Corporations and Elections: a century of Debate

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Corporations and Elections:

A Century of Debate

Robert E. Mutch

American Political Science Association
2003 Annual Meeting
Philadelphia, Pennsylvania

Corporations and Elections: A Century of Debate

Robert E. Mutch

Laws prohibiting political contributions and expenditures by business corporations have been on the books at the state level for more than 100 years, and the federal statute dates from 1907.1 The first court cases involving violations of these laws were decided in 1916. The only such cases to attract the attention of law reviews and political science journals, however, have been those decided since 1978: Bellotti and its progeny. This skewed attention pattern is understandable: Before the 1970s, only about 10 cases were brought under state and federal laws; nearly twice as many have been brought since then. Also, Bellotti was the first such case to reach the U.S. Supreme Court, which for the first time granted constitutional rights of political speech to corporations.
By 1978, though, corporations had been making political contributions for decades, in violation of state and federal laws. Why, then, were there so few cases in the first six decades these laws were in effect, and why were there so many more in the last three decades? Why was Bellotti the first case to reach the Supreme Court? Bellotti also seems to have been part of a trend, as lower courts had earlier made similar grants of First Amendment rights to corporations, and the high Court agreed to hear similar cases in the next twelve years. It’s not immediately clear why this should be so. First Amendment challenges to federal and state laws were not new, as they were raised first in the 1916 cases -- when they were bluntly rejected -- and raised again in the 1960s, when they were ignored. Despite the poor record of First Amendment challenges, they were revived as primary arguments in the 1970s, when they also received a more favorable reception from state and federal courts. If Bellotti and its progeny are similar to cases in the previous sixty years, why did they get a different response from the courts? If they are different, how do they differ? Finally, given how long these cases have been in the courts, why haven’t the constitutional issues been resolved?
This paper is an attempt to answer those questions. The court cases will be divided into three periods: the first cases, in the years before 1920; those in the years from 1920 to 1970; and the sudden increase of constitutional challenges beginning in the mid-1970s. In each of these periods, someone has asked questions similar to those posed here. Earl F. Sikes, who in 1928 wrote one of the first scholarly treatments of campaign finance law, thought the 1907 Act probably was unconstitutional, and wondered why it took nine years before it was challenged in court.2 Forty years later, dealing with a slightly richer history of litigation and legal commentary, Edwin M. Epstein ignored constitutional questions, preferring to examine the 1907 Act’s “long but undistinguished tenure” to gauge its “relevance to contemporary life.”3 Robert H. Sitkoff took yet another approach in 2002, after the upsurge of First Amendment challenges had dwindled to a trickle.4 He also seems to think the federal statute is unconstitutional, and wonders how the federal and state prohibitions got passed in the first place and why they are still on the books. Like Sikes and Epstein, he takes a practical approach to answering these questions, but comes up with a very different answer.
A note on terminology: To simplify a discussion that ranges over almost 100 years, the federal statute will be referred to throughout this paper either as the 1907 Act or “the federal statute,” whatever its wording or codification in any given year. Although state laws barring corporation political contributions and expenditures are not, strictly speaking, “corrupt practices acts,” (Mutch 2001, 23-24) that is what they have been called for decades and that is what they will be called in this paper.
Cases, arguments, and commentary
Before corrupt practices acts. In at least two instances, courts dealt with the subject of corporation political contributions even before there were laws prohibiting the practice. In 1898, shareholders in a Montana mining company filed a complaint accusing corporation officers of “fraudulently diverting and misappropriating” treasury funds. Among the instances they cited were a contribution to promote the creation of a new county and another to the “silver cause.”5 When the case reached the state supreme court in 1904, the justices issued a per curiam decision finding those contributions to be ultra vires: “The donation[s] . . . were clearly outside the purposes for which the corporation was created, both being for strictly political purposes. The statute specifies the purposes for which corporations may be created. Political purposes do not appear in the enumeration.”6
