Gonzalez floats campaign finance reform legislation, asks Ethics Commission for opinion

On By In election, legal

On the heels of her announcement that she is running for state Attorney General, Council member Lorena Gonzalez auditioned for the role by announcing that is working on campaign-finance reform legislation “to protect the integrity of Seattle’s democracy.” She sent a draft version of the bill to the Seattle Ethics and Elections Commission, which in turn held a discussion on the topic last week.

Preface: one of the bedrock tenets of our court system, which dates back to and was really the impetus for the creation of English Common Law, is the idea that similar cases should be decided the same way. This is codified in the principle of “stare decisis,” which says that lower courts must adhere to the prior decisions of higher courts, and all courts must follow their own past precedents unless it can be shown that a previous decision was clearly in error. In this article we’re going to discuss a lot of important case law precedents, including some controversial ones like Citizens United. In fact, Citizens United casts a huge shadow over this bill. But I want to make clear that when I cite a case like Citizens United, it’s not because I necessarily agree with how the Court decided the case; rather, it’s simply because it is now the controlling precedent and will be the filter through which the courts eventually decide the fate of this bill (should it pass). 

Gonzalez’s bill does three things, one of which is non-controversial. The other two, if passed, are guaranteed to generate protracted legal fights. In fact, that’s the point: they are designed to be test cases to force higher courts to define the boundaries of government’s ability to regulate campaign finance, and as potential vehicles for overturning precedents with which Gonzalez and many others disagree.

The one noncontroversial provision in the bill extends the transparency and disclosure requirements for advertisements paid for by campaigns and PACs. It broadens the scope of what must be disclosed to “qualified public communications,” which includes:

any paid advertisement (including search engine marketing, display advertisements, video advertisements, native advertisements, and sponsorships) that communicates a message relating to any political matter of local importance, including (1) legislation, as defined in Section 2.06.010 of the Seattle Municipal Code, or (2) an elected official’s position on such legislation, in an effort to influence the development, proposal, drafting, consideration, reconsideration, promotion, adoption, enactment, rejection, approval, disapproval veto, or failure to take action upon such legislation.

Commercial advertisers must maintain records of qualified public communications for four years in a form that is open for public inspection.

Courts have consistently affirmed the rights of governments to require documentation and transparency related to campaign contributions and expenditures because of the public interest in knowing who is spending money to influence elections. There is nothing in this section of Gonzalez’s bill that should create legal issues.

The second issue the legislation tackles is that of foreign influence in U.S. elections.  Federal law already prohibits “foreign nationals” from contributing to a campaign or political committee at any level in the United States, where “foreign national” is defined as:

  • an individual who is not a citizen, not a U.S. national, and not a permanent resident;
  • a “foreign principal“: a foreign government, a foreign political party, or “a partnership, association, corporation, organization, or other combination of persons organized under the laws of or having its principal place of business in a foreign country.”

However, that leaves a loophole: foreign nationals can invest in a corporation (potentially just a shell corporation) with its principal place of business in the United States, and funnel money through that corporation to campaigns and political committees.  Gonzalez wants to close that loophole — as does FEC Commissioner Ellen Weintraub.

The bill prohibits “foreign-influenced corporations” from making independent expenditures or contributing to an independent expenditure committee in Seattle. But the definition of “foreign-influenced corporations” is problematic. The bill says that a corporation is foreign-influenced if any of the following are true:

  • a single foreign owner holds, owns or controls 1% or more of the equity, voting shares, membership units, or other ownership interests of the corporation;
  • a group of owners collectively hold, own or control 5% or more of the corporation;
  • a foreign owner participates directly or indirectly in the corporation’s decision-making process with respect to the corporation’s political activities in the United States.

The U.S. Supreme Court has affirmed that governments have the right to prohibit foreign nationals from contributing to election campaigns. But the question of “foreign-influenced” U.S. companies is still an open one. And it boils down to a quantitative question: how much foreign influence is too much? Consider:

  • a wholly-owned U.S. subsidiary of a foreign company;
  • a U.S. company (public or private) whose board of directors are all non-U.S. citizens;
  • a U.S. company whose CEO is not a U.S. citizen;
  • a U.S. company with one member of its board of directors who is not a U.S. citizen;
  • a U.S. company whose Director of External Relations is not a U.S. citizen;
  • a U.S. company where a non-U.S. citizen owns 51% of the company;
  • a U.S. company where a non-U.S. citizen owns 20% of the company;
  • a U.S. company where a non-U.S. citizen owns 1% of the company;
  • a U.S. company where a non-U.S. citizen owns $2000 of stock.

