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Beaumont v. FEC

Summary

On June 16, 2003, the U.S. Supreme Court, overruling the U.S. Court of Appeals for the 4th Circuit, held that the prohibition on contributions by corporations is constitutional as applied to nonprofit MCFL-type advocacy corporations, such as North Carolina Right to Life, Inc.

On October 3, 2000, the U.S. District Court for the Eastern District of North Carolina, Northern Division, found that the prohibitions of the Federal Election Campaign Act (the Act) and Commission regulations against corporate independent expenditures and contributions on behalf of federal candidates violated the plaintiffs' First Amendment rights. The court granted the plaintiffs' motion for summary judgment and denied the FEC's motions for partial summary judgment and denied the FEC's motions for partial summary judgment and partial dismissal. The court stayed the effect of this ruling until a final order is issued.

On October 26, 2000, the court also imposed a preliminary injunction barring the FEC from enforcing the statutory and regulatory provisions against the plaintiffs.

On December 21, 2000, the Federal Election Commission appealed this case to the United States Court of Appeals for the Fourth Circuit.

Background

North Carolina Right to Life, Inc. (NCRL), members of its board of directors and an unaffiliated individual asserted that Section 441b of the Act, which prohibits corporations from making contributions or expenditures in connection with a federal election, is unconstitutional because it makes no exception for nonprofit, ideological corporations. The lawsuit also challenged the constitutionality of two FEC regulations: one that prohibits corporations from making contributions (11 CFR 114.2(b)) and another that creates an exemption from the ban on corporate expenditures for certain nonprofit corporations, pursuant to the Supreme Court's decision in FEC v. Massachusetts Citizens for Life (MCFL), 479 U.S. 238 (1986) (11 CFR 114.10).

Commission regulations at 11 CFR 114.10 provide that certain "qualified nonprofit corporations" may be exempt from the prohibition on corporate independent expenditures. To be considered a "qualified nonprofit corporation," a corporation must meet the following criteria:

  • Its only express purpose is the promotion of political ideas;
  • It does not engage in business activities;
  • It has no shareholders or other individuals who receive a benefit that might discourage an individual from disassociating from the corporation on the basis of that corporation's political positions; and
  • It was not established by a business corporation or labor organization and does not accept direct or indirect donations from business corporations.

NCRL argued that it failed to meet this exemption only because it accepted a small amount of corporate contributions and participated in "minor business activities incidental and related to its advocacy of issues." NCRL further argued that, even though the FEC had conceded that a Fourth Circuit decision in an earlier case between NCRL and North Carolina over a similar provision in a North Carolina statute barred enforcement of the Act's prohibition against NCRL, its officers remained subject to criminal liability and, as a result, their First Amendment rights were censored.

NCRL also argued that, in this case, the Act's ban on corporate contributions to political candidates infringed on the organization's right to association. While the FEC argued that NCRL's ability to contribute through a separate segregated fund minimized this infringement, NCRL contended that the maintenance of such a fund was a burden.

Decision

The court found no compelling justification for denying NCRL (a nonprofit, ideological organization) the right to make contributions and independent expenditures solely because it was an incorporated entity. Moreover, the court was not persuaded by the FEC's argument that a ban on corporate contributions was constitutional, as applied to NCRL, while a ban on corporate expenditures might not be.1 The court found the distinction between contributions and expenditures immaterial.

The court declared that the provisions in question were unconstitutional as applied to NCRL and suggested that the court in its final order, deem these provisions facially unconstitutional.

Final order

On January 24, 2001, the court found that the prohibitions on corporate contributions and expenditures of the Act and Commission regulations were unconstitutional as applied to NCRL. The court found that the statute and regulations infringed on NCRL's First Amendment rights without a compelling state interest. The court permanently enjoined the Commission from relying on, enforcing or prosecuting violations of 2 U.S.C. §441b and 11 CFR 114.2(b) and 114.10-or any other parts of the Act whose restrictions flow from these provisions-against the plaintiffs.

