Category: Elections

Federal Election Commission to Reconsider Political Involvement by U.S. Subsidiaries of Foreign Corporations on Tuesday

Feederal Election CommissionForeign nationals, both individuals and corporations, have long been barred from making contributions in federal, state or local elections in the United States. The statutory prohibition includes contributions made “directly” or “indirectly,” bars the solicitation as well as the making of contributions, and since 2002, includes a ban on expenditures, independent expenditures, or electioneering communications by foreign nationals.  Penalties are stiff, including incarceration for a criminal violation.

But how should the law treat U.S. corporations that are subsidiaries of a foreign corporate parent? Are they “American” if run by U.S. citizens, incorporated in the United States, and U.S. citizens make all funding and spending decisions?  The Federal Election Commission first answered this question in a  1978 advisory opinion and, in essence concluded that if U.S. citizens control the decisions about contributions and the operation of the PAC, using corporate funds raised from U.S. operations, and the PAC contains only funds from lawful U.S. donors, the ban on “indirect” contributions by a foreign national does not apply, even if the U.S. subsidiary is wholly owned by a foreign parent company.

This view has always had its dissenters, but for decades this has been the view of a majority at the FEC. However, since 2012, at least three FEC Commissioners have argued that this view of the law is incorrect, and that the issues should be reconsidered and/or reversed so that U.S. subsidiaries of foreign corporations would be barred from making contributions or expenditures in federal, state or local elections, including being barred from operating a corporate PAC.  This has generated 3-3 deadlocks in a number of advisory  opinions. The FEC will revisit the issue Tuesday, as Commissioner Ravel has placed the issue on the agenda for the FEC’s next meeting, seeking to remove the exemption for U.S. subsidiaries run by U.S. nationals.

There seem to be three principal arguments in favor of a change.

  • The tools presently available to enforce the law are too weak to address the threat, and only an outright ban is sufficient to stop foreign involvement.

  • Even when foreign nationals have no direct role in contribution decisions, the foreign ownership alters the thinking of the Americans who run the U.S. subsidiary, and their loyalties cannot help but shift to the interests of their foreign owners, and only a total ban can prevent this indirect influence.

  • Citizens United led to an unwarranted expansion of corporate political power, and this is one way to reign it in.

In a statement released in advance of the meeting, Commissioner Ravel seems to be advancing the first of these arguments, citing a recent and successful Justice Department prosecution of a foreign national who funneled contributions into a state election, and a recent news report alleging that foreign nationals directly controlled a U.S. corporation’s decision to give to a super PAC. Some will take this as a sign the current regime is working, with violations being uncovered and prosecuted.

The issue is unlikely to be resolved at the FEC on Tuesday, but will remain a hot button topic in campaign finance, and should be on everyone’s radar screen if Congress takes up the issue of campaign finance reform in the next Congress.

ARTICLE BY Robert Lenhard of Covington & Burling LLP

© 2016 Covington & Burling LLP

Legislature Tries Again To Put Citizens United On California Ballot

Nearly two years ago, I wrote that the California Supreme Court had blocked an effort to include an advisory vote in the statewide ballot. Proposition 49 asked whether the United States Congress and California Legislature should approve an amendment to the U.S. Constitution overturning the United States Supreme Court decision in Citizens United v. Federal Election Commission, 130 S. Ct. 876 (2010).  Just after New Year’s Day, the California Supreme Court issued an opinion addressing the merits of the argument.  The Court concluded:

  • As a matter of state law, the Legislature has authority to conduct investigations by reasonable means to inform the exercise of its other powers;

  • Among those other powers are the power to petition for national constitutional conventions, ratify federal constitutional amendments, and call on Congress and other states to exercise their own federal article V powers (U.S. Const., art. 5);

  • Although neither constitutional text nor judicial precedent provide definitive answers to the question, long-standing historical practice among the states demonstrates a common understanding that legislatures may formally consult with and  seek nonbinding input from their constituents on matters relevant to the federal constitutional amendment process;

  • Nothing in the state Constitution prohibits the use of advisory questions to inform the Legislature’s exercise of its article V-related powers; and

  •  Applying deferential review, Proposition 49 is reasonably related to the exercise of those powers and thus constitutional.

Howard Jarvis Taxpayers Assn. v. Padilla, 62 Cal. 4th 486, 494 (2016).

