The U.S. Supreme Court ruled, in the 2010 Citizens United v. Federal Election Commission decision, that the limitations placed on campaign contributions by corporations and unions were unconstitutional. As is common in the aftermath of a significant decision, follow-on lawsuits have been filed challenging other bans or limitations on the same or similar grounds. One such decision, issued on April 16, 2012, should be of particular interest to federal government contractors, especially given the federal elections taking place this year.

The Case

The plaintiffs in Wagner v. FEC filed suit in the District Court for the District of Columbia, alleging that the 70-year-old ban on federal contractors making campaign contributions (specifically Section 441c of the Federal Election Campaign Act) should be invalidated.[1] Currently, companies or individuals receiving federal contracts are totally banned from making campaign contributions.

The “pay-to-play” contribution restrictions were enacted in response to the “Democratic campaign book” scandal, which refers to the practice of requiring contractors to “buy campaign books at extremely inflated prices.” This practice left contractors with little choice but to make contributions if they wished to get any work. Finding that this was “just a subterfuge to levy cold-blooded blackmail,” Congress enacted a ban on all campaign contributions to “prevent corruption and the appearance thereof.”

The Wagner plaintiffs challenged the ban on both First Amendment and Equal Protection grounds. In considering a motion for preliminary injunction, Judge James Boasberg’s decision weighed both arguments and found them lacking. Because the plaintiffs were found unlikely to succeed on the merits, the preliminary injunction was denied.

Examining the First Amendment argument, the trial court applied intermediate “closely drawn” scrutiny, which means that a restriction of free speech rights would only be upheld if is found “closely drawn to match a sufficiently important interest.” The court then analyzed the relevant governmental interest in preventing corruption, as well as the appearance of corruption.

Having found that this interest was “no doubt … sufficiently important to warrant restrictions in political contributions,” the question remaining was whether or not the total ban on contributions by federal contractors was sufficiently closely drawn to serve the government’s interest. The court found persuasive the history of the ban, other cases, and the availability of other avenues for political expression. As a result, it found that the ban passed constitutional muster.

With regards to the Equal Protection argument, plaintiffs in this suit were unique in that they were unincorporated individuals who held relatively low-dollar contracts. It was unfair, they argued, that they were totally banned from making political contributions, whereas federal employees and contractor-related entities (such as executives, shareholders, employees and political action committees) were not similarly banned.

The court found that neither the federal employees nor the contractor-related entities were similarly situated as required to support an Equal Protection argument. Although some federal employees often work alongside contractors and perform similar tasks, the history of corruption in seeking federal employment was not similar to that of seeking federal contracts. The court also failed to be persuaded that corporate-related entities were similarly situated.

Given that this decision was issued within the context of a motion for preliminary injunction, plaintiffs still have the opportunity to develop their case further. However, at present, it seems unlikely that the court would change its position completely and come out on the other side of this issue. Therefore, there is now at least one case that stands for the proposition that the total ban on federal contractor political campaign contributions will survive post-Citizens United review; but, it is also likely that the decision will be appealed. 

The Commentary

In a nutshell, the D.C. court probably got it right. Among those who specialize in government contracting, there seems to be a general (although not universal) consensus that politics should be left out of the procurement process to the greatest extent possible. After all, it seems like there are enough problems in public procurements without having to worry about the increasing political pressure or potential for fraud.

Yes, there may be ways for monies paid to federal contractors to end up being used for purposes of political expression. But, it would seem that the most pernicious form of danger comes in permitting direct political contributions to be made by contractors to politicians. It tempts both politician (in the form of blackmail) and contractor (in the form of “buying” its contracts) to take the focus of the procurement process away from a system that at least attempts to advocate for a competitive bidding process that treats all contractors fairly and equally while also trying to protect the American taxpayer. 

Upholding the ban in its current form seems to serve the legitimate interest of preventing fraud. While the Wagner plaintiffs may believe that the ban on their contributions is “unfair,” there is a much bigger picture, with a sordid history, that cannot be overlooked.

