Election Law

A Cautionary Tale of Corporate Political Spending Emerges in Minnesota

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Trevor Potter. Photo by Cameron Davidson

Long regarded as a leader in campaign finance reform, Minnesota until this year had some of the nation’s toughest laws on political spending by corporations. With the federal government and many other states, Minnesota for decades tried to tame corporate political participation through various restrictions on expenditures.

Minnesota legislators considered encroachment on the political process so severe that by 1988 they wound up with a comprehensive ban on corporate spending in attempts to influence the outcome of the state’s elections.

Violations by corporate executives, officers, other individuals and even stockholders meant up to $20,000 in fines and as much as five years in prison. Corporations themselves faced up to $40,000 in fines and dissolution. In addition to fines, corporations registered outside Minnesota could forfeit the right to do business in the Gopher State.

That all changed on Jan. 21 when a bitterly divided U.S. Supreme Court threw open the door to unlimited corporate and union campaign spending from their own pockets in its long-anticipated decision in Citizens United v. Federal Election Commission. In one fell swoop, a five-justice conservative majority ignored more than 100 years of legislation and jurisprudence to the contrary and held that spending restrictions violate corporate rights to free speech under the First Amendment.

This new corporate spending power gets its first real workout in the approaching Nov. 2 midterm elections.

While it’s too early to tell whether Citizens United will lead to the runaway corporate spending critics fear, one account had it increasing sharply a month before the elections. The Washington, D.C.-based Center for Public Integrity reported Oct. 4 that political groups that depend on corporate and union money were on track to spend $500 million, up from $300 million in the last midterms, in 2006.

However, the center couldn’t identify nearly a third of the donors. That’s because many corporations prefer to give to organizations that always have been able to keep their names secret—Citizens United notwithstanding—under Section 501(c) of the Internal Revenue Code. As a trade association, for example, the U.S. Chamber of Commerce long has enjoyed that exemption. The chamber announced earlier this year that it plans to pump $75 million into the elections.

Minnesota remains in the vanguard. Though the state’s legislators quickly responded by enacting new laws permitting corporate political spending, opponents have had them tied up in court for most of the year. And as one of the state’s first companies to take the spending plunge, Minneapolis-based retailer Target Corp. instead bought itself a heap of embarrassment when it backed a pro-business gubernatorial candidate who had a second motive. The company angered employees, customers and shareholders because the candidate also loudly opposes gay rights and abortion.

Some predict that the ensuing controversy could do as much to chill corporate political spending as the restrictions struck down in Citizens United. “For a lot of corporations, it does not make sense to do this,” says David Schultz, a business professor at Hamline University in St. Paul who also teaches election law at the University of Minnesota.

Turning On A Dime

To reach its result in Citizens United, the majority overruled all of one of the court’s precedents and part of another decided just seven years ago that supported corporate restrictions. Besides their core First Amendment claim, supporters also say the court simply brought consistency to its previously confusing and conflicting campaign finance jurisprudence.

“What is hard to understand is how the court can turn on a dime,” says former Federal Election Commission Chairman Trevor Potter, who also served as counsel to Republican Sen. John McCain’s presidential campaigns in 2000 and 2008. The 2002 law in question bears the Arizona senator’s name and the name of its Democratic co-sponsor, Sen. Russell Feingold of Wisconsin.

“Consistency already existed,” Potter says. “There were very clear lines. So beyond this case, where does it go?”

The decision applies to corporations that, without participation from the office seekers themselves, independently spend shareholder dollars advocating the election or defeat of particular candidates. The majority rejected arguments that spending restrictions prevent corruption or its appearance. The decision doesn’t touch a long-standing ban on direct corporate giving to candidates.

Corporations previously could—and still may—indirectly spend money on politics through political action committees, which are segregated from the corporate structure and depend upon voluntary contributions. Now the Supreme Court says corporations also can spend straight from their treasuries without the extensive requirements that govern PACs, such as appointing a treasurer, keeping detailed records on donors and filing monthly reports with the FEC.

Potter won’t have to wait long to see where Citizens United leads. Months before the polls were scheduled to open, dozens of spinoff cases began queuing up across the country, hoping for Supreme Court consideration as critics tried to figure out how to blunt the already expanding decision’s reach.

