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.

Commentary on cases in the first period. The biggest question about the early cases is why the First Amendment challenge was raised at all. The argument was not original with the breweries’ lawyers -- two Republican members of Congress had raised First Amendment objections during House debate on the federal statute -- but given popular suspicion of corporations in the early decades of the twentieth century, it does not seem to have been an argument likely to find much support on or off the bench.19 The most likely reason for raising this challenge was that the movement to prohibit the manufacture and sale of alcoholic beverages threatened the breweries’ very existence. Unlike the ballot measures at issue in the next two periods, the prohibition measures focused on just one industry with the intent of outlawing it. In terms of the Massachusetts law struck down in the Bellotti decision, it would be difficult to find a political issue that was more “materially affecting” for breweries than prohibition.
The arguments themselves also were more direct than those made in the 1970s and afterward. Attorneys for the Lansing Brewing Company simply claimed that the Michigan law was unconstitutional because it denied artificial persons the same rights of political speech enjoyed by natural persons. Their only attempt to support this claim was to assert that U.S. Supreme Court rulings that corporations were persons under the Fourteenth Amendment made corporations the equals of citizens, at least with respect to political speech. Although the same points were asserted almost as bluntly in the very different ideological climate of the 1970s and 1980s in Supreme Court dissents and state and federal court decisions, many of the recent versions of the First Amendment argument tend to be more circumspect about equating corporations with citizens.

The judges in those early cases were equally direct in rejecting claims that corporations have rights of political speech. The judges in both the Gansley and the Brewers cases were unanimous in finding that making political contributions was not even an implied corporate power. These decisions also were in keeping with the findings, in the pre-corrupt practices cases McConnell and Perkins, that corporation political contributions were ultra vires. The laws whose constitutionality judges were defending may have been relatively new, but precedent for treating corporations as legal fictions that had only the powers granted or implied in their charters was more than a century old.