The court did not find, however, that 2 U.S.C. §441(b) and its implementing regulations were unconstitutional on their face. In order to find a statute facially unconstitutional, rather than merely invalid as applied to a specific case, the court must find that its constitutional infringements are "substantial" in relation to its legitimate uses. The plaintiffs submitted a list of nonprofit, tax-exempt corporations, arguing that the statute's unconstitutional infringement was "substantial" in that it reached "hundreds, if not thousands, of constitutionally protected ideological corporations." The court, however, ruled that the plaintiffs had failed to show that the statute's constitutional infringements were substantial in relation to their "plainly legitimate sweep." The court said, "In light of these numbers [4.5 million for-profit corporations] and the importance of the statute's 'plainly legitimate' purpose of regulating for-profit corporations, its inadvertent infringement on the rights of 'hundreds if not thousands' does not appear 'substantial' . . ." The court concluded that the constitutionality of the statute should be considered on a case-by-case basis.

Appeal

On March 6, 2001, the Commission appealed this case to the U.S. Court of Appeals for the Fourth Circuit. On March 15, 2001, the Fourth Circuit Court of Appeals consolidated this appeal with a previous appeal, filed on December 22, 2000, that requested relief from the district court's preliminary injunction of October 26, 2000. That injunction barred the Commission from relying on and enforcing the challenged provisions against the plaintiffs pending a final decision in the case. The plaintiffs filed a cross appeal on March 16, 2001.

Appeals court decision

On January 25, 2002, the appeals court affirmed the district court decision that found the prohibitions on corporate contributions and expenditures to be unconstitutional as applied to NCRL. The appeals court also affirmed the district court's finding that the Act's prohibition on corporate contributions and expenditures, and Commission regulations that implement the prohibition, were not facially unconstitutional.

The appeals court found that a complete ban on corporate contributions and expenditures in connection with federal elections, with an exception to the corporate expenditure ban "so narrow that NCRL does not fit into it," burdened the plaintiffs' First Amendment speech and association interests. The court explained that "Organizations that in substance pose no risk of 'unfair deployment of wealth for political purposes' may not be banned from participating in political activity simply because they have taken on the corporate form."

The FEC argued that the Act did not absolutely ban corporations from engaging in political activity. Rather, it permits corporations to establish political action committees, which can make contributions and expenditures subject to the Act's limits. The appeals court, however, found that the reporting requirements and administrative burdens associated with maintaining a political committee "stretch far beyond the more straightforward disclosure requirements of unincorporated associations." The court concluded that, as a nonprofit advocacy group, the "NCRL is more akin to an individual or an unincorporated advocacy group than a for-profit corporation."

The appeals court found that the criteria at 11 CFR 114.10, which create a test for whether a nonprofit corporation qualifies for the MCFL exemption, merely codify the list of nonprofit corporate attributes considered by the Supreme Court in MCFL. Relying upon a previous Fourth Circuit case involving NCRL, the appeals court held that these rigid criteria could not be used to determine whether an organization qualified for the constitutionally-mandated exception. The court ruled that the NCRL was constitutionally entitled to the exception and was not barred from making independent expenditures to influence federal elections.

The court also ruled that the prohibition on corporate contributions was unconstitutional as applied to NCRL. The court reasoned that same rationale the Supreme Court used to find the ban on independent expenditures unconstitutional as applied to MCFL also applied to contributions. The court found that contributions by an MCFL-type corporation carried no greater risk of political corruption than did independent expenditures by such an organization. Thus, the appeals court concluded that, as applied to the NCRL, the prohibition on corporate contributions was not closely drawn to match a sufficiently important government interest in preventing real or perceived corruption of the political system.

The appeals court, however, found that the Act's corporate prohibition was constitutional in the "overwhelming majority of applications," and, thus, was not facially unconstitutional. 2 U.S.C. §441b(a). The court rejected the plaintiffs' argument that the statute was unconstitutional because it did not contain an MCFL exception, citing a case in which the Supreme Court had rejected a similar argument concerning a state statute modeled on §441b(a). The appeals court affirmed the district court's permanent injunction barring the FEC from prosecuting the plaintiffs for violations of §441b and 11 CFR 114.2(b) and 114.10. The appeals court also affirmed the district court's finding that the statute and its implementing regulations are not facially unconstitutional.

Supreme Court decision

The case was appealed to the Supreme Court solely on the issue of the constitutionality of the ban against contributions from nonprofit advocacy corporations.2 The Court agreed to hear the case because on this issue the U.S. Court of Appeals for the 4th Circuit was in conflict with the U.S. Court of Appeals for the 6th Circuit.