In Arizona Free Enterprise Club’s Freedom Club PAC v. Bennett, the case considered most likely to get Supreme Court review, the plaintiffs aim at an Arizona law that provides matching government funds to already publicly subsidized candidates. The law was designed to level the playing field for those candidates who sometimes face unlimited spending by independent committees and opponents who use private money. The plaintiffs maintain, however, that the law can match private spending nearly dollar for dollar, thus disadvantaging privately supported candidates and violating their First Amendment rights. In a signal that it’s willing to hear the case, the high court in June blocked the state from distributing matching dollars and ordered the parties to quickly begin preparing their appeals.

Citizens United initially covered only corporations and unions. But in SpeechNow.org v. FEC, the U.S. Circuit Court of Appeals for the District of Columbia determined that unincorporated associations and other organizations deserved the same treatment, and also wiped out limits on individual contributions to them as well. Now the plaintiffs want the Supreme Court to pare back those organizations’ obligations to register and to publicly disclose names of spenders.

In Minnesota, legislators responded to Citizens United by allowing independent corporate spending, subject to organizational, registration, public reporting and disclosure requirements. The new law allows corporations to spend directly from their treasuries or give to outside independent committees. Opponents complain the new system still burdens them and imposes unconstitutional speech restraints erased by the Supreme Court.

“There is only sporadic enforcement of Citizens United and outright defiance in some states,” says Terre Haute, Ind., lawyer James Bopp Jr., the original architect behind the landmark decision. He’s currently challenging Minnesota’s new law and those in other states, mostly for ideological clients opposed to same-sex marriage and abortion rights.

“Minnesota has employed a common method,” says Bopp, also a member of the Republican National Committee. “What is particularly reprehensible about this approach is Citizens United says you just can’t do that.”

Targeting Target

On a practical level, Minnesota this summer also offered a cautionary tale for corporations mulling spending stockholder money on politics. The story opened when Target gave $100,000 in cash and another $50,000 in services to MN Forward, a committee organized by the state Chamber of Commerce and former aides to outgoing Gov. Tom Pawlenty. The committee spent the money on advertising supporting Republican candidate Tom Emmer, who wants to succeed Pawlenty.

After the spending by Target and other corporations came to light in July, CEO Gregg Steinhafel justified it by saying Emmer was the best candidate for job creation and economic growth. But Emmer also has made no secret of his opposition to same-sex marriage and abortion. And though other corporations took public flak for their support of Emmer, Target’s spending smacked gay-rights advocates right between the eyes. The company had cultivated a warm-and-fuzzy public image among gays by offering domestic partner benefits to gay employees and sponsoring the Twin Cities Pride Festival. But now representatives for advocacy groups remain unconvinced by Target’s insistence that it remains committed to gay rights despite its support for Emmer.

More was at stake than hurt feelings. State and national advocates say they stand a realistic chance of persuading Minnesota legislators to enact a same-sex marriage bill next year. But they need a governor to sign it. So Emmer clearly isn’t their man.

Elsewhere, Target’s spending may have gone undetected. But supporters say Minnesota’s new law makes that impossible.

“There’s so much transparency in our laws that we knew right away,” says Monica Meyer, executive director of OutFront Minnesota, the state’s main gay advocacy organization. “In other states you just can’t do that. Right away we felt we had to respond.”

Steinhafel further angered gays when he touted the corporation’s 2010 rating of 100 percent on a corporate equality index and buying guide compiled by the Human Rights Campaign, the nation’s largest gay and lesbian advocacy organization. Among calls for a boycott and a growing Facebook campaign against the retailer, the group in response removed Target from the buying guide and pledged to match the company’s $150,000 by spending the same amount to elect a gay-friendly governor and legislators.

In the past, Target hasn’t been shy about its political spending, reporting that in 2008 it raised $322,000 for its voluntary PAC. More than 52 percent of the company’s PAC money went to Democrats. Target names a half-dozen executives who may make spending decisions, including the CEO and general counsel.

But the company refused to say who decided to pay to support Emmer and declined comment beyond posts on its website responding to the controversy. Repeated calls to MN Forward and the chamber of commerce went unreturned.

“Sometimes managers don’t speak for the corporation,” Professor Schultz says. “They speak for themselves. This becomes a statement of your corporate identity.”

