On the Regulation of Corporate Political Speech

By Professor Alan J. Meese

The Blog of the William and Mary Chapter of the American Constitution Society recently posted an article reporting on and summarizing William Van Alstyne’s November 11 lecture regarding Citizens United v. Federal Election Commission, currently pending before the Supreme Court. At the end of the last term, the Court ordered reargument in the case, asking the parties to address whether, for instance, the Federal Government may, consistent with the First Amendment, ban speech by Corporations in support of or in opposition to a particular political candidate. The Court first approved such a ban in Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990), in a 6-3 decision. Two justices presently on the Court dissented: Justice Kennedy and Justice Scalia. (Justice O’Connor, it should be noted, joined Justice Kennedy’s dissent).

Among other things, the ACS article summarizes the case for stringent regulation of corporate speech as such:

“Generally speaking, the campaign reform acts were put into place to prevent large commercial corporations from being able to contribute a large, disproportionate amount of money towards a particular campaign under the idea that such a contribution would make the democratic process less pure. Another reason why the campaign reform statutes were enacted was the fact that people purchase stocks from a corporation to further their own economic interest – not to make a political statement. The Supreme Court has upheld these campaign reform acts in the past, finding that a commercial corporation contributing money from its treasury to a candidate comes too close to bribery.”

This is a fair summary of the rationales that proponents of such regulation have articulated. It should also be noted that such regulation includes outright bans on corporate political speech in connection with elections. Moreover, statutes banning such speech generally allow corporations to set up PACS that collect voluntary contributions from affiliated persons, such as shareholders and employees. Proponents of such bans on corporate speech argue that such PACS produce “enough” speech to vindicate the legitimate rights of corporations and their individual constituents to influence the political process.

Citizens United involves a slightly more complicated provision, Section 203 of the so-called Bipartisan Campaign Reform Act of 2002. Section 203 prohibits corporations from speaking 60 days before a general federal election and 30 days before a federal primary, whenever such speech requires expenditures from the corporation’s general treasury, as opposed to the sort of “separate fund” described above. Moreover, Section 203’s prohibitions arguably sweep more broadly than those at issue in Austin, described above, insofar as they apply even to speech that is primarily about issues, so long as a candidate is mentioned and the speech occurs during the requisite unsafe harbors before an election, i.e., when such speech is most likely to be effective.

I do not disagree with Professor Van Alstyne’s description of how the Court might rule in Citizens United. Moreover, I agree that the decision could have major implications for the scope of state and federal authority over speech during political campaigns. Finally, I agree that, at least when it comes to regulation by individual states, the correct application of the Constitution could turn on whether corporations are, as the Supreme Court has repeatedly held or assumed for over a century, “persons” within the meaning of the 14th Amendment.

At the same time, I thought I would take this opportunity to offer some thoughts about the regulation/prohibition of Corporate political speech, from the perspective of someone who has taught Corporate Law and once even wrote about the regulation of corporate speech in a paper published by our own Bill of Rights Journal. See Alan J. Meese, Limitations on Corporate Speech: Protection of Shareholders of Abridgement of Expression, 2 W&M Bill of Rights Journal 305 (1993), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983547

First, it is important to distinguish between speech, on the one hand, and contributions to candidates, on the other. Much commentary about the case, particularly by proponents of such regulation, muddies the distinction between these two means of influencing the political process.

Citizens United wants to speak, not make a contribution to a candidate or otherwise fund a campaign. Such speech costs money, but so does speech by individuals. (Even bumper stickers, yard signs and billboards cost money. Ditto for advertisements that an individual might take out in the newspaper or on television. Writing a letter to the editor or canvassing a precinct can cost money, particularly if the author or the canvasser must forgo other opportunities to write or canvass). Ditto, too, for the exercise of certain other constitutional rights, e.g., building a church. If a state law provided that “no one shall spend more than $50,000 building a house of worship,” we would (properly) call the law a burden on the exercise of religion, not a regulation of “religious spending.” A proper application of the First Amendment in the Citizens United case requires the Court to distinguish between “speaking” and “contributing.”

Second, the Supreme Court has properly (in my view) held that individuals are generally free to speak as much as they want, even if such speech is very expensive. Thus, the state could not prevent Ross Perot or Bill Gates from spending his entire personal fortune taking out newspaper advertisements in support of a candidate, so long as each really was acting independently. Nor could it prevent Mr. Perot from giving away his fortune to the Church of his choice. It would not matter in this connection if the resulting speech was “disproportionate” to the actual public support for the ideas expressed.

Third, there is no good reason for treating corporations, large or small, any differently from Ross Perot or Bill Gates, both of whom earned most of their wealth from . . . corporations! Corporations are legal fictions, just like “partnerships,” “sole proprietorships,” “limited liability companies,” “labor unions,” “non profit corporations,” etc. Behind these fictions are actual human beings who contribute labor, capital, know how, etc. to a joint enterprise. Corporations, like other forms of business organization, are best understood as a “nexus of contracts” between various categories of individuals that supply inputs to a joint enterprise. Where corporations are concerned, such suppliers include shareholders, debtholders, managers, employees, directors and others. Hopefully such enterprises earn enough to pay off lenders, pay handsome wages and salaries, and earn a profit. In the case of a corporation, some of the profits are paid out as dividends, some are reinvested in new projects, and some remain in the corporate treasury, for future use at the discretion of management.

