. N.Y. Times, Jun. 17, Thus, it seems that in the view of many supporters of the law, it was meant to protect corporations from attempts at extortion by political candidates just as much as it was intended to protect the political process from the undue influence from corporate interests, which is the stated motivation for more recent laws restricting political contributions. The original Tillman Act only banned direct corporate contributions to candidates for office. The law was later expanded to prohibit corporate contributions to political parties as well as to prohibit corporations from making independent expenditures in connection with any federal election. See Federal Election Campaign Act of 1971, P.L In other words, corporations were prohibited from expending any general treasury advocating for the election or defeat of any federal candidate. The total ban on direct corporate political contributions has been challenged several times over the years as an unconstitutional restriction on the First Amendment right to political speech. The Supreme Court has always declined to declare the ban unconstitutional, most recently in Iowa Right to Life v. Tooker, 134 S. Ct (April 7, 2014) denying cert. 717 F.3d 576 (8th Cir. 2014). The general reasoning of the decisions declining to overturn the ban on direct corporate political contributions has been that preventing actual corruption or the appearance of corruption is a sufficient justification to curb corporate political speech rights. See, e.g., Iowa Right to Life v. Tooker, 717 F.3d 576 (8th Cir. 2014). However, the aforementioned ban on corporate expenditures advocating for the election or defeat of a federal candidate was declared unconstitutional by the Supreme Court in the very controversial decision in Citizens United v. Fed. Election Comm n, 558 U.S. 310 (2010). In that case, the Supreme Court held that while a ban on direct contributions to candidates was permissible, a ban on independent expenditures was too attenuated from the Government s desire to prevent corruption or the appearance of corruption to justify the Thomson Reuters

2 The Government Contractor restriction on corporate First Amendment rights. This decision opened the floodgates to the Super PAC phenomenon, discussed in greater detail below. The Ban on Political Contributions by Government Contractors A federal law of slightly more recent vintage than the corporate contribution ban is a ban on any contribution by a Government contractor to a federal candidate. See Act of July 19, 1940, 54 Stat. 767, 772. The law, enacted in 1940, came out of a growing sense that the federal contracting space was a unique breeding ground for corruption and that contractors were engaged in pay to play arrangements whereby they made political contributions in exchange for contracts. See 86 Cong. Rec (1940). The ban was also motivated by the desire to promote the public interest in merit-based governmental administration. See id. The ban applies to a contractor from the time of the commencement of negotiations of the contract until termination of negotiations or completion of performance. The term commencement of negotiations has been interpreted to mean as early as the time when a contractor responds to a request for information or otherwise expresses to the Government its interest in bidding on a Government contract. Furthermore, the ban only applies to the contracting entity itself and does not apply to the employees, executives, directors or shareholders of the contractor, who are free to make contributions in their individual capacity. Practically speaking this ban on contributions by Government contractors only truly affects those contractors that are individuals, partnerships or LLCs taxed as partnerships since Government contractors that are corporations are already prohibited from making political contributions, as discussed above. Furthermore, the ban is especially pernicious for those who perform contracts as individuals (for example, personal services contractors) as they are totally prohibited from making political contributions while the individual members of partnerships and LLCs that perform Government contracts may make political contributions in their personal capacity. In other words, individual Government contractors are completely excluded from political participation in the form of political contributions by virtue of their choice to earn a living by performing personal services contracts for the Government. Indeed, they are one of the few classes of citizens that cannot make political contributions to federal candidates. The seeming unfairness of this arrangement has been the subject of litigation and federal court decisions, discussed in greater detail below. Corporate PACs Despite the bans on political contributions by both corporations and Government contractors, corporate Government contractors are not without recourse to attempt to influence federal elections. Separate segregated funds, better known as corporate PACs, allow certain members of a corporation s leadership to pool political contributions and then pass the money on to candidates. A corporate PAC is sponsored by the corporation and must bear the corporate moniker in its official name. Furthermore, the corporation may use its general treasury funds to cover the PAC s administrative and fundraising expenses, for example paying for legal counsel related to the PAC or paying an employee to be the PAC director and solicit contributions to the PAC. However, consistent with the ban on contributions by corporations, no corporate funds may be put into the PAC s account for contributions to federal candidates. A corporate PAC operates by gathering voluntary contributions only from certain individuals affiliated with the sponsoring corporation its owners, directors, executives and their families, who are known as the restricted class. The PAC will then contribute or