Spending on candidates also didn’t fare so well in at least some segments of the business community. An unscientific survey by the Minneapolis-St. Paul Business Journal found that 68 percent of 742 respondents said it’s a bad idea for companies to back political campaigns.

Though any backlash over the Emmer spending may not harm Target financially, the public embarrassment may be difficult to overcome and could make other executives think twice before putting money into politics.

“All the good will Target had built up over the years was lost with that $150,000,” Schultz says. “Rule No. 1 in marketing is know your consumer base. Target didn’t.”

The Other Corporate Spenders

Citizens United speaks of corporations in the familiar sense of companies that sell stock and are out to make a profit. But nearly all the plaintiffs in the ongoing wave of litigation—dubbed the corporate free speech movement—are anything but. Though some business interests have entered the fray, Indiana lawyer Bopp, the movement’s godfather, counts ideological groups as his staple clients. From a practical standpoint, courts may find those groups more sympathetic than, say, some Wall Street bank.

“I just think it’s very unlikely that many business corporations are going to be interested in something like that,” Bopp acknowledges. “You never know who’s going to get mad at you. If corporations were anxious to do this, they’d already be doing it.”

Ideology only goes so far, though. Bopp initially advised the plaintiffs in Citizens United, but as the Supreme Court argument neared, they replaced Bopp with former Solicitor General Theodore B. Olson, regarded as less ideological and more experienced in the high court.

Olson is credited with successfully attacking the basic prohibition on corporate spending, while Bopp’s argument centered on killing public disclosure. Bopp lost big time, with the justices upholding disclosure 8-1.

“To their surprise, Bopp and company took a huge hit on disclosure,” says former FEC Chairman Potter. “It was like two torpedoes amidships.”

Bopp wasn’t deterred by the Supreme Court’s decision, promising just days later to “dismantle the entire regulatory regime that is called campaign finance law.” Ending disclosure remains his baby. After all, he speculated, business corporations may not want to help his clients without some promise of anonymity. “I don’t see him getting many takers on this,” Potter says.

Though skeptics doubt Bopp would stop there, he says he merely wants to trim mountains of paperwork facing his clients in favor of a one-page form the justices endorsed in Citizens United, which still would identify corporate political spenders.

But he’ll have to hold his horses for a while. U.S. District Judge Donovan W. Frank in St. Paul smelled something odd in the timing of Minnesota Citizens Concerned for Life Inc. v. Swanson when Bopp’s client asked him to strike Minnesota’s new disclosure law less than three months before the election.

“Invalidating the election laws at issue here would likely result in corporations making independent expenditures without any reporting or disclosure on the eve of the upcoming general election,” Frank wrote Sept. 20 in denying the request. “This result so close to the election would clearly harm the state, Minnesota voters and the general public interest.”

The Supreme Court did toss Bopp a bone of sorts in June. It first held in Doe v. Reed that signatures on referendum petitions generally are subject to disclosure. But Bopp lived to fight another day when the justices sent back to the lower courts the narrower question of whether signers of a petition to repeal expanded rights for gays in Washington State would be harassed if their names were made public.

The Burden of Disclosure

Not all plaintiffs lawyers are so starry-eyed when it comes to disclosure. Indeed, even after the Justice Department declined to appeal contribution limits or coverage of new entities in SpeechNow, the plaintiffs still filed a cert petition asking the Supreme Court to scale down disclosure provisions that apply to them. They say the requirements burden them more than the bare-bones brand that the court approved in January. But the lead plaintiffs lawyer on that case says that while he likes the idea of total anonymity, it’s useless to ask the justices to strike spenders’ identities altogether.

“In principle, I agree,” says Steven M. Simpson, a senior attorney at the Arlington, Va.-based Institute for Justice, and co-counsel with the Center for Competitive Politics in Alexandria, Va. “But in practice, it’s a loser. The court has basically answered that question.”

Meanwhile, folks trying to work around the result in Citizens United appeared to be going nowhere even faster then Bopp’s Minnesota adventure.

A congressional attempt went down in July, falling short of the 60 votes needed to avoid a Republican filibuster in the Senate. Known best by the acronym DISCLOSE, the legislation tried to skirt First Amendment problems that killed parts of the McCain-Feingold law in January.

