Supreme Court Poised to Allow Corporate Funding of Campaign Ads

In a stunning move, the Supreme Court announced on Friday that it is reconsidering the constitutionality of laws that prohibit corporations and unions from funding ads that influence elections. A ruling that such laws are unconstitutional would invalidate a decades-old spending restriction that applies in federal elections and in many states, and would unleash a flood of spending in the 2010 cycle and beyond.

The issue is presented to the Court in Citizens United v. FEC, a challenge to the “electioneering communications” provision of the McCain-Feingold law. That law, which passed in 2002, bars corporate and union financing of ads that identify a federal candidate, and that are aired in the run-up to the election on broadcast, cable or satellite. Citizens United, a non-profit group, wanted to air an anti-Hillary Clinton documentary through a cable television video on-demand service, and advertise for it on broadcast and cable television. A lower court said that because the group accepted corporate funding, it could do neither.

Rather than rule on the narrow question of whether this ban could be constitutionally applied in this instance, the Court announced that it wants to reconsider prior rulings allowing government to ban corporations and unions from spending their money in connection with elections. At stake is not just the McCain-Feingold law, but also a federal law that prohibits corporations and unions from paying for communications that “expressly advocate” for the election or defeat of a candidate - and many similar state laws.

This turn of events is remarkable not only because the Court seems poised to make a transformative change in campaign finance rules, but because five-and-a-half years ago the Court rejected a facial challenge to the electioneering communications provision in McConnell v. FEC. The Court had yet another opportunity to remake the law just two years ago in FEC v. Wisconsin Right to Life, but Chief Justice Roberts and Justice Alito – neither a fan of the electioneering communications provision - decided to proceed more incrementally. Now it appears that the two are ready to join three other Justices (Kennedy, Scalia, and Thomas) to chart a new path.

Re-argument is scheduled for September 9, 2009, just weeks before the Court formally begins its next session. A ruling in the case could come early in 2010, opening the door to a wide range of organizations – corporations, unions, business and trade associations, and ideological groups – to fund campaign ads and other communications.

RULE G-37 MAY EXPAND TO BALLOT COMMITTEE CONTRIBUTIONS

Last week, the Municipal Securities Rulemaking Board (MSRB) announced that it is considering expanding the reach of its Rule G-37 to cover ballot committee contributions. The rule, which was adopted in 1994, prohibits any securities underwriter from engaging in business with a municipal issuer within two years after it, or one of its professionals, makes certain political contributions. It also requires the disclosure of certain political contributions to issuer officials.

The MSRB’s latest actions are driven by concerns that municipal securities dealers can curry the favor of politicians by contributing to bond ballot campaign committees that they support. The MSRB’s latest proposal would apply G-37’s disclosure requirements to contributions to bond ballot campaigns, but would not invoke the two-year time-out on doing business with the municipality.

The draft amendment to G-37 is available on the MSRB website. The MSRB is seeking comments on, among other things, the prevalence of contributions to bond ballot committees, whether there is a connection between making such contributions and securing bond underwriting business, and how dealers are solicited to make such contributions. Comments are due by August 7, 2009.

OTHER PAY-TO-PLAY DEVELOPMENTS

State and local governments continue to pass new pay-to-play laws and make changes to existing law. The rapid change in this area is well-illustrated by these developments that occurred in just the last week or so.

Colorado
On Tuesday, June 23, a state district judge temporarily enjoined enforcement of Amendment 54, a Colorado ballot initiative that established state and local pay-to-play rules. Approved by voters in December 2008, the law prohibits campaign contributions and fundraising by companies that have sole-source contracts with state or local agencies, and by the company’s officers, directors, and individuals with a 10% or greater ownership interest. The law also bars companies from receiving a sole source contract related to a ballot initiative if the company or any of its principals contribute to the initiative.

Ruling from the bench, Judge Catherine A. Lemon sharply criticized several provisions in the law, commenting that her ruling was not a close call. The state Attorney General acknowledges constitutional problems with Amendment 54, but expects to appeal. Until a written decision is issued and the Attorney General decides whether to seek a stay pending appeal, caution is advised.

San Antonio
The San Antonio City Council has expanded its pay-to-play law. Previously, the law prohibited legal signers on proposals submitted for city contracts from making a campaign contribution to any council member or candidate. The contribution ban has been extended to cover:

• Any individual seeking a “high-profile” discretionary contract, as designated by the city
• Any owner or officer of an entity seeking such a contract
• The spouse of any of these individuals
• Any attorney, lobbyist, or consultant retained to assist in seeking the contract

The blackout period runs from the 10th business day after the solicitation has been released until the 30th calendar day after the contract is awarded. Additionally, city officials and employees are no longer able to accept gifts of entertainment, transportation, or lodging from those seeking or doing business with the city.

Oklahoma
In Oklahoma, the state’s Pension Oversight Commission and the Tobacco Settlement Board have voted to require disclosures by all firms seeking to manage the investment of public funds. Prospective investment advisers must reveal the existence of third-party marketing agents and any fees paid to these third-parties to assist in securing state business.

Detroit
In the wake of recent corruption scandals, a pay-to-play proposal, modeled on New Jersey’s law, was introduced in the Detroit City Council. The ordinance would prohibit political contributions from companies that have or seek no-bid city contracts valued at more than $25,000. The contribution ban would extend to employees, family members, and political action committees; and it would apply for the year preceding a contract award.

FOLLOW UP ON PAY-TO-PLAY WEBINAR

We appreciate that many of you were able to join us for our webinar last week on recent developments regarding “pay-to-play” laws and a view toward the future. For those of you who were unable to join us, the presentation with audio and PowerPoint slides can be accessed here. Please contact us if we can assist you with tailoring a training program for your company or developing a multi-state compliance plan in this increasingly risky area.