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On January 28, 1991, the U.S. Court of Appeals for the Second Circuit ruled that the Federal Election Campaign Act (the Act) does not preempt state law doctrine on corporate waste. Philip M. Stern, a General Electric (GE) stockholder, filed suit alleging that GE's funding of its separate segregated fund (GE/PAC) constituted a waste of corporate assets under state law.

The district court had dismissed the allegations, ruling that they were preempted by the Act. Reversing the district court decision on this issue, the appeals court held that the Act did not preempt Mr. Stern's allegations of corporate waste. The court, however, dismissed the allegations on other grounds but granted Mr. Stern leave to replead. With respect to Mr. Stern's allegations that GE violated federal lobbying and anti-bribery statutes, the appeals court affirmed the district court's dismissal of the claims.

Allegations of Corporate Waste

Mr. Stern alleged that GE's payment of GE/PAC's administrative and solicitation expenses constituted a waste of corporate assets under state law because:

  • GE did not realize any benefit from GE/PAC's contributions to incumbent candidates since they were made without regard to the candidates' positions on issues of concern to GE; and
  • GE's payments for administrative and solicitation expenses were excessive in relation to the amount of contributions the PAC collected.

In response, GE argued that the allegations should be dismissed because they fell within the FEC's exclusive jurisdiction under 2 U.S.C. §437c(b)(1). (Under that provision, the FEC has exclusive jurisdiction over civil enforcement of the Act.) The appeals court rejected this argument because Mr. Stern's allegations focused on GE's waste of corporate assets under state law rather than on whether GE's activities violated the Act.

In reversing the district court holding that the allegations of corporate waste were preempted by the Act, the appeals court pointed out the "narrow wording" of statute's preemption clause: the Act preempts "any provision of state law with respect to election to Federal office." 2 U.S.C. §453. The court said that Congress did not intend the Act to preempt the entire field of corporate political spending. That would result in a total absence of regulation on the appropriate amounts that corporations may spend on their PACs, since the Act is silent on this issue.

The court found that state regulation of corporate waste did not conflict with federal law in this case. The Act's provision allowing a corporation to pay for the costs of administering and soliciting contributions to a PAC (2 U.S.C. §441b(b)(2)(C)) was designed to limit, rather than encourage, corporate political spending "in order to preserve the integrity of the political process....Thus, state-law regulations that tend to reduce a corporation's support of its political action committee do not impede the FECA's goals."

The court, however, dismissed Mr. Stern's allegations of corporate waste because he failed to allege fraud or "bad faith" on the part of the company's directors. The court, however, granted Mr. Stern leave to replead these allegations.

Other Allegations

The court of appeals upheld the district court's dismissal of Mr. Stern's allegation that GE's administrative and solicitation payments for GE/PAC were actually lobbying expenditures that should have been reported pursuant to the Federal Regulation of Lobbying Act. Mr. Stern had alleged that the failure on the part of GE directors to comply with this statute exposed GE to prosecution under 2 U.S.C. §269 and therefore constituted a breach of fiduciary duty. The appeals court disagreed, finding that GE's spending did not constitute "direct communication" with government officials and therefore was not subject to the lobbying statute.

Similarly, the court of appeals upheld the district court's dismissal of Mr. Stern's allegation that GE directors exposed GE to liability by acquiescing in GE/PAC's violation of the federal anti-bribery statute. Mr. Stern had claimed that certain GE/PAC contributions violated the statute because they were given to "grandfathered" Members of Congress with the knowledge that the contributions might be converted to the candidate's personal use under 2 U.S.C. §439a. The appeals court said that because such use is lawful under the Act, the contributions did not violate the anti-bribery statute (18 U.S.C. §203). Moreover, "[c]riminal intent under section 203 turns not on what the contributor expects the recipient to do with the money, but rather on what the contributor expects to receive for that money."

Source:   FEC Record -- July 1991, p. 6. Stern v. General Electric Co., 924 F.2d 472 (2d Cir. 1991).