DB Capitol Strategies
The S T R A T E G I S T
March 09, 2010
 

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Citizen's United v FEC:
New Risks of Coordination May Lead to Unique Opportunities for PAC's

 

The Supreme Court ruling in Citizens United v. FEC will profoundly impact the flow of money in campaigns.  However, it is unlikely that corporate funding will either flood campaigns or significantly benefit Republicans and conservatives as predicted. Still, the new campaign finance dynamic will have a practical impact on the operations of political action committees - your PAC.

 

In the short term, all PACs, including corporate separate segregated fund (SSF) PACs, remain subject to the same rules, limits and reporting requirements on receipts, contributions, expenditures, and coordination.  However, a nuanced analysis of Citizens United reveals significant implications for the SSF and the non-connected "citizen's" PAC.

 

In light of Citizens United, corporations may now spend unlimited sums on independent expenditures and electioneering communications in support of particular candidates.  Critics of this ruling highlight its perceived benefit to Republicans and conservatives and the assumption that corporations tend to lean right and could significantly outspend typically left-leaning unions.  The presumed result is a power shift in favor of Republicans, balkanization of political influence along economic lines, and weakened party influence.  In this view, the impact of PACs in general and citizens PACs in particular would be dwarfed by corporate spending.  DB Capitol Strategies takes a different view.

 

Economic incentives - not political ideology - drive corporate behavior

Corporations exist to make money, and engage in political activity to enhance and sustain earning strength.   The assumption that corporate decision makers are aligned with Republicans does not guarantee a willingness to significantly increase support of particular candidates, parties, or ideologies.  Having a meaningful impact is costly, and there are several factors to consider before we assume that corporate decision makers will open the floodgates.

  • The corporate political giving attitude up to this point can by no means be described as zealous. Recent data suggests that corporate decision makers are increasingly displeased by constant solicitation from candidates, parties, PACs, and political causes.  They cite the lack of tax benefits and the difficulty in gauging a gift's impact as a basis for frugality.
  • Corporations with the resources to make significant political expenditures are generally politically savvy.  They often have in-house and/or external government relations professionals and participate in trade associations.  While engagement for industry-specific interests is to be expected, that does not translate into a desire to fund specific candidates or to dramatically increase spending on government relations activities
  • There are risks in backing the losing horse, the winning horse from the wrong stable, or the winning horse from the right stable today, but not tomorrow.  Corporate decision makers can appreciate the possibility that a supported candidate will lose, earning the ire of the winner - and that's bad business.  Backing a winning candidate of the minority party can lead to an equally displeased majority.  Even backing a winning candidate of the majority party has risks - politics is cyclical and eventually the minority becomes the majority.  While these risks may be negligible up to a certain economic level, the resources required for an effective independent expenditure are big enough to be noticed and remembered.  For large enterprises that are inherently sensitive to government regulation and contracts, why take the risk?
  • In any large or publically held company, some number of shares will be held by government entities (e.g. CALPERS), some by extra-governmental or union entities, and some by other corporate entities.  All shareholders want to maximize value and economic return.  It is unclear that independent expenditures to elect a particular candidate or support a specific party will generate a measurable benefit without alienating at least one group of shareholders.
  • Perhaps the main reason for corporations to be wary of independent expenditures is the very significant risk of violating FEC coordination rules.  Even an unintentional violation can turn a lawful independent expenditure into an unlawful corporate contribution, with grave consequences.
 

The Coordination risk

An independent expenditure or electioneering communication becomes a coordinated communication, and for a corporation an unlawful in-kind contribution to a candidate or party, etc., when it fully satisfies a three-prong test.  The first prong is payment (by A, in this case a corporation). The second prong is content (for example, a call for candidate B to be elected, defeated, etc.).  Both the first two prongs are easily and objectively tested.  The third prong is the subjective, fact-intensive, and highly problematic conduct prong.

 

There are five tests for conduct, any one of which by itself meets the conduct prong.  The most significant is the "request or suggestion" test, under which any communication made by corporation A at the request of candidate B, or that is suggested by A and assented to by B, satisfies this test.  This test covers the conduct of agents of A and B as well, which is where the fact-intensive inquiry becomes particularly complex, and worrisome to corporate clients.  For example, if a campaign volunteer is also a corporate employee involved in corporate spending on political activities, whose agent is he, and when?  Are wealthy members of a candidate's finance committee, that also sit on a corporate board, agents of one or both?  Where do outside lobbyists who have professional ties to a candidate fit?  The FEC states that "neither agreement nor formal collaboration is necessary for a communication to be a coordinated communication."  Under these broad guidelines, could a conversation about a donation between a candidate and an SSF be considered coordination if the parent corporation later makes independent expenditures, possibly at the urging of SSF personnel?  There is a near infinite array of possible fact patterns that could meet the test, satisfy the prong, and turn an independent expenditure into a coordinated communication to the significant harm of the corporation.  In an environment where enforcement is likely going to dwell on these fact intensive inquiries, is it worth the risk to a corporation?