expend those funds on behalf of a candidate for federal office, subject to a limit of $5,000. The rationale behind generally limiting solicitations to the restricted class is to prevent companies from exerting undue pressure on lower-level employees to contribute or otherwise to imply that an employee s job depends on a contribution. Even when soliciting the restricted class for contributions, the PAC must still abide by certain boundaries to ensure that there is no undue pressure on the restricted class to contribute. Specifically, any solicitation must describe the PAC s political purpose to those it is soliciting money from. They have the right to decline to contribute, with no adverse consequences they must be assured through language in the solicitation that the amount of a contribution will provide no benefit or disadvantage within the corporation. Thus, though the PAC technically is a separate entity from the corporation, the corporation exercises full control over it and its contributions are directed by an employee of the corporation. So the PAC truly serves the corporation s political interests Thomson Reuters

3 Vol. 58, No. 10 / March 9, 2016 To create a PAC, the sponsoring corporation first must register with the Federal Election Commission, the federal agency tasked with enforcing the nation s campaign finance and election laws. The name of the PAC must include the corporation s full name and the abbreviation PAC. Next, the corporation must establish a new bank account for the separate segregated fund, and contributions to the PAC must not be commingled with the corporation s general treasury. The corporation must also appoint a treasurer within 10 days of its establishment. Treasurers are personally responsible for managing the PAC, filing the required reports with the FEC and ensuring that all its activities comply with relevant laws. Because treasurers are liable for fulfilling their responsibilities, it is critical that they fully understand them. A PAC is also limited as to how much can be contributed to each candidate. Standard PACs may only contribute $2,600 to a single candidate in each election cycle, which is the same dollar limit for individuals. But PACs that qualify as a multicandidate committee may contribute up to $5,000 to a single candidate in each election cycle. Multicandidate committees are larger, more established PACs having a broad base and making contributions to multiple candidates. To qualify, PACs must have received contributions from at least 51 persons, been registered for at least six months and contributed to at least five federal candidates. A corporation may solicit PAC contributions through a variety of methods, including orally, in mailings or through an in-house corporate publication. However, it is important that only the restricted class receive these solicitations, and solicitations must not be sent to anyone outside of the restricted class. As noted above, the cost of these solicitations need not come out of the PAC s treasury but may be paid for from the corporation s general treasury. An individual who agrees to contribute to a PAC may contribute up to $5,000 per year. Super PACs As mentioned above, the 2010 decision by the Supreme Court in Citizens United v. Federal Election Commission opened the door to another important and somewhat controversial path for corporate political participation the independent expenditure. An independent expenditure is a political communication that expressly advocates the election or defeat of a clearly identified candidate for federal office. To qualify as an independent expenditure the expenditure must be independent in the sense that it must be made without any coordination with the candidate s campaign. Recall that before Citizens United, corporations, including non-profit corporations and trade associations, could not use their general treasury funds to make independent expenditures. So, as a practical example, a corporation that wanted to see John Smith elected to the U.S. Senate could not finance the creation and distribution of a flier that said, Vote for John Smith for U.S. Senate. In Citizens United, the Supreme Court held 5 4 that the First Amendment gives a corporation the right to engage in this sort of political activity. In the mind of the Supreme Court majority, corporate independent expenditures are fundamentally different than direct contributions: while direct contributions are more likely to create the appearance of corruption because a contribution made directly to the candidate gives the appearance of a quid pro quo, political speech that is not coordinated with the candidate does not provide the same opportunity for quid pro quo. Supporters of the ban on independent expenditures by corporations had also argued that large corporate expenditures would create a distorting effect that would drown out the voice of individual voters and create the appearance that large corporations were influencing elections for their sole advantage. The majority, however, rejected this argument and held that the public was aided by the political speech and information that flowed from independent expenditures and that there was insufficient evidence that corporate independent expenditures created the claimed distorting effect. See generally Citizens United, 558 U.S Thus, a corporation may now spend its general treasury to advocate for the election or defeat of a candidate so long as the expenditure is truly independent and not coordinated with a candidate s campaign. Expenditures (for example, television or radio advertisements) that are coordinated with a candidate s campaign constitute impermissible corporate contributions to that campaign. If a corporation and a candidate are found to have engaged in coordinated communications, the penalties for both parties can be severe. Citizens United led to the creation of independent expenditure-only committees, better known as Super PACs. Super PACs allow individu Thomson Reuters 3

