FEC v. Citizens Club for Growth, Inc.

On September 6, 2007, the U.S. District Court for the District of Columbia approved an agreement between the FEC and Citizens Club for Growth, Inc. (formerly known as Club for Growth, Inc.), ending a lawsuit pending before the court. Filed on September 5, 2007, the agreement asked the court to enter a consent judgment requiring Club for Growth (the Club) to pay a civil penalty of $350,000 for failing to register with the Commission as a political committee and to report its contributions and expenditures.

Background

Under the Federal Election Campaign Act (the Act) and Commission regulations, organizations that make expenditures or receive contributions in excess of $1,000 must register with the Commission and file periodic financial disclosure reports. 2 U.S.C. §§431(4)(A), 433 and 434 and 11 CFR 100.5, 102.1 and 104.3. The Act also prohibits these organizations from receiving contributions from corporations or labor organizations and limits contributions from individuals to no more than $5,000 per year. 2 U.S.C. §441b(a) and 11 CFR 114.1(a)(1), and 2 U.S.C. §441a(f) and 11 CFR 110.1(d). In its landmark Buckley v. Valeo decision, the Supreme Court further defined the term “political committee” to include groups whose major purpose is to influence the election of candidates to office. 424 U.S. 1, 79 (1976).

This matter was initiated by an administrative complaint filed with the Commission by the Democratic Senatorial Campaign Committee (DSCC) alleging, among other things, that the Club, a Virginia Corporation registered with the Internal Revenue Service (IRS) as a political organization under Section 527 of the Internal Revenue Code, had improperly failed to register with the FEC as a political committee.

Registering and reporting as a political committee. Following the investigation of a complaint filed with the FEC in 2003, the Commission determined that Club for between 2000 and 2004 expressly advocating the election or defeat of clearly identified federal candidates. In addition, the Club mailed at least five fundraising solicitations during that period that clearly indicated that funds received would be targeted to the election or defeat of specific federal candidates. The Club received well in excess of $1,000 in contributions in response to these solicitations. Because the Club both made more than $1,000 in expenditures and received over $1,000 in contributions, it met the statutory definition of a political committee and was required to register and report with the Commission, provided that its major purpose was to influence federal elections.

Major purpose. The FEC found that the Club’s major purpose was influencing federal elections. According to numerous fundraising solicitations from 2000 to 2004, its goals at the time were to “elect more pro-growth leaders to Congress,” "help Republicans keep control of the House and take back the Senate,” “elect pro-growth congressmen who will fight to cut taxes and limit government,” “help Republicans retain control of the House and Senate in the upcoming elections,” "help Republicans keep control of Congress” and “defeat status quo incumbents.”

Disbursements. Further, supporting the FEC’s findings as to the Club’s major purpose, the FEC found the vast majority of its disbursements, which totaled about $15.1 million between August of 2000 and the end of 2004, were made in connection with federal elections. The Club’s spending focused on candidate research, polling and ads and other public communications referencing clearly identified federal candidates. In 2004, it spent approximately 88 percent of its disbursements on advertising supporting or criticizing clearly identified federal candidates.

Receipts from individual in excess of $5,000 and prohibited corporate contributions. From 2000 through the end of 2006, Club for Growth accepted approximately $10.78 million in contributions from individuals that exceeded the $5,000 contribution limit. Between 2000 and 2004, it also accepted more than $93,000 in corporate contributions.

On October 19, 2004, after finding reason to believe that the Club accepted contributions and made expenditures in excess of the $1,000 registration threshold, the Commission authorized an administrative investigation. Based on the results of that investigation, the Commission’s General Counsel notified the Club on April 25, 2005, that he was prepared to recommend that the Commission find probable cause to believe the Club violated the Act by failing to register as a political committee. The Club filed a response on May 31, 2005.

On July 19, 2005, the Commission voted to find probable cause to believe that the Club violated the Act and approved a proposed conciliation agreement. The Commission was unable to secure an acceptable conciliation agreement with the Club, prompting this suit.

Court complaint

On September 19, 2005, the FEC asked the U.S. District Court for the District of Columbia to find that the Club violated the Act by failing to register with the Commission after meeting both the statutory definition of “political committee” and the “major purpose” test established by the Supreme Court.

According to the Commission’s complaint, the Club was formed primarily to help elect candidates to Congress who would vote for and implement its policy views. In fact, in its registration statement with the IRS, the Club describes itself as primarily dedicated to helping elect pro-growth, pro-freedom candidates through political contributions and issue advocacy campaigns.

Based on its investigation, the Commission determined that the Club met the threshold for registration as a political committee by spending millions of dollars on federal campaign activity during the 2000, 2002, and 2004 election cycles, and by soliciting funds from donors indicating their funds would be spent to help elect or defeat specific federal candidates. The Club encouraged large donations from federally-prohibited sources, and accepted many contributions from individuals that exceed the Act’s $5,000 per year contribution limit on contributions to political committees. Some of the Club’s solicitations clearly indicated that the funds received would be used to support or oppose specific federal candidates. As a result, those contributions apply towards the political committee registration threshold. See FEC v. Survival Education Fund, Inc., 65 F.3d 285, 295 (2d Cir. 1995).

The Commission found that the largest component of the Club’s expenditures during the last three election cycles was political advertising, and that many of its ads contained messages that expressly advocated the election or defeat of clearly identified federal candidates. Based on those ads alone, the Commission alleges that the Club triggered political committee status in August 2000, at the latest.

The Commission asks that the District Court find that the Club:

• Failed to register as a political committee and as a result, failed to file periodic reports of its receipts and disbursement with the Commission;
• Knowingly accepted prohibited corporate contributions and contributions exceeding the limitations established by the Act; and
• Alternatively, made prohibited corporate expenditures.