 

DB Capitol Strategies advises corporate clients not to make any independent expenditure's at this time. The risk of even inadvertent "coordination" is very real and very high. The result would be a significant violation of FEC regulations. It is far better to use other means of corporate political engagement - SSF's and trade associations.

 

Union incentives

Unions have no shareholder interests to alienate, no profit motive to protect, and members who generally support the Unions goals and actively engage in political activity.  Unions will likely be able to deploy greater resources at less risk than corporations, and are likely to be the big winners under Citizens United.  Therefore, we expect a significant increase in union political spending. Unions must still be mindful of the unique risks of coordination, but the advantage seems to be theirs.  From a PAC practitioner perspective, if your organization's interests are in opposition to union interests, you now have a wonderfully marketable boogieman to use for fundraising.  For PACs aligned with particular union interests, there is an opportunity to cast your efforts as part of the movement and broaden your appeal.

 

The practical & tactical

The supposed flood of corporate dollars into national campaigns is likely not going to materialize, and likely not in the current cycle.  Corporate involvement will continue to be pushed through SSF's and particularly trade associations, which will likely see some increased funding.  This will enable associations to mount more effective issue-oriented advertising, but they will likely remain wary of electioneering communications for specific candidates.

 

While there is no immediate impact on PAC's from a legal and compliance perspective, we can anticipate some practical consequences. 

  • Look for SSF's becoming more prevalent in their own organizations and net increases in administrative funds and restricted-class contributions.
  • Grassroots "Citizens PACs," driven by a movement or cause but without a specific candidate or organization, will likely enter a period of growth and hold an increasing share of the campaign finance pie.
  • Another form of non-connected committee, the "Player's" PAC, will also grow, headlined by major names out of office that  draw both grassroots support and donors (e.g. Newt Gingrich, Al Gore).
  • Expect no change to the relative amount of funding flowing to Leadership PACs - Citizens United does not change the incentives related to Leadership PAC contributions or donor bases.

 

PACs, trade associations, and unions will take larger roles in campaign finance.  Political parties will see relative decline as growth in party contributions will likely be less than growth in the overall campaign financing mix.  In the long run, continued independent populist frustration with government, incumbents, and parties as the perceived source of "the problem" will further shrink the financial role of political parties.

 

Caveats and final thoughts

First, this analysis is based on national campaigns, where costs are significant.  The dynamic may hold true at a state-wide level as well (subject to state laws and in light of Citizens United, their continued constitutionality).  At the local level - for state legislators, county commissioners, mayors, and others - this analysis is problematic.  The cost and risk factors involved in impacting a sub-statewide race may be significantly reduced.  Corporate expenditures in sub-statewide elections were generally not subject to the now-stricken FEC regulations, but were subject to various state laws.  However, the constitutional law holdings in Citizens United could invalidate similar state laws.  Is it in the interest of a corporation to act first and challenge the law at a high legal and public relations cost?  Is it in the interest of a state to bring an action that it reasonably knows will eventually lose in order to enforce a law that may no longer be constitutional?  And, to what extent will the political alignments and ambitions of individual Governors and state Attorneys General come into play?

 

Secondly, campaign managers may become increasingly concerned about "outsiders" disrupting a carefully designed candidate message with well meaning, but off-message, independent communications. For example, a pro-choice candidate in a pro-life district for whom a pro-choice CEO makes a supportive independent expenditure may end up being hurt more than helped.  Look out for "defensive coordination" where a candidate sends a letter asking for assistance specifically to stop it from coming.

 

Lastly, and perhaps most intriguing, the reasoning of Citizens United raises the possibility that future cases will allow direct corporation contributions to candidates.  If the First Amendment guarantees to corporations the same rights to independent expenditure and coordination rules as individuals, should they also be entitled to the same rights regarding direct political contributions - a recognized form of political speech?  In other words, will corporations eventually be able to make direct political contributions to candidates?  From a PAC practitioner standpoint, this could sound the death knell of the SSF - or at least the company-funded administrative fund that is their main advantage.  It would at a minimum lead to significant rethinking of FEC regulations.

About DB Capitol Strategies

and Dan Backer, Esq.

DB Capitol Strategies provides legal & operational guidance to political committees with a focus on PAC treasury and FEC reporting and compliance through its lead attorney Dan Backer.  Mr. Backer is a graduate of the University of Massachusetts Amherst and George Mason University School of Law.  In 2009, Mr. Backer earned the Professional Lobbying Certification (PLC) from the American League of Lobbyists.  He is admitted to practice law in Virginia, DC pending, and before the U.S. District Court for both the Eastern & Western Districts of Virginia.  Mr. Backer has extensive experience with public policy & advocacy programs, grassroots organizations, and political committees.  Mr. Backer is Treasurer or Assistant Treasurer of several PACs.

 

For questions, please contact Dan Backer at [email protected] or call 202-210-5431.