4 The Government Contractor als and corporations to contribute to a common fund to engage in independent expenditures. There are no limitations on contributions to or expenditures by Super PACs other than the Super PACs must not coordinate their expenditures with a candidate s campaign. In recent elections, individual Super PACs have spent tens of millions of dollars advocating the election of one candidate or the defeat of another. Thus a Super PAC may exert far more influence on a federal election than a corporate PAC (discussed above) because a corporate PAC may contribute no more than $5,000 to any candidate and may only receive contributions from individuals in its restricted class of no more than $2,600. Creating a Super PAC is relatively simple the organizer must file a form with the FEC and additionally submit a letter to the FEC indicating that it intends to raise funds in unlimited amounts but that it will not use those funds to make direct contributions to candidates nor engage in any coordinated communications or electioneering activities with candidates. Recent Efforts to Loosen and Tighten Restrictions on Political Contributions by Government Contractors Against this legal milieu, there are constant efforts to loosen or tighten the restrictions on political participation by Government contractors. Most recent and most significant have been efforts to lift or modify the ban on political contributions by Government contractors, which, as discussed above, really only affects individual Government contractors as well as efforts to prohibit or regulate involvement with Super PACs by Government contractors. Several individual Government contractors who were performing personal services contracts for Government agencies sued in the U.S. district court for the District of Columbia challenging the ban on direct political contributions by Government contractors because of its unequal treatment of individual Government contractors in a case that became known as Wagner v. Fed. Election Comm n, 717 F.3d 1007 (D.C. Cir. 2015). The plaintiffs pointed out that due to a loophole in the overlapping regulations, individual Government contractors are completely cut out of the political process while corporate Government contractors are able to influence the political process through their corporate PACs. Furthermore, they argued that the ban made it such that individual Government contractors are one of the few classes of individual citizens who are completely cut off from making political contributions. Employees, executives, shareholders and directors of corporate Government contractors as well as the partners in Government contractors organized as partnerships or LLCs all remain free to make political contributions in their personal capacity while the individual contractors cannot. Finally, the individual contractors argued that they are really no different than Government employees, often working side-by-side with them in the same office and performing the same functions. But while Government employees are free to make political contributions individual contractors are not and there is no rational justification for this. Ultimately, on July 7, 2015, the Court of Appeals for the D.C. Circuit decided against the individual contractors, reasoning that the longstanding Government interest in preventing pay-to-play and ensuring merit-based public administration justified the ban. Wagner v. Fed. Election Comm n, 793 F.3d 1 (D.C. Cir. 2015); 57 GC 214. Furthermore, the court reasoned that while individual Government contractors cannot make direct political contributions they have many other political associational rights and so the ban is not over-inclusive. Relatedly, the court found that the ban was not under inclusive by failing to prohibit contributions from the corporate PACs of Government contractors or executives of Government contractors because the ban on direct political contributions gets at the class of individuals most likely to be engaged in quid pro quo. Lastly, the court found that the fact that the contractors were akin to Government employees actually militated against the contractors because the Supreme Court has repeatedly held that certain restrictions on the First Amendment rights of Government employees are justified. The contractors appealed the case to the Supreme Court which denied certiorari on Jan. 19, 2016, and therefore the judgment of the D.C. Circuit stands. However, other groups are likely to initiate new litigation of this issue in an attempt to bring it before the Supreme Court. The Obama Administration has also begun to weigh in in an attempt to curb the ability of Government contractors to make political contributions. In January 2016, the White House indicated that it was working on an executive order to require Government contractors to make deeper and more detailed public disclosures of their political activity, especially as it relates to their contributions to Super PACs. While current rules already require Thomson Reuters

5 Vol. 58, No. 10 / March 9, 2016 Super PACs to reveal the identity of their donors, supporters of more stringent requirements on corporate political activity believe that more detail should be required and that Super PACs should disclose the information on a more frequent basis. The Obama Administration is expected to issue an executive order requiring just that in the coming weeks. Such an order would, in all likelihood, face a legal challenge. However, the Supreme Court in Citizens United indicated that disclosure requirements would pass constitutional muster. F This Feature Comment was written for The Government Contractor by Ryan C. Bradel, who is Of Counsel in the Government Contracts and Projects group of Greenberg Traurig, LLP and also maintains a practice in federal election and campaign finance law Thomson Reuters 5