The DISCLOSE Act would have barred election spending by government contractors, recipients of TARP economic bailout money and domestic corporations controlled by foreign nationals. To keep spenders from masking their identities by contributing through intermediaries, it also would have ramped up disclosure by tracking sources of money flowing into a covered organization.

To enhance identification of political ad sponsors, the highest-ranking executive of a corporation or other covered organization would have to appear on camera to say he or she approves the message, as candidates must do today. And the top donor for each ad also would have been required to record a “stand-by-your-ad” statement.

Now the future of congressional action depends on which party is in control after the midterms.

Things didn’t get any better for opponents at the FEC this summer, as members in a 5-1 vote rushed to approve formation of two independent committees that want to go into the unlimited spending business, one supporting Republican candidates and the other backing Democrats.

The approvals, based on staff-written drafts of advisory opinions, drew a stern dissent from Commissioner Steven T. Walther. He complained that the commission in light of the seismic shift in Citizens United should have used its normal rulemaking process, which provides for much more extensive public comment than working from the drafts.

Moreover, Walther griped that the commission went too far with a Democratic group, called Commonsense Ten, allowing it not only to collect unlimited contributions from individuals a la SpeechNow, but also from corporations and other political committees—questions the SpeechNow court didn’t face. “In my view, it is better practice for the commission to address the consequences of these fundamental changes as a rulemaking proceeding rather than piecemeal through the advisory opinion process,” Walther wrote.

Still, the action appeared decisive compared with other recent fare offered by the commission’s three Republicans and three Democrats. “It’s gridlocked at the moment,” Potter says. “It takes four votes to approve anything.”

Those who say the courts have gone overboard did receive some encouragement in March when a three-judge district court panel in Washington denied a plan by the Republican National Committee to collect unlimited contributions to support state candidates in California, as well as fund redistricting efforts and voter education programs. Congress in McCain-Feingold banned such so-called “soft-money” and its major sources—corporations and unions–and replaced it with traceable contribution limits.

Among other arguments in the Bopp-generated case, the Republicans maintained that limits on party activity only apply to support for federal candidates, not to the state-based activities the GOP planned. But the district panel concluded in RNC v. FEC that it lacked the authority to disturb the restrictions because the Supreme Court already had upheld them. The justices without comment affirmed the panel decision.

An Immodest Proposal

Though some observers view Citizens United as a freak occurrence that will correct itself with time, others see it already so deeply ingrained in the legacy of the Roberts court that it won’t budge easily, if at all.

“Today’s decision is backwards in many senses,” complained dissenting Justice John Paul Stevens. For Stevens, the outcome “elevates the majority’s agenda” over the evidence, precedent and narrower ways to decide the case without employing a broad First Amendment solution.

So the immediate task for critics is to give individual voters a larger voice to effectively compete with corporations that can muster big bucks from their own bank accounts at the drop of a hat. After Citizens United, the First Amendment becomes an obstacle that may be easier to avoid than overcome. In one attempt, three Washington think tanks this year collectively proposed empowering small donors mainly by using the Internet and recasting the role of public financing.

“You will never be able to keep determined rich people out of the system,” says co-author Michael J. Malbin, executive director of the Campaign Finance Institute, a policy research organization. Also contributing were the American Enterprise Institute for Public Policy Research and the Brookings Institution.

The proposal draws inspiration from Barack Obama’s 2008 presidential campaign, which shattered all fundraising records by using the Internet to attract and get money—usually $200 or less—from small donors. Most significantly, the proposal would redefine public funding and offers the parties a chance to coordinate their activities with their candidates, something they can’t do now. Recommendations also include encouraging low-income voters to contribute by offering them tax rebates or other incentives.

“It completely changes the dynamic,” Malbin says. “I don’t know if it reduces corporate spending, but it reduces the effect of corporate spending.” Before that happens, however, people will need to get online.

To accomplish that, the proposal wants the government to step up its efforts to increase high-speed broadband Internet access that is universal and either inexpensive or free. Internet providers also would be required to provide nondiscriminatory access to political speech, and the government would create a website that would act as a central clearinghouse for election information.