Fourth, if a corporation speaks, by, for instance, paying for an advertisement in a newspaper, it is because the directors, elected by the shareholders, have hired managers who think such speech is in the best interest of the corporation, i.e., the shareholders. Shareholders are persons. The funds expended are presumably retained earnings that managers are “investing” in speech they believe will benefit the shareholders. Corporate law traditionally grants managers very wide leeway to make investment decisions, e.g., whether to focus on building large or small cars, cars or tractors, tractors or boats, inboard or outboard motors, etc. Economists and economically sophisticated legal scholars explain this leeway by pointing out that various non-legal market mechanisms align the interests of directors and managers on the one hand, and shareholders on the other. These mechanisms are not perfect; no such mechanism is, but they deter directors and managers to some extent from employing retained earnings for projects that do not advance the interests of shareholders.

There is no reason to believe that directors/managers are any less likely to act in shareholder interests when making investments in speech than when making investments in factories, charitable giving, or research and development. If shareholders think Ford is making poor investment decisions, whether the investments are speech or factories, they can sell their shares. In other words, what we sometimes call “corporate speech” is really speech on behalf of persons who have authorized such speech, utilizing resources that the corporation could otherwise pay out to shareholders in dividends or use to invest in new projects.

As a result, bans on “corporate speech” are really bans on individual speech, and they must stand or fall under the same standards applied to analyze bans on individual speech.

Fifth, there are two counterarguments to the pro-speech approach that I have just sketched. First, that corporations receive “special privileges” from the state that justify additional state regulation, privileges such as perpetual life, entity status, and limited liability. Each such privilege, it is said, facilitates the creation of wealth in the economic marketplace that corporations might improperly transfer into the political arena by spending resources on speech that exceeds the “actual public support” for the ideas expressed. Second, that shareholders need protection from managers who will use “their” money to speak about candidates the managers support, whether or not shareholders support them.

The Supreme Court bought the first argument in Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1991), and Justice Brennan, in a concurrence, bought the second argument, analogizing corporate speech to a “theft” of shareholder assets to support viewpoints with which shareholders disagree. Neither argument withstands scrutiny, in my view.

Many corporations are quite young, and yet bans on corporate speech apply “across the board,” regardless of the age of the corporation. Hence, the “perpetual life” attribute does not justify the current scope of speech regulation. Moreover, limited liability limits the liability of shareholders, not corporations (who are fully liable for their torts or contract breaches despite limited liability), and it’s a bit odd to invoke a benefit granted to individuals to justify disadvantaging corporations. (Moreover, corporations often “pay” for limited liability because they must pay higher interest rates to compensate voluntary creditors for the latter’s inability to access shareholder assets if the corporation is judgment proof.)

To be sure, limited liability, perpetual life, entity status, etc. all facilitate the separation of ownership from control in large public corporations and thereby facilitate the creation and retention of wealth. (An investor is far more likely to purchase shares in a corporation if he or she knows that he or she can only lose the amount invested, without putting personal assets at risk). Still, lots of background rules, whether contract law, tort law, partnership law, agency law, property law, trademark law, the law of secured transactions, etc., facilitate the creation and retention of wealth by individuals — where would a franchise be without the state action necessary to enforce a trademark — but we don’t therefore conclude that individuals have received “special benefits from the state” that justify additional limits on their speech. Nor would we, for instance, allow the state to squelch speech by individuals to whom it had guaranteed a minimum income, even if the state argued that it was merely preventing the recipients of state largesse from using that largesse to distort the political marketplace. Here again, there is no reason to distinguish individuals from corporations.

Moreover, most industries are characterized by free entry, so there is no reason to believe that the special nature of the corporate form generally allows firms to earn above-average returns, because such returns would just attract additional competition from other corporations. Finally, unless I am mistaken, bans on corporate speech are not reserved for large corporations, but apply even to corporations that are much smaller than many partnerships, for instance. Thus, even taken on their own (unpersuasive) terms, such bans are not narrowly tailored to further their purported interest.

What, though, about the “shareholder protection rationale?” Proponents of this approach argue that, if shareholders want to support a candidate, they can contribute to special funds that then spend the money on speech as directed by the corporation. Under this approach, Justice Brennan said, speech reflects “actual support” for the views expressed. This is mere wordplay. Such speech reflects some actual support, yes, but not the full actual support. As Roberto Romano argued before Austin, reliance upon separate funds is beset by collective action problems. One shareholder’s contribution benefits all shareholders, even those who don’t contribute. The result will be free riding and thus suboptimal expenditures on speech. Such a burden is not justified by any effort to protect shareholders, who have voluntarily agreed to participate in an enterprise that uses retained earnings to speak. Perhaps states could adopt heightened scrutiny of speech to make sure such speech furthers a firm’s interest, but an outright ban, relegating shareholders to suboptimal separate funds, sweeps too far and offends the First Amendment, in my view. For an elaboration of this rebuttal of the shareholder protection argument, see Alan J. Meese, Limitations on Corporate Speech: Protection of Shareholders of Abridgement of Expression, 2 W&M Bill of Rights Journal 305 (1993). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983547

Let’s hope the Supreme Court keeps these various principles in mind when reconsidering Austin!

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Published in: on November 16, 2009 at 10:48 am Comments Off on On the Regulation of Corporate Political Speech

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