Earlier this month, Senators Benjamin Allen and Mark Leno decided to take another run at putting an advisory vote on the ballot. They gutted SB 254, a bill amending the Streets and Highways Code, and inserted legislation calling a special statewide election to be consolidated with the November 8, 2016 general election.  At this special election, the voters will be asked to vote on the following “advisory” question:

Shall the Congress of the United States propose, and the California Legislature ratify, an amendment or amendments to the United States Constitution to overturn Citizens United v. Federal Election Commission (2010) 558 U.S. 310, and other applicable judicial precedents, to allow the full regulation or limitation of campaign contributions and spending, to ensure that all citizens, regardless of wealth, may express their views to one another, and to make clear that the rights protected by the United States Constitution are the rights of natural persons only?

When Governor Brown allowed Proposition 49 (SB 1272) to become law without his signature, he observed “we should not make it a habit to clutter our ballots with nonbinding measures as citizens rightfully assume that their votes are meant to have legal effect.”  (Letter to Members of Cal. State Senate, July 15, 2014.). Perhaps the same could be said of proxy statements.

Article By Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP
© 2010-2016 Allen Matkins Leck Gamble Mallory & Natsis LLP

California Political Contribution Case That 19 Law Professors Missed

Earlier this week, I wrote about an amicus curiae brief submitted by 19 law school professors Friedrichs v. Cal. Teachers Ass’n, a case now pending before the United States Supreme Court.  In particular, I questioned whether these academics properly described the holding Finley v. Superior Court, 80 Cal. App. 4th 1152 (2000).  The professors claimed that the case represented a “rare example” of a court holding that the business judgment rule is a defense to an attack on a corporate contribution.  In fact, the reported holding in the case was that the business judgment rule was a defense to the decision of a special litigation committee.

The 19 law professors also incorrectly described the holding in another California case, Barnes v. State Farm Mut. Auto. Ins. Co., 16 Cal. App. 4th 365 (1993) (“claim by policyholder of mutual insurance company seeking to stop insurer from engaging in political activities dismissed because the decision was protected by the business judgment rule . . .”).  Although the Court of Appeal did invoke the business judgment rule in Barnes, it did so in the context of the policyholder’s separate claim that the company was maintaining too large a surplus.  The policyholder’s challenge to political expenditures was made on constitutional grounds and the Court of Appeal’s analysis of that claim did not involve the business judgment rule.

Even though the law professors erroneously cited Finley and Barnes, I do believe that courts should, and do, apply the business judgment rule to director decisions to make political and other contributions.  In fact, the professors overlooked one California case in which the court expressly deferred to the business judgment of the directors. Marsili v. Pacific Gas & Elec. Co., 51 Cal. App. 3d 313 (1975) was a derivative suit challenging the propriety of a political contribution.  Here’s what the Court of Appeal had to say:

Neither the court nor minority shareholders can substitute their judgment for that of the corporation “where its board has acted in good faith and used its best business judgment in behalf of the corporation.”

Quoting Olson v. Basin Oil Co., (1955) 136 Cal.App.2d 543, 559-560 (1955).

Article By Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP

© 2010-2015 Allen Matkins Leck Gamble Mallory & Natsis LLP

Staying Above The Political Fray – The RIA (Registered Investment Adviser) Political Contribution Rule

Sheppard Mullin Law Firm

It is entirely understandable if after the recent hotly contested “mid-term” elections the general public would like to put political campaigns behind them– at least for the few months before the hype around the 2016 U.S. Presidential elections kicks into gear.  For many folks in the U.S. financial services industry, however, political campaigns have to be kept in mind all year round, every year.  This is thanks, foremost, to the U.S. Securities and Exchange Commission’s “pay-to-play” rules promulgated under the Investment Advisers Act of 1940 (the “Advisers Act”).  The so-called “pay-to-play” rules can be found in Advisers Act Rule 206(4)-5 (the “Political Contribution Rules”) (which can be found on page 194 of this PDF).  The Political Contribution Rule was first proposed in 2009, in the wake of the scintillating tales arising out of the unquestioned abuse of position by certain politicians at the pension plans for New York, California, Illinois and New Mexico, to name a few.  The Political Contribution Rule was adopted in 2010 (and went effective in 2011) and has found its place into the compliance programs of RIAs across the US.