Also consider:

  • a local union chapter where 20% of the members are not U.S. citizens or permanent residents;
  • a local union chapter where the President is not a U.S. citizen or permanent resident;
  • a local community organization representing a neighborhood that is mostly immigrants, many of whom are not (yet) citizens or permanent residents.

Some of these are obviously too influenced by foreign interests. Some are clearly not. Many are in the grey area. Grey areas create problems for the law, especially when it comes to constitutional rights.

Underlying all of this is the right to free speech as protected by the First Amendment. Generally speaking, contributing money is a form of speech.  The courts have been clear that they won’t tolerate laws that favor one kind of speaker over another, e.g. unions but not corporations.  We can assume they would feel the same way about favoring some kind of foreign-influenced organizations (e.g. unions) over others (e.g. corporations). But it’s much harder to draw a bright line that quantifies the acceptable amount of foreign influence.

Gonzalez’s bill says that if a single shareholder owns 1% of a corporation or a group of foreign investors collectively own 5%, then it is “foreign influenced.” The 1% figure came out of academic work that concluded that 1% ownership was enough to influence a company, and from Securities and Exchange Commission rules that allow anyone with 1% of the shares of a company to submit a shareholder resolution for consideration. Though the SEC rule cited is actually broader than that: it requires ownership of 1% of the stock, or as little as $2000 in stock. So in practice the ability to submit a shareholder resolution is not a closely-held privilege tied to anything more than token stock ownership.

It might surprise you to learn that many companies meet this criteria, including:

  • Uber, which has a 10% ownership stake by the Saudis;
  • AirBnB, which is 4% owned by Moscow-based DST Global;
  • Amazon, which is 7.5% foreign-owned in aggregate.

If this provision passes into law, it will be challenged on (at least) two grounds:

  1. Whether it impermissibly singles out corporations through restrictions on speech and expenditures (vs. unions and other organizations also with “foreign influence”);
  2. Whether the 1%/5% limit on foreign ownership is too low to represent meaningful influence, and in practice simply prohibits large publicly-traded companies from making financial contributions in elections.

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The third provision in the legislation is the most controversial, and has the most complex case law. Gonzalez proposes to set a $5000 cap on contributions by a person to independent expenditure committees for use in elections in Seattle in any electoral cycle. And just to be crystal-clear on this: that means you could give up to $5000 to a PAC supporting a single candidate, and you could give up to $5000 to a PAC supporting multiple candidates (such as CASE or CAPE).

The same underlying rules apply: money is a form of speech, subject to First Amendment protections. That doesn’t mean a government can’t restrict speech, but the government must have a reason for doing so that sufficiently justifies the restrictions. The courts have decided that political speech is one of the most sacred forms of speech and thereby governments must meet the highest bar for limiting it, known as “strict scrutiny.” To justify limiting political speech, there must be a “compelling government interest” that can’t be met through other means.

Through a long, complicated set of cases, the Supreme Court has whittled down the acceptable compelling government interests to a single one:  preventing corruption or the appearance of corruption. In particular, it has said that the flow of money can be restricted to prevent “quid pro quo” arrangements where a candidate grants political favors in return for contributions. That is the basis for strict limitations on contributions directly to campaign funds, which have been repeatedly upheld by the courts.

A proposed government interest that has been rejected by the court is “equity,” i.e. trying to prevent people with more money from spending more to influence the outcome of an election than people with less money. Interestingly, equity is a goal that Gonzalez cites in her letter to the Seattle Ethics and Elections Commission (and one that will surely be used against her legislation in court):

“Through the Democracy Voucher program, the City has already enacted contribution limits of $250 for participating candidates. However, this contribution limit only applies to people donating directly to a candidate’s campaign but does not apply to donations made to independent expenditure committees.  While an individual may have already reached their $250 contribution limit, they may still contribute to an independent expenditure committee in support of their preferred candidate and, thus, effectively allow a person to legally exceed the existing $250 contribution limit. This is an inequity and gap in our electoral system as people with more financial means can further influence an election by donating to independent expenditure committees.”