The Citizens United ruling has created a bit of chaos, as corporations find themselves guessing which regulations were affected and which were not. The Federal Election Commission has been slow to issue any new regulations provide any clarify on this problem (Citizens United was decided more than two years ago, in January of 2010.[2] ) At least one super-PAC has been willing to exploit the gray areas of this area of the law with regards to contractor contributions.[3]

As reported in the L.A. Times, and discussed in a New York Times editorial, a handful of companies holding government contracts donated a combined $890,000 to the Restore Our Future super-PAC, a pro-Romney group.  Apparently, after the newspapers confronted them about the donations, one contractor claimed to be unaware of the potential risk and stated that it would seek a refund. As of the date of this article, the Restore Our Future donation page states, “Federal government contractors should consult counsel prior to making a contribution to Restore Our Future.”[4]

Setting aside, for the moment, that government contractors donate money to super-PACs, the reality is that there are ways to get the money to the candidates and causes that they favor, notwithstanding the prohibition against making campaign contributions. Section 441c of the FECA prohibits federal contractors from making, directly or indirectly, any contribution, or promise to make a contribution, to any political party, committee, or candidate for public office or to any person for any political purpose or use. But, as noted above, the ban does not pertain to the executives, officers, shareholders, or employees of federal contractors. 

Additionally, Section 441c(b) permits separate segregated funds (“SSFs”), which are a form of PAC. SSFs, unlike stand-alone PACs, are connected to a corporation, labor organization or incorporated membership organization.[5]  Under the 441c(b) exception, federal contractors are able to bear the costs of the creation and administration of the SSFs, and such costs are not considered “contributions” or “expenditures” by the FECA. SSFs are then able to solicit contributions from their employees, stockholders, executives, administrative personnel and their families.

Also, although federal contracting entities themselves are prohibited from making campaign contributions, the FEC has taken the view point that parent companies and subsidiaries are separate entities. As a result, contributions made to campaigns by the parent company of a government contractor do not violate Section 441c.

President Obama, apparently not a fan of such “workarounds,” has twice tried to impose a requirement on contractors who bid on federal contractors to report, as part of their bids for federal contracts, any monies expended by them for political purposes. Citing the need to promote transparency and accountability, in April 2011, President Obama circulated a proposed executive order that would have required contractors to report any such contributions made within the past two years, whenever such contributions, in the aggregate, exceeded $5,000 during a given year.

This obligation to report would extend beyond the actual bidding contractor, to include the contractor’s directors, officers, or any affiliates or subsidiaries within its control. It would even have pertained to contributions made to third parties, if made with the “reasonable expectation” that the contributions would then be made for covered expenditures. Not only would such information have been required to be disclosed at the time of submitting an offer on a federal public contract, but the data would have been required to be published for public viewing on data.gov. 

The executive order was never finalized, and the opposition was quick to react. In fact, the House saw to it that multiple fiscal year 2012 appropriations bills included prohibitions against its issuance. In May of 2011, Rep. Darrell Issa, R-Calif., introduced the Keeping Politics Out of Federal Contracting Act of 2011, which would “prohibit the submission of political contribution information as a condition of receiving a Federal contract.”[6]

Just recently, on April 26, 2012, the House Committee on Oversight and Government Reform considered the bill and ordered it to a vote by the House, apparently in reaction to President Obama, who, not being deterred, had reinserted similar reporting requirements into his 2013 budget proposal in February 2012. 

From a practical point of view, even in a post-Citizens United world, contractors should use caution in making contributions to super-PACs. While there may be some shades of gray as to whether the total ban will survive judicial scrutiny, this could be a lengthy process, and the Wagner case should put contractors on notice that the FEC still considers the ban to be in effect.
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[1] Wagner v. FEC, No. 11-1841 (JEB), (D.D.C., April 16, 2012)

[2] According to the L.A. Times story, the FEC has been slow to amend its regulations post-Citizens United at least in part due to political disputes among the commissioners. 

[3] Super PACs cannot make contributions directly to any candidate’s campaign, although they have the ability to raise limitless funds from corporations and individuals and their spending is not otherwise limited.

[4] See http://restoreourfuture.com/donate-piryx/ (accessed May 16, 2012).

[5] They are similar to nonconnected PACs in many ways, but there are variations in reporting and registration requirements, as well as other differences.  See http://fec.gov/pages/brochures/ssfvnonconnected.shtml (accessed May 16, 2012). 

[6] H.R. 2008112th Congress (2011); identical S.1100, 112th Congress (2011) was introduced by Sen. Susan Collins, R-Maine, on the same date (May 26, 2011). 

This article was originally published on Law360, May 25, 2012.