The New York State Court of Appeals reached a similar decision three years later, in a prosecution for larceny that arose out of the 1905 investigation into the business dealings of the state’s insurance companies. By providing the first public evidence that the “big three” life insurance companies -- New York, Equitable, and Mutual -- had made campaign contributions to the Republican National Committee in 1896, 1900, and 1904, this investigation sparked the national scandal that led to the passage of the 1907 Act and most state laws barring corporate political donations.7 The grand larceny charge was the brainchild of the New York City district attorney, who indicted the New York Life vice president who had been reimbursed from company funds for his 1904 contribution to the Republican National Committee. When the case reached the state court of appeals, a divided court found for the defendant. The court ruled 4-3 that while “the innocent motive of indirectly promoting the corporate affairs through the supposed advantage of the continuance in power of the Republican administration . . . lacked the criminal intent” necessary to make the contribution a crime, it was nonetheless “absolutely beyond the purposes for which that corporation existed and was wholly unjustifiable.”8
Even if two cases could be said to constitute a trend, these two would not qualify. The officers of Combination Mining and Milling appear to have been either inept or dishonest, and eventually accumulated so many suspicious and poorly recorded expenditures that shareholders probably would have brought suit even if there had been no political contributions. Moreover, given the absence of other such suits, it also is likely that the shareholders would not have acted at all had the officers done no more than make the campaign donations.9 The New York grand larceny case was no less a fluke. New York Life and other insurance companies had been making generous political contributions for almost ten years by the time the insurance investigation made the fact known to the public, and no suits had been brought against any of them for taking actions that were “foreign to the chartered purposes of the corporation.”10 The unexpected revelations were nonetheless a local as well as a national sensation, and they reawakened concerns about corporate political involvement that went back at least as far as the 1894 state constitutional convention.11 The New York legislature acted quickly, unanimously barring corporations from making campaign contributions almost nine months before Congress passed the federal statute.12
Cases and arguments in the first period, before 1920. Although most other states soon passed their own versions of the federal statute, it was some years before they were tested in the courts. The first cases tried under the new state and federal corrupt practices acts all involved breweries, and all clustered around the years 1916, 1917, and 1918. The first prosecution was in Michigan, where, in 1914, Jacob Gansley, an officer of the Lansing Brewing Co., gave $500 in corporate funds to defeat a county ballot proposition to prohibit the sale of alcoholic beverages. The next was in Indiana, in 1915, where Crawford Fairbanks and other officers of the Terre Haute Brewing Company gave $200 in corporate funds to defeat a similar measure. Several other Indiana cases followed, all involving local option elections.13 In 1916, The United States Brewers’ Association and 72 Pennsylvania breweries – every incorporated brewery in the state -- were indicted in a U.S. district court for “conspiracy to corrupt the 1914 election of a United States Senator and members of Congress in Pennsylvania.”14
The most common defense raised in these state supreme court cases had nothing directly to do with the corporate character of the defendants, but rather with whether state corrupt practices laws applied to ballot-issue elections. Like defendants in similar cases through the end of the century, nearly all the defendants in the state cases contended that those laws applied only to candidate elections. Like courts through the end of the century, the courts in these early cases were divided on this question. The reason for division usually was whether the statute was criminal: If it was, or if enough judges believed it was, a court was likely to decide that ballot-issue elections were not covered. In Fairbanks, for example, the Indiana Supreme Court reversed a lower court dismissal of the charge that the president of Terre Haute Brewing made a corporation contribution, rejecting the argument that the law did not apply to local option elections. In Terre Haute Brewing, on the other hand, the corporation itself was charged with the same offense, but under a penal statute. In that case, the court ruled that the statute did not cover local option elections. In Gansley, the Michigan Supreme Court upheld the conviction of a company officer for making a corporation contribution, but the judges split on the ruling. The dissenters claimed Gansley should not have been convicted because the statute was penal, and because the strict construction required of such statutes would have resulted in a finding that the state law was unclear as to whether local option elections were covered.