In the case law related to campaign finance, there is a clear and important distinction made between contributions and expenditures. “Expenditures” are what an individual, campaign, or political committee spends on trying to influence the outcome of an election. “Contributions” are what an individual or committee give to a campaign or another committee. This distinction figures centrally in understanding how the case law is likely to play out when this matter is in front of the courts.

In the 1975 case Buckley vs Valeo, the Supreme Court invalidated limitations on expenditures by individuals, campaigns and political committees, but held that contributions could be restricted. The logic behind this is that expenditures are direct forms of speech, subject to the highest level of scrutiny; contributions, however, are a second-hand, indirect form of speech where the contributor is not the party actually conducting the speech itself, and limiting contributions is a relatively minor restriction so long as the contributor’s ability to make their own expenditures is not curtailed:

“While contributions may result in political expression if spent by a candidate or an association to present views to the voters, the transformation of contributions into political debate involves speech by someone other than the contributor.”

In 1981 in California Medical Assn. vs. FEC, the Supreme Court affirmed the constitutionality of the federal law that limits contributions to political committees to $5000.

However, in 1990 in Austin vs. Michigan Chamber of Commerce, the Court ruled that a Michigan state law prohibiting corporations from using treasury funds for independent expenditures was constitutional.  This line of ruling was further extended in McConnell vs. FEC. In so doing, it created a mess of conflicting case law.

In the infamous Citizens United case, the Supreme Court resolved the conflict by overturning Austin and its successor lineage and returning to the Buckley finding that there are no limitations on direct expenditures. Further, it doubled down on this, ruling that because independent expenditure committees are, by law, not allowed to coordinate their activities with the candidates they benefit, they do not present a risk of corruption — eviscerating the one acceptable “compelling government interest” as it applies to independent expenditures.

Within a few months of Citizens United, two additional U.S. Court of Appeals rulings were handed down: one in the D.C. Circuit (SpeechNow vs. FEC), and one in the 9th Circuit (Long Beach Area Chamber of Commerce PAC vs City of Long Beach). Both cases concerned contribution limits to independent expenditure committees, and both came to the same conclusion: because in the Citizens United ruling the Supreme Court determined that independent expenditure committees don’t pose a risk of corruption, “risk of corruption” cannot be proposed as a compelling government interest to restrict contributions to them. And since risk of corruption is the only allowable justification for limiting political contributions, that means there is no acceptable justification and thus there are no limits to contributions. The SpeechNow case invalidated the federal law that limited contributions to political committees to $5000, despite the California Medical Assn. ruling to the contrary. It was not appealed to the Supreme Court.

Now, as it stands, in the 9th and D.C. Circuits, there are no limits to contributions to independent expenditure committees, which is why in the current Seattle election cycle Amazon could make a $250,000 contribution to CASE, Nick Hanauer could make a $25,000 contribution to CAPE, the SEIU international action fund could make a $477,000 donation to the SEIU 775 local PAC, and dozens of other contributions over $5,000 were made.

Gonzalez’s proposed bill would restore the $5000 contribution limit to independent expenditure committees. Assuming the City Council passes it, it will be tossed out by the District Court, which must adhere to the 9th Circuit ruling in Long Beach. The 9th Circuit could potentially overrule its own ruling in Long Beach, but it’s unlikely to do so. The real test will be whether the Supreme Court decides to review it — and that is the hope of Gonzalez and others who have gathered to support her, including:

One of the key arguments they make is that since the Citizens United ruling, data has shown that large donors tend to donate both to a candidate’s campaign directly and in larger amounts to the PAC supporting that candidate. In practice, they argue, that means that even if the candidate and the PAC aren’t coordinating directly with each other, the common donors create a back-door channel for coordination. They also argue that the Supreme Court’s finding in Citizens United that independent expenditures do not give rise to corruption was “dictum, a nonbinding aside” that does not carry the force of law — though that is obviously false since the Citizens United ruling couldn’t be clearer:

For the reasons explained above, we now conclude that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption.

For its part, the Seattle Ethics and Elections Commission expressed a desire to take their time with this legislation and analyze relevant data first before considering a recommendation (or whether to make one at all). Expect at least one more conversation on the topic at their future meetings — and perhaps several more. Staff for Gonzalez who were present at the meeting said that depending on the Commission’s opinion, the legislation might be formally introduced in early 2020.

 

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