Additionally, the Commission asks the Court to permanently enjoin the Club from violating the Act; order the Club to register and file disclosure reports with the FEC until it terminates its status as a political committee; order the Club to disgorge all excessive and prohibited contributions it has received since it became a political committee; and assess an appropriate civil penalty.

Court decision

Denial of the Club's Motion for Interlocutory Appeal

On October 10, 2006, the U.S. District Court for the District of Columbia denied the Club’s motion for the court to certify its June 5, 2006, decision for interlocutory appeal. An interlocutory appeal allows an appellate court to review a lower court’s decision prior to the final judgment in the case. Interlocutory appeals are rare, in part because the moving party, in this case the Club, has the burden to show exceptional circumstances that justify the expedited process. The court held that the Club failed to do so.

One requirement for granting certification for an interlocutory appeal is that there must be a substantial basis for a difference of opinion about the ruling. While the Club disagreed with the court’s application of a previous case, FEC v. Legi-Tech., Inc., 75 F.3d 704 (D.C. Cir. 1996), to the circumstances, the Club did not cite any case law to contradict the court’s decision. The court stated that the June 5, 2006, decision was not based on “novel and untested legal theories.” Instead, the decision was based on the legal doctrine of harmless error, deference to the FEC, the plain language of the Act and settled principles of law regarding agency ratification actions. Since the Club did not show a substantial ground for difference of opinion, the court denied the Club’s motion to certify the decision for an interlocutory appeal

Denial of the Club's Motion to Dismiss

On June 5, 2006, the U.S. District Court for the District of Columbia issued a memorandum opinion and order denying the Club’s motion to dismiss. In its motion to dismiss, the Club claimed that because the Federal Election Commission (FEC) failed to follow proper procedures before bringing this lawsuit, the court lacked subject-matter jurisdiction. In the opinion denying the Club’s motion, the court found that the FEC was in compliance with the enforcement provisions of the Act. Specifically, the court found that the FEC’s failure to provide timely notice of the administrative complaint constituted harmless error; the agency was entitled to deference in its conciliation procedures; and the Commission properly ratified its decision to file suit.

The Club made three distinct arguments in support of its motion to dismiss, each rejected by the court for the reasons set out below. First, the Club argued the FEC failed to provide timely notice of the allegations made against it.

Under the Act, the Commission shall notify any person alleged to have committed a violation within five days after the FEC’s receipt of the complaint. 2 U.S.C. 437g(a)(1). In this case, the FEC sent notice of the administrative complaint to Stephen Moore, who served as the Club’s President, as well as Treasurer of the Club for Growth, Inc. PAC (the PAC). The notification was addressed to Mr. Moore as Treasurer of the PAC. After realizing the error, the FEC sent notice to Mr. Moore again, this time addressing the document to him as President of the Club. In its opinion, the court did not agree with the Club’s claim that this error resulted in untimely notification. Though the original (and timely) notice was sent to him in his capacity as PAC Treasurer rather than as President of the Club, the court noted that through Mr. Moore, the Club had notice.

In the motion to dismiss, the Club also argued that the FEC’s conciliation proposals were not made in good faith. The Act requires the Commission to attempt, for a period of at least 30 days, to correct or prevent violations by informal means, and to enter into a conciliation agreement with any person involved. 2 U.S.C. 437g(a)(4)(A)(i). In assessing whether the FEC complied with this statutory provision, the court afforded high deference to the agency’s action. The court’s opinion also noted that the Club provided no evidence or argument to support this claim, except that they did not like the FEC’s conciliatory offers. The opinion also reasoned that the Act requires the Commission to come to the conciliation table, but does not instruct it on the nature of its offerings. The court agreed with the FEC’s argument that, in showing deference, the court should not scrutinize the FEC’s conciliation offers.

Lastly, the Club argued that the Commission violated the Act by authorizing the lawsuit prior to the completion of the conciliation process. During the course of the conciliation process, the FEC General Counsel sent an undated letter to the Club indicating that the Commission had authorized suit be filed in District Court if the parties were unable to reach an agreement. Although the court held that the initial contingent suit authorization, prior to completion of the conciliation process, was contrary to law under 2 U.S.C. 437g(a)(6)(A), it found that the FEC cured the defective vote by later ratifying its first action. On December 5, 2005, the Commission reaffirmed authorization for the General Counsel to pursue litigation. In its opinion, the court noted that the FEC’s reaffirmation constituted a subsequent review of evidence, and since the December 5 action came after 30 days of conciliation efforts, it was consistent with the requirements of the Act.

Court order

The Court entered the consent judgment proposed by the parties, which includes a permanent injunction against future violations by the defendant and its successors, officers and employees and requires that the Club file disclosure reports with the FEC and pay to the U.S. Treasury any funds over $5,000 remaining in its bank account after payment of legal expenses, up to the amount of excessive and prohibited contributions the Club originally accepted.

Source:   FEC Record— October 2007; November 2006; November 2006; August 2006; November 2005

District Court (DC)

Court decisions:

• Order (06/25/2012)
• Consent Judgment (09/05/2007)
• Order Denying Defendant's Motion for an Interlocutory Appeal Certification; Denying Defendant's Motion to Stay (10/10/2006)
• Memorandum Opinion Denying Defendant's Motion for an Interlocutory Appeal Certification (10/10/2006)
• Memorandum Opinion Denying Defendant's Motion to Dismiss (06/05/2006)

Related documents:

• Stipulation for Entry of Consent Judgment (09/05/2007)
• Complaint filed by FEC (09/19/2005)