What distinguishes the Michigan and federal district court cases is that defendants challenged the constitutionality of the laws on First Amendment grounds, and asserted rights of political speech for corporations. Gansley’s argument in the Michigan case is notable for the ways in which it resembles and differs from the constitutional challenges of the 1970s:
Section 14 of the Act is unconstitutional and void (1) because it denies to corporations as artificial persons the right granted to natural persons to make the legitimate expenditures authorized by Section 3 of the Act; and (2) it denies to corporations the right to make such lawful expenditures as may be necessary to protect their interests in contests to be determined by the people at the polls.15
As precedent for their first argument, Gansley’s attorneys cited U.S. Supreme Court decisions finding corporations to be “persons” under the Fourteenth Amendment. They claimed these decisions put “artificial persons on an equality with natural persons” and so should be treated alike: “Private corporations own property and money which they have a right to dispose of as may please them. . . . and are entitled . . . to the same freedom of action as natural persons.” (ibid, 7, 8)
Their second argument addressed the ballot issue itself, pointing out that “[c]orporations like the Lansing Brewing Company engaged in brewing malt liquors in this state have a direct financial interest” in opposing attempts to prohibit the production and sale of their products. (ibid, 10) It was in this connection that they cited the state constitution’s guarantee of free speech for every “person,” and claimed the state law prohibiting “corporations from protecting and defending their own interests” was “obnoxious to the constitutional right of freedom to speak or to write.” (ibid, 11) They concluded by calling the state law “one of those fool enactments that occasionally get through the legislature.” (ibid 13)
The state supreme court rejected these arguments. Addressing the Fourteenth Amendment, the court held that the state government may control corporations it has created, even if they are created under general incorporation statutes, and their powers “are simply such as the statute confers.” (191 Mich. 357, 373) Although state and federal courts had recognized since Dartmouth College v. Woodward (4 U.S. 518 [1819]) that corporations had other powers implied in the grant to pursue a particular line of business, the court said it did not follow that contributing to a campaign fund was among those powers:
The expenditure of the money of the Lansing Brewing Company for election purposes cannot be deemed to be a property right within the meaning of the Fourteenth Amendment. Such corporations have no right to participate in the elective franchise. . . . The Lansing Brewing Company was created under our statute for the purpose of manufacturing beer. The privilege was not conferred upon it of using its funds for the purpose of influencing public sentiment in connection with any election. (ibid, 375-76)
The freedom of speech argument was dismissed in less than two pages. The court held that the state constitution’s free speech guarantee applied to natural persons only, not artificial ones, so it followed that the prohibition of corporation contributions did not restrict the activities of the Lansing Brewing Company’s managers. “The individual activities of the officers of the corporations are not prohibited. They may freely speak, write, and publish their views.”16
The federal district court in the Brewers case also rejected the First Amendment challenge raised by the Pennsylvania breweries, finding that the 1907 Act “neither prevents, nor purports to prohibit, the freedom of speech or of the press.”17 Defining corporations as having been “created with certain fixed and definite powers,” the court held that “[t]hese artificial creatures are not citizens of the United States, and, so far as the franchise is concerned, must at all times be held subservient and subordinate to the government and citizenship of which it is composed.” (239 F. 163, 168)
The subject of corporate political contributions made only one other appearance in the courts during the 1910s. In 1917 the U.S. Supreme Court granted an Interstate Commerce Commission petition to require the president of the Louisville and Nashville Railroad Company to appear before the Commission and answer questions about company funds “expended . . . for political campaign purposes” in Tennessee and Alabama.18 If the railroad company did make such contributions, the company’s managers did not assert a constitutional right to do so, and they did not have to answer charges in court. After this first flurry of cases, nearly fifty years passed before another corporation raised a First Amendment defense.

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