A critical element of the proposal would be mandatory disclosure reports available to the public in real time on a single site. Moreover, the Federal Communications Commission would also make its advertising logs available in real time, allowing voters to see what the candidates and independent spenders are saying about each other.

The proposal does come with a rather long string attached: parties could raise and spend unlimited amounts on coordinated activities with candidates—as long as that money comes from individuals giving $200 or less.

The same condition would apply to public funding. Instead of the typical dollar-for-dollar public match for candidates who raise certain amounts on their own, the think tanks would offer multiple-dollar matches tied to small contributions. In its municipal elections, for example, New York City gives $6 for each dollar of the first $175 received from an individual. That leaves the candidate with $1,225 to spend when the match is included.

Research by the Finance Institute suggests the small-donor approach holds some promise. It looks to Minnesota again. The state led the nation in its 2006 gubernatorial and legislative races, with 51 percent of its contributions coming from folks who gave $250 or less. In 32 of 36 states that conducted the same elections that year, small donations accounted for 18 percent at most. Nevada finished dead last, with only 2 percent coming from small contributors.

The think tank proposal attributes Minnesota’s success largely to partial public funding triggered by modest contribution limits and a tax refund of up to $50 for contributions. Citing budget constraints, the state halted the $10.4 million program in 2009.

The British Experience

When corporations do spend under Citizens United, they use other people’s money. So stockholders should have some say over whether and how corporations use their dollars, says Ciara Torres-Spelliscy, a lawyer at the Brennan Center for Justice in New York City. She’s drafted a proposal borrowed from a 2000 British law that’s designed to give them that say.

Justice Anthony M. Kennedy flabbergasted Torres-Spelliscy and other Citizens United critics with the suggestion that stockholders who don’t like the way corporations spend their money always can sell, or use “the procedures of corporate democracy” presumably to take their complaints to the corporation’s annual meeting—widely deemed a dead-end street when it comes to getting action.

“Justice Kennedy seems willfully and helplessly oblivious to the way corporate law works,” says Torres-Spelliscy.

Her proposal, which only would reach public companies governed by the Securities and Exchange Commission, would require shareholder permission, direct disclosure of expenditures to shareholders and personal civil liability for directors who violate election spending policies.

In Britain, a similar regulatory scheme has had a dramatic effect on corporate election spending.

“It dropped precipitously,” Torres-Spelliscy says. “I suspect it’s the fact that you have to tell shareholders where you spent the money.”

Nearly all corporate donations in the United Kingdom go to the Conservative Party, which before the law changed in fiscal 1997-98 received 120 contributions totaling about $4.5 million in U.S. dollars. The totals dropped to $2.7 million in 2001 and to $1.8 million in 2003.

In Britain, shareholders don’t approve each donation but rather authorize a political budget on an up-or-down vote. To reduce duplication of efforts and the burdens of compliance, Torres-Spelliscy would make corporations communicate political information to shareholders in documents already required by the SEC.

Though Torres-Spelliscy would prefer corporations to be as specific as possible in their spending plans, she also worries that demands for too much information may encounter First Amendment problems. That essentially leaves stockholders with no recourse against disagreeable expenditures until after the elections.

“I think there’s a fine line that needs to be treaded between specificity and constitutional rights,” Torres-Spelliscy says. But once the money is spent, she says stockholders who check on it may be surprised at what they find. “If you’re talking about a multinational, they may be spending on a prime minister’s race halfway around the world that you’ve never heard of.”

Still, Citizens United and any offspring likely will hang around a long time, as none of the justices in the majority has shown any indications of leaving the court. Nevertheless, the academics already are looking decades ahead, with an eye on refocusing First Amendment campaign finance jurisprudence on individual voters.

“If you look at [Citizens United] long term, it winds up as an outlier,” says Monica Youn, who directs the Brennan Center’s campaign finance reform project. “But you need a 15- to 20-year plan.”

So Youn has marshaled some of the nation’s top election law experts, already cranking out law review articles on the subject, in hope of developing a new First Amendment paradigm down the road—one that doesn’t accord corporations greater rights than individuals, or equate money with free speech, or replace First Amendment speech with a commercial marketplace.

“All three of these would have been laughed out of court 30 years ago,” says Youn, a former corporate lawyer. “The First Amendment is not about money.”

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