In brief (and the Political Contribution Rule should not be thought of in brief, as it is a very complicated rule, and far reaching), the Political Contribution Rule provides that it constitutes fraudulent activity for an SEC registered investment adviser to accept compensation for the provision of advisory services to a US public pension plan (other than a federal pension plan) if within the prior two years certain folks at the firm (or their family members) made non-de minimisdonations (roughly, in excess of $350 or $150 per campaign, depending) to any government official or candidate whose governmental position puts (or would put) them in a position to influence the decisions of a public pension plan.  The express prohibition on “doing indirectly that which you are prohibited from doing directly” (see Rule 206(4)-5(d)) and coverage of political activity committees (PACs) make clear that the Political Contribution Rule is intended to capture a broad range of political giving.  For this reason, an RIA compliance policy designed to avoid any issues with the Political Contribution Rule will pick up RIA staff (regardless of title – to avoid any inference of firm directed giving by senior staff), their immediate family members (including children) and, most conservatively, prohibit all political giving, entirely.  Another reasonable response to the Political Contribution Rule is to simply not manage any money for or accept investments from public pension plans.

As invasive and hard to read as the Political Contribution Rule is, the SEC staff stand ready to enforce the rule.  In the first administrative proceeding brought under the rule, TL Ventures Inc. agreed to pay $295,000 to settle claims made by the SEC under the Political Contribution Rule.  The SEC action against TL Ventures arose out of a pair of political contributions made in 2011 (the year the Political Contribution Rule went into effect) by a “covered associate” of TL Ventures, who donated $2,000 to the governor of the State of Pennsylvania and another $2,500 to a Philadelphia mayoral candidate.  These donations resulted in a violation of the Political Contribution Rule when matched with the fact that TL Ventures had accepted investments by the Pennsylvania State Employees’ Retirement System in two TL Ventures venture funds formed in 1999 and 2000, as well as an investment by the Philadelphia Retirement Board in the TL Ventures venture fund formed in 2000. Although these fund investments were fairly dated by 2011, they were still generating fees to TL Ventures during their run off phase.  The dates involved might suggest to a more sympathetic observer that the violation was an oversight, but (as is often the case) other issues that arose during the SEC exam of TL Ventures likely exhausted any willingness on the part of the staff to give TL Ventures the benefit of the doubt.  The order describing and resolving the TL Ventures case presents an interesting set of facts, generally; you can read more about the TL Ventures settlement here.

However, and not without irony, political developments may draw the Political Contribution Rule out of the shadows of regulatory compliance and plop it squarely onto the political stump.  The reason is that in the upcoming 2016 presidential campaign certain candidates for higher office might find themselves at a disadvantage with deep pocketed would-be campaign contributors (i.e., owners and employees of financial services firms) due to the Political Contribution Rule.  A prime example would be New Jersey Governor Christopher Christie, who is widely expected to throw his hat into the ring for nomination as the presidential candidate for the Republican Party.  As the sitting Governor of New Jersey, Chris Christie is an “official” under the Political Contribution Rule, and as governor of New Jersey holds sway over the approximately $81 billion New Jersey’s Public Employees’ Retirement System, through the Governor’s ability to make appointments to the New Jersey State Investment Council.  The Political Contribution Rule does not apply to U.S. federal officials, but, as a sitting governor, any political contributions to Gov. Chris Christy’s presidential campaign would be picked up by the Political Contribution Rule.  Thus, any contribution to a Christie presidential campaign by an owner or employee of a hedge or private equity fund (or other asset manager) would side line her or his advisory firm from managing investments for New Jersey state pension plans.   And, of course, Governor Christie’s proximity to Wall Street and its deep pocketed financial services firms will make the issue that much more acute for him.