Another factor contributing to the judges’ abrupt rejection of First Amendment arguments may have been wide backing for the laws themselves: By the time the Gansley and Brewers cases were decided, statutes prohibiting corporations from making campaign contributions had been enacted in some form by all but eleven of the forty-eight states.20 The national sweep of these acts suggests a climate of public opinion that was not favorable to corporations. Indeed, opposition to corporation money in elections had been growing at least since the 1888 presidential campaign, and had intensified after the 1896 campaign. (Mutch 2001, 18-19; Sikes, 188-89) A “Topics of the Time” editorial in the Century magazine for August 1897 saw “corporations, capitalists, and speculators” using “so-called political contributions” to create a kind of property representation in Congress and the state legislatures that was “not at all in the interest of liberty and good government.” (Century 633) An 1898 Political Science Quarterly article claimed that “the masses” saw the corporation as “some alien monster” and even “the better educated” saw it as “a being of cold and crafty intellect, inordinate ambition and unlimited selfishness.”21
Given the mixture of admiration and fear aroused by corporations, and what appears to have been broad opposition to their financing of election campaigns, we have to wonder: Why did the new state and federal laws produce so few court cases? If state and federal governments took the new laws seriously -- that is, if the impetus behind the legislation was more than a short-term appeasement of public opinion designed to get a controversial issue off the public agenda -- then we should have seen more prosecutions. If corporations took the laws as seriously as did their counterparts in the 1970s and 1980s, we should have seen more constitutional challenges to forestall enforcement. The record of the early years of these laws, however, suggests that there were not even token attempts by governments to enforce the new laws, and no inclination on the part of corporations to challenge them. Sikes, Epstein, and Sitkoff offered different answers to this question.
Sikes believed the 1907 Act was unconstitutional, but not for First Amendment reasons. He quoted without comment a long section from the federal district court decision in Brewers that rejected a First Amendment challenge. He thought the federal statute was vulnerable on other grounds, that Congress had overstepped its powers in prohibiting corporations from contributing to presidential campaigns (which constitutionally were campaigns for the votes of presidential electors, who were state officials). Constitutional vulnerability aside, though, Sikes offered a thoroughly practical explanation for corporations’ evident unwillingness to challenge the statute:
There are good reasons for this failure to contest the validity of the statute, even though some of its provisions are of very doubtful constitutionality. It would be very bad political policy for a party to be linked up with a corporation in its attempt to have the law declared void. No party wants to have the reputation of seeking gifts from corporations. Public sentiment is, or is believed to be, opposed to such contributions. It is easy, moreover, for a gift from a corporation to be disguised as a gift from an individual. The contribution is received, and the undesirable publicity avoided. (192)
Epstein points to doubts over that same constitutional question to explain why there were so few prosecutions before the Supreme Court ruled in Burroughs v. United States (290 U.S. 534 [1934]) that Congress could regulate contributions to presidential elections.22 He spends less than a page on the Brewers decision, and, like Sikes, makes no comment either on the First Amendment defense offered in that case or on why it stands alone in a period marked by nonenforcement.. Constitutional validity aside, Epstein believes the chief weakness of the 1907 Act lies in the policy assumptions behind it. He believed the “primary purpose” of that Act “was to destroy the influence over elections that corporations exercised through their financial contributions,” and describes its enactment by quoting Richard Hofstadter’s dismissive characterization of the Progressive Era as “moral absolutism.” (Epstein 1968, 12) Although he focuses on the 1940s, 1950s, and 1960s, Epstein’s assessment of those years suggests he would agree with Sikes’s contention that the ease of evading the law contributed greatly to the lack of enforcement by federal and state governments as well as the absence of challenges from corporations.
Sitkoff’s answer is quite different. Like Sikes, he appears to believe the 1907 Act is unconstitutional. In common with conservative legal theorists since the 1970s, however, he sees its vulnerability in First Amendment terms, calling the statute a “longstanding discrimination against corporate political speech.” (1123) He poses two alternative explanations for how such a discriminatory law got enacted in the first place, only one of which also explains why it and its state counterparts are still in force.
The first explanation, which he correctly sees as the most common, is that the 1907 Act is “a product of political entrepreneurship by opportunistic politicians who capitalized on the Progressive Era’s distrust of large corporations generally and a few salient corporate campaign finance scandals in particular.” (1128) Although he finds some support for this “this simple account” in the historical record -- writing that Senator Benjamin Tillman (D-S.C.) assumed sponsorship of the bill “when the issue had achieved popular salience after the 1904 election” in an attempt to “attract public attention to him and give him a measure of control over the new Congress’s legislative agenda” (1129-30) -- he rejects it as unsatisfactory. He explains his rejection as follows: “in the 1940s. . . . if the Tillman Act had truly lessened corporate influence, we would have expected corporate limits to be ratcheted up, not the subsequent establishments of limitations on unions.” (1130) That is, he believes political entrepreneurship is synonymous with enacting legislation that actually realizes its purported goal. Thus passage of the 1907 Act and state laws couldn’t have been entirely the result of political entrepreneurship because the laws didn’t work.
Sitkoff believes that new theories of economic regulation provide a better answer. In this view, “corporations probably supported the enactment of the Tillman Act as a means of protecting themselves from extortive threats by political leaders.” (1131) He devotes a paragraph to Marcus Hanna’s systematic fundraising in the 1896 and 1900 campaigns and suggests we look at the 1907 Act in this “extortion-colored light.”(1133) Acquiescing in a ban on direct corporate contributions would have been a rational corporate response, but not if the ban on contributions were complete. Because rational corporate leaders would not have wanted to close themselves off entirely from “the market for legislation,” the 1907 Act was deliberately made “porous” so that “corporations could still purchase legislation through many indirect means, albeit at a higher price.” (1137) That is, they could contribute indirectly by channeling treasury funds through the personal accounts of corporate executives, despite the tax burden of having to account for those funds as though they were personal income. The higher price placed on political contributions would not have been a fatal objection to the 1907 Act because Sitkoff does not believe most corporations ever wanted to make campaign contributions anyway, and have done so only because they were the victims of predatory politicians. In his view, corporate managers do not voluntarily make political contributions because they know they are economically damaging in two ways: first, because the use of treasury funds for any purpose other than business investment threatens to lower the company’s stock price by lowering its economic performance (1109-12, 1115, 1119, 1122-23); and because giving money to politicians violates the collective action ethic that lay behind business support for, and shaping of, the 1907 Act. (1125-28) According to Sitkoff’s explanation, the 1907 Act solved a collective action problem not only in that “corporations as a class do better in a