The Court began its decision by noting that federal law has banned corporations from contributing directly to federal candidates for nearly 100 years. Over the years the Court had reasoned this prohibition against corporations is intended to:

  • Prevent corruption and the appearance of corruption3 by ensuring that corporate earnings are not turned into political war chests;
  • Protect individuals who have paid money into a corporation from having their funds used to support candidates to whom they may be opposed; and
  • Hedge against the use of corporations as illegal conduits for circumventing the contribution limits.

The Court then noted that its decision in FEC v. National Right to Work Committee (National Right to Work)4 "all but decided the issue against NCRL's position." See FEC v. National Right to Work Committee, 459 U.S. 197 (1982). The Court explained that in National Right to Work it specifically rejected NCRL's arguments that deference to Congress on the proper limits of corporate contributions depended upon the details of a corporation's form or its affluence. The Court also explained that its decision in MCFL, which NCRL and the U.S. Court of Appeals for the 4th Circuit had relied upon in their reasoning, undermined NCRL's arguments, noting that in MCFL the Court concluded that restrictions "on contributions require less compelling justification than restrictions on independent spending."

According to the Court, ruling in favor of NCRL would mean recasting its understanding of the "risks of harm" of corporate political contributions, their "expressive significance" and the deference owed to Congress on how to treat them. NCRL argued that contributions by MCFL-type corporations posed no potential threat to the political system, and the governmental interest in combating corruption was not sufficiently strong to warrant Act's broad prohibition against contributions from MCFL-type corporations. The Supreme Court, in rejecting this argument, noted that nonprofit advocacy corporations, "like their for-profit counterparts, benefit from significant 'state-created advantages' and may well be able to amass substantial 'political war chests.'" Additionally, the Court stated that nonprofit corporations are "no less susceptible than traditional business corporations to misuse as conduits for circumventing the contribution limits imposed on individuals."

NCRL also argued that the Act's ban on corporate contributions should be subject to a strict level of constitutional scrutiny because it bans corporations from making contributions rather than merely limiting them from doing so. The Court also rejected this argument noting that in reviewing political financial restrictions, "the level of scrutiny is based on the importance of the 'political activity at issue' to effective speech or political association." The Court determined that contribution restrictions "have been treated as merely 'marginal' speech restrictions" and therefore are constitutional if they are "'closely drawn' to match a 'sufficiently important interest.'" Additionally, the Court pointed out that recognizing that the "degree of scrutiny runs on the nature of the activity regulated is the only practical way to square two leading cases," National Right to Work and MCFL.

Moreover, the Court stated that NCRL's contention that the corporate prohibition is unconstitutional because it is not sufficiently closely drawn rests on a false premise in that the prohibition is not a complete ban but rather contains significant exceptions, including allowing corporations and unions to pay for the administrative expenses of their PACs. Finally, the Court noted that in National Right to Work, which was decided by a unanimous Supreme Court in 1982, it thought that the regulatory burdens placed on PACs were insufficient to make them unconstitutional as an advocacy corporation's sole avenue for making contributions. "There is no reason to think the burden on advocacy corporations is any greater today," the Court concluded, "or to reach a different conclusion here."

Having found that the prohibition on corporate contributions is constitutional as applied to NCRL, the Supreme Court ordered that the judgment of the U.S. Court of Appeals for the 4th Circuit in Beaumont v. FEC be reversed.

FOOTNOTES:

1 The Supreme Court's decision in FEC v. Massachusetts Citizens for Life, permitting qualified nonprofit corporations to make independent expenditures, extends only to corporate expenditures and not to corporate contributions. 2 The Court noted that as a result it had no occasion to address whether NCRL was entitled to an MCFL-type exception to the ban on corporate independent expenditures. The Court also quoted from its decision in MCFL noting that MCFL's formal policy against accepting donations from corporations was "essential to our holding." 3 The Court quoted from its decision in FEC v. Colorado Federal Republican Campaign Committee that it understood corruption to mean "not only quid pro quo agreements, but also undue influence on an officeholder's judgment, and the appearance of such influence." See FEC v. Colorado Federal Republican Campaign Committee, 533 U.S. 431. 4 National Right to Work addressed a nonstock corporation's ability to solicit contributions from outside of its membership. The Court concluded that a solicitation to any individual who had at one time contributed to the PAC, regardless of whether or not he or she was a member, went beyond the permissible solicitation of members provided for by 441b.

Source:   FEC Record -- July 2003; March 2002; May 2001; March 2001; February 2001; December 2000. 278 F.3rd 261.

Documents

Supreme Court

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Court of Appeals (4th Circuit)

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