There may be no need to wait for the political fireworks to start popping on this issue.  The New York and Tennessee state Republican parties have already brought a legal action against the SEC to invalidate the Political Contribution Rule.  In that case, the plaintiffs allege that the SEC overstepped its authority because the Political Contribution Rule illegally attempts to regulate activity that is exclusively the responsibility of the Federal Election Commission.  (Copy of the complaint). This is similar to the claims of the law suit that lead to the “Goldstein” decision, which saw the SEC’s initial attempt at forcing hedge fund managers to register with the SEC as investment advisers invalidated in 2006.  However, on September 30, 2014, U.S. District Judge Beryl Howell dismissed the plaintiff’s challenge to the Political Contribution Rule, finding that the court lacked jurisdiction and that only the U.S. Court of Appeals for the District of Columbia Circuit had authority to hear the case. Presently, it remains to be seen whether the New York and Tennessee state Republican parties (or anyone else) will renew the complaint with the U.S. Court of Appeals for the District of Columbia.

The political winds seem to be blowing in such a way that the Political Contribution Rule may get blown out of RIA compliance programs.  The SEC staff’s rationale for wanting to address the pay-to-play scandals of the recent and not so recent past are entirely understandable.  But the breadth of the Political Contribution Rule does suggest that the behavior being targeted is best addressed by public pension plans, many of whom have already taken affirmative steps to address the SEC staff’s concerns about the temptations they present to fund manager (many or which are notably doing).  The Political Contribution Rule is hard to implement, cuts too close to the right to political speech, and, ultimately, may hit too close to home for many politicians.

ARTICLE BY

Thomas M. Devaney
Jung Yeon Son
OF
Sheppard, Mullin, Richter & Hampton LLP

Wisconsin Right to Life v. Barland (7th Cir. May 14, 2014)

Godfrey Kahn

On May 14, 2014 the Seventh Circuit U.S. Court of Appeals released its long-awaited decision in Wisconsin Right to Life v. Barland. Click here to read a copy of the court’s decision.

The opinion is authored by Judge Diane Sykes who was a member of the Wisconsin Supreme Court before being nominated by President Bush and then appointed to the federal Court of Appeals in 2004. The matter had been fully briefed, argued and pending since January 2013.

In 2010, the Government Accountability Board (the G.A.B.) adopted an administrative rule, GAB 1.28. In short, this rule greatly expanded the scope of communications subject to regulation as independent expenditures. As a result, issue advocacy communications in the 30/60 days before an election that identified a candidate would be presumed to be independent expenditures and subject to full PAC regulation under state campaign finance law, including donor disclosure.

In response to the G.A.B.’s adoption of this highly controversial rule, three lawsuits were filed almost immediately after the rule took effect. One of those lawsuits was filed in federal court in the Eastern District of Wisconsin by attorney James Bopp on behalf of Wisconsin Right to Life (WRTL). However, WRTL not only sued the G.A.B. about administrative rule GAB 1.28, it also challenged a multitude of other Wisconsin campaign finance laws. Today’s decision is essentially a resolution of WRTL’s lawsuit and all of those legal challenges.

WRTL prevailed in virtually all of its arguments, including:

  • Wisconsin’s ban on corporate political spending is unconstitutional under Citizens United;
  • GAB 1.28 which treats issue advocacy during the 30/60 day preelection period as fully regulable express advocacy/independent expenditures is unconstitutional; and,
  • GAB 1.91 which imposes PAC-like registration and reporting requirements on all organizations that sponsor independent expenditures is unconstitutional as applied to sponsors who are not superPACs (such as 501(c)(4) organizations and other non-committee sponsors).

The Court of Appeals reached its conclusions using very strong and clear language on government’s limited ability to regulate political speech:

  • “The effect of [Buckley] was to place issue advocacy—political ads and other communications that do not expressly advocate the election or defeat of a clearly identified candidate—beyond the reach of the regulatory scheme.” (p. 20)
  • “As applied to political speakers other than candidates, their committees, and political parties, the statutory definition of ‘political purposes’ in section 11.01(16) and the regulatory definition of ‘political committee’ in GAB 1.28(1)(a) are limited to express advocacy and its functional equivalent as those terms were explained in Buckley and Wisconsin Right to Life II.” (p. 62)
  • The G.A.B.’s administrative rule “sweeps a far wider universe of political speech into [state campaign finance laws], introducing confusion for ordinary political speakers who lack the background or assistance of a campaign finance lawyer.” (p. 64)
  • “Regulations on speech, however, must meet a higher standard of clarity and precision. In the First Amendment context, ‘rigorous adherence to [these] requirements is necessary to ensure that ambiguity does not chill protected speech.’ Vague or overbroad speech regulations carry an unacceptable risk that speakers will self-censor, so the First Amendment requires more vigorous judicial scrutiny.” (p. 65)

The WRTL decision also highlights the confusing nature of Wisconsin’s campaign finance statutes and the burdens these laws place on those organizations desiring to participate in the process:

Like other campaign-finance systems, Wisconsin’s is labyrinthian and difficult to decipher without a background in this area of the law; in certain critical respects, it violates the constitutional limits on the government’s power to regulate independent political speech. Part of the problem is that the state’s basic campaign-finance law—Chapter 11 of the Wisconsin Statutes—has not been updated to keep pace with the evolution in Supreme Court doctrine marking the boundaries on the government’s authority to regulate election-related speech. In addition, key administrative rules do not cohere well with the statutes, introducing a patchwork of new and different terms, definitions, and burdens on independent political speakers, the intent and cumulative effect of which is to enlarge the reach of the statutory scheme. Finally, the state elections agency has given conflicting signals about its intent to enforce some aspects of the regulatory mélange. (pp. 3-4)

The WRTL decision also is an excellent summary of the history of campaign finance regulation and litigation in Wisconsin during the last 20 years. It covers in detail successful legal challenges brought against the Elections Board / Government Accountability Board (the G.A.B) by our law firm on behalf of Wisconsin Manufacturers & Commerce (Wis. Supreme Court 1999); Wisconsin Realtors Association (W.D. Wis. 2002); and, Wisconsin Club for Growth / One Wisconsin Now (W.D. Wis. 2010). And, it discusses how despite losing in each of these instances, the G.A.B. continued to push for greater regulation—not less—of political speech.

Bottom line, the WRTL decision makes clear that the government’s authority to regulate political speech extends only to money raised and spent for speech that is express advocacy and that “ordinary political speech about issues, policy, and public officials must remain unencumbered.” (p. 9) Hopefully, with the strong language in this opinion, the G.A.B. will now understand the statutory and First Amendment limitations on its ability to regulate political speech. And, hopefully, the State Legislature will now understand that “Wisconsin’s foundational campaign finance law is in serious need of legislative attention to account for developments in the Supreme Court’s jurisprudence protecting political speech.” (p. 80)

Article By:

Mike B. Wittenwyler
Godfrey & Kahn S.C.

New York Federal Judge Finally Tosses Aside Limits on Contributions to New York Super PACs (Political Action Committees)

COV_cmyk_C

Super PACs in the Empire State and in the Big Apple are about to become more “super.”  On April 24th, a New York federal court finally (albeit begrudgingly) struck down a state law that effectively capped contributions to state Super PACs at no more than $150,000.  Prior to today’s ruling, New York had been one of a few holdout states refusing to recognize the application of Citizens United to state laws limiting contributions to independent political groups.  Indeed, the New York Attorney General defended the limit even after the Second Circuit concluded that it was likely unconstitutional as applied to the Super PAC that challenged it.  It is not clear whether the state will appeal the decision and face a near-certain loss.  If the decision stands—as we expect it will—donors may now contribute unlimited sums to independent political committees that run ads for or against New York state or city candidates.

Article By:

Zachary G. Parks
Of: 
Covington & Burling LLP

U.S. Supreme Court Finds Aggregate Limits on Federal Campaign Contribution are Unconstitutional

Bracewell & Giuliani Logo

On April 2, 2014, the United States Supreme Court held in a 5-4 decision that aggregate contribution limits, those limits placed on an individual’s overall direct contributions during a two-year election cycle, were unconstitutional as a violation of the First Amendment. The case, McCutcheon v. Federal Election Commission, No. 12-536 (U.S. April 2, 2014), is the latest case in which the Supreme Court has loosened federal regulation of campaign contributions.

In a fractured decision, Chief Justice John Roberts authored a plurality opinion that struck down the aggregate limit as a “mismatch” between the government’s goal of curbing corruption and its chosen means of imposing an aggregate limit. Although the government has a valid interest in limiting quid pro quo corruption between contributors and elected officials, the Court explained, an aggregate limit imposed across all candidates does not limit the risk of corruption enough to justify the way it significantly limits the right to support candidates in an election. In the face of core First Amendment guarantees, the aggregate limit could not survive because it was not “closely drawn to avoid unnecessary abridgment of associational freedoms.” Slip opinion at 30 (citation omitted).

The Chief Justice was joined by three of his colleagues: Justices Antonin Scalia, Anthony Kennedy, and Samuel Alito. Justice Clarence Thomas wrote separately to say that he would both strike down aggregate limits and overturn key Supreme Court precedent sanctioning a wide array of campaign finance restrictions.

The Dissent

Writing for the four Justices in dissent, Justice Stephen Breyer argued that aggregate campaign contribution limits had been previously held to be constitutional and that the reversal of existing precedent will come at a grave cost to the U.S. political system. In his view, the decision of the plurality “undermines, perhaps devastates, what remains of campaign finance reform.” Slip opinion at 30 (Breyer, J., dissenting). Justice Breyer was joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan.

Unchanged Rules

Prior to today’s decision in McCutcheon, campaign contributions were subject to two key limitations. The first limit, which remains intact, is the base limit on individual contributions to a single campaign, party committee, or political action committee. That limit remains unchanged, thus there is still a limit of $2,600 that an individual may contribute to a candidate for each election in the two year election cycle. As a result, one may contribute $2,600 for a primary election, $2,600 for a general election, and an additional $2,600 if there is a runoff election. Limits on contributions to other committees may be seen on the below chart.

In addition, the decision has no impact on the operation of a Super PAC, otherwise known as an “independent expenditure-only committee.” Nor does the decision permit corporations to make contributions to federal candidate committees.

New Rule

The limit that was struck down today restricted the overall amount individuals can contribute to election campaigns during a given two-year election cycle. Those aggregate limits were most recently set at $48,600 for federal candidates and $74,600 for other political committees, including national and state party committees, for an overall limit of $123,200 per two-year cycle. As such, prior to this decision a person could give the maximum base contribution of $5,200, for both a primary and a general election, to a maximum of nine federal candidates, whereas now a person can contribute to all federal candidates if she so desires. Similarly, an individual may now contribute to as many PACs as desired, including state and federal committees, such as the Democratic National Committee and the Republican National Committee, as long as each contribution is within the base limit currently set at $32,400 for the national party committees.

In viewing the below chart from the Federal Election Commission, the box in the upper right corner, under Special Limits, has been eliminated. All the other listed limits continue to be the federal legal limits.

Kedar Bhatia contributed to this article.

Article By:

Laurence A. Levy
Of:
Bracewell & Giuliani LLP

 

Treasury and IRS Provide Thanksgiving Surprise: Proposed 501(c)(4) Political Activity Rules

Womble Carlyle

As most of America travelled over the river and through the woods to Grandma’s house before the Thanksgiving holiday, the Treasury Department and the IRS delivered their own holiday gift.  On Tuesday, November 26, they released proposed guidance aimed at clarifying which conduct by tax-exempt social welfare organizations – 501(c)(4) entities – qualifies as political campaign activity.

Under existing IRS regulations, the promotion of social welfare does not include direct or indirect participation in political campaigns on behalf of or in opposition to any candidate.  Over the years, the IRS has used a wide-ranging facts and circumstances test to determine whether an organization is engaged in an impermissible level of political campaign activity.  In the aftermath of the recent IRS scandal regarding the review of 501(c)(4) applications, Treasury and the IRS believe that more definitive political activity rules would reduce the need to conduct fact-intensive inquiries when applying the rules for qualification as a social welfare organization.

To accomplish this objective, Treasury and the IRS have coined a new term, “candidate-related political activity.”  This term encompasses existing definitions of political campaign activity from federal tax and campaign finance laws, and includes the following:

  • Express advocacy communications;
  • Public communications made within 60 days before a general election or 30 days before a primary election that clearly identify a candidate for public office, as well as any other communications that have to be reported to the FEC (including independent expenditures and electioneering communications);
  • Monetary and in-kind contributions to or the solicitation of contributions on behalf of campaign, party and other political committees, and other tax-exempt organizations that engage in political activity; and
  • Other election related activities such as voter registration and get-out-the-vote drives, distribution of candidate or political committee materials, and the preparation and distribution of voter guides.

The proposed rules raise many serious concerns.  For example, candidate-related political activity could include conducting nonpartisan voter registration drives and distributing nonpartisan voter guides.  Moreover, the proposed rules attribute to 501(c)(4) organizations, among other things, political activities conducted by their officers, directors or employees acting in that capacity.

Unfortunately, the draft rules do not elaborate on the possible differences between conduct taken in an official capacity and personal political conduct by an officer, director or employee.  Finally, many contributions from a 501(c)(4) to another tax-exempt organization would appear to qualify as candidate-related activity unless the contributor receives a written confirmation that the recipient does not engage in such activity and the contributor restricts the use of the contribution.

The proposed political activity rules also leave many important issues unaddressed.  Under existing rules, 501(c)(4) entities must be “primarily” engaged in activities that promote the common good or social welfare.  The proposed rules provide no guidance on what proportion of an organization’s activities must be dedicated to this purpose to qualify under section 501(c)(4).   The proposed regulations also do not apply to entities that qualify under Section 501(c)(3) (charitable organizations),  Section 501(c)(5) (labor unions),  Section 501(c)(6) (trade associations), or Section 527 (political organizations).  Treasury and the IRS are, however, accepting comments on the advisability of making changes in each of these areas.  Interested persons may submit comments to the IRS by February 27, 2014.

Article by:

Of:

Womble Carlyle Sandridge & Rice, PLLC

Will a New California Ballot Initiative Usher in the Next National Shift in Privacy Law?

Poyner Spruill

Just 10 years ago, California enacted the first breach notification law and unwittingly transformed the landscape of American privacy and data security law. To date, 45 other states, multiple federal agencies, and even local governments have followed suit. California residents may soon find themselves voting on a ballot initiative that could have an equally dramatic effect on this area of law.

computer broadcast world

The ballot initiative, known as the California Personal Privacy Initiative, is designed to remove barriers to privacy and data security lawsuits and also would promote stronger data security and an “opt-in” standard for the disclosure of personal information. Specifically, the initiative would amend the California Constitution to:

  1. Create a presumption that “personally identifying information” collected for a commercial or governmental purpose is confidential

  2. Require the person collecting such information to use all reasonably available means to protect it from unauthorized disclosure

  3. Create a presumption of harm to a person whenever her confidential personally identifying information has been disclosed without her authorization.

Notwithstanding the presumption of harm, the amendment would permit the disclosure of confidential personally identifying information without authorization “if there is a countervailing compelling interest to do so (such as public safety or protected non-commercial free speech) and there is no reasonable alternative for accomplishing such compelling interest.”

Turning first to the impact on litigation, plaintiffs have largely been unsuccessful in privacy and data security litigation because they have failed to show harm resulting from an alleged unlawful privacy practice or security breach. The obligation to show harm arises at two stages when a case is litigated in federal court: first, the plaintiff must establish that he has suffered an “injury in fact” in order to meet the requirements for Article III standing, and second, the plaintiff must satisfy the harm requirement that applies to the relevant cause of action (e.g., negligence). If the case is litigated in state court, the standing requirement does not apply, but most, if not all, privacy and data security breach class actions have been litigated in federal court.

The ballot initiative would create a presumption of harm that could allow more lawsuits to satisfy the injury-in-fact standard (step one, above) and the harm requirement for the underlying cause of action (step two, above). Without that barrier, business would be stripped of the most effective means of prevailing on a motion to dismiss for certain causes of action. And in some scenarios, business would be forced to rely on untested or tenuous defenses, making companies more likely to settle, rather than fight, previously unsustainable causes of action.

Other components of the initiative would exacerbate the uptick in litigation, including the presumption that personally identifying information collected for a commercial purpose is confidential and the requirement that organizations use reasonable measures to prevent unauthorized disclosure of that information. Plaintiffs’ claims are sometimes based on an allegation that promises made in the defendant’s privacy notice regarding security measures are deceptive. Currently, companies can protect themselves against these claims by making only conservative representations about privacy and security. But the ballot initiative could create a general duty to adopt reasonable privacy and security measures, raising the prospect that plaintiffs could more successfully pursue negligence-style claims, which companies cannot deter solely by adopting conservative privacy notices.

The initiative also employs a very broad definition of personally identifying information: “any information which can be used to distinguish or trace a natural person’s identity, including but not limited to financial and/or health information, which is linked or linkable to a specific natural person.” (The definition does not cover publicly available information lawfully made available to the public from government records.) This expansive definition would force organizations to apply stricter security to types of information that might not otherwise receive those protections. Furthermore, the definition is particularly problematic when considered in conjunction with the presumption of harm discussed above because identifiable data such as names, email addresses, and device identifiers are routinely shared by businesses without consent. If this initiative succeeds, the increased threat of litigation will incentivize businesses to default to an opt-in standard for disclosures of information.

There is, however, at least one reason to believe that the initiative may not be as detrimental to business interests as some are predicting. Showing a nominal harm for the underlying cause of action does not necessarily equate to an award of damages so, even if the ballot initiative is successful, there would in some cases remain a practical limitation on the plaintiff’s ability to recoup money damages. Where statutory damages are available, or where a plaintiff can show some actual monetary harm, money awards would be possible. But in cases where statutory damages are not available and a plaintiff must show actual monetary harm to procure a monetary award, the ballot initiative may not save such claims. For example, the damages award flowing from a negligence claim is generally based on the actual damages incurred by a plaintiff. Therefore, even if the plaintiff could state a cause of action for the purpose of defeating a motion to dismiss, the plaintiff may not be entitled to anything more than a nominal damages award if the plaintiff cannot demonstrate monetary damage such as the cost of credit monitoring, identity theft insurance, or perhaps even therapy bills. On the other hand, courts could interpret the amendment as requiring recognition of a new type of harm, similar to emotional distress, that is compensable through money damages—even without a showing of some concrete financial harm to the plaintiff.

The ballot initiative’s proponents must obtain 807,615 signatures before Californians would have the opportunity to vote on it. If the signatures are collected, then the initiative will appear on the ballot without further opportunity to seek amendments to address business concerns. If the initiative appears on the ballot, it would require only a simple majority vote to pass. Interested organizations should work to ensure that public debate over the initiative includes a discussion of the heavy burden on business that could result from the initiative.

 
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Dewonkify – Electoral College

The National Law Review recently published an article by Hilary M. Hansen of Drinker Biddle & Reath LLP regarding the Electoral College:

 

The Word: Electoral College

The Meaning: The Electoral College is a body of 538 electors that determine the official outcome of the Presidential elections. Each state’s representation in the Electoral College is based on the state population (two per state, plus one for each Congressional district). Washington, DC has three electoral votes, but other U.S. territories do not have any.

After the votes are cast on Election Day, electors gather in their respective state capitols to cast votes for President and Vice President based on their state’s popular vote.  The vote is then certified.

In all states except Maine and Nebraska, which use a district-based electoral system, votes are awarded winner-take-all – a candidate just needs to receive 51% of the popular vote to receive all the state’s electoral votes. Each state decides how electors are chosen; no person holding elected or appointed federal office can serve as an elector. A candidate needs 270 electoral votes to win; if no one reaches that threshold the House of Representatives determines the President.

Used in a Sentence: “The election night drama of 2000 may be recreated this year, as experts say there is a real chance for one presidential candidate to win the popular vote but lose the presidency thanks to the Electoral College system.” (from U.S. News article “Electoral College, Popular Vote Split is Possible, Experts Say”)

What it Means: What really matters in an election is getting 270 electoral votes. Under the Electoral College system, the winner of the popular vote can lose an election – it has happened four times, in 1824, 1876, 1888, and 2000. The distribution of votes across the country is important; while the popular vote may swing in favor of one candidate, if the votes are concentrated in certain states, they may not have enough electoral votes to win.

History: The roots of the Electoral College go back to the founding fathers’ debate over the extent to which the United States would be a federal system. Virginia delegates to the 1787 Constitutional Convention proposed having Congress elect the President. Out of concerns about separation of powers and the independence of the President, the “Committee of Eleven” recommended that there be an independent group of electors, apportioned to states in equal numbers as their representation in Congress. This indirect election mechanism was then incorporated into the Constitution; Article II, Section 1 refers to a system of Presidential “electors” and lays out the framework for the Electoral College. While the Constitution describes this system and the role of these electors, the term “Electoral College” was not used until 1845. Throughout U.S. history there have been over 700 proposals to reform the Electoral College, including efforts to change to a proportional vote base rather than winner-take-all and to abolish the system completely and rely on popular vote as the sole electoral method.

©2012 Drinker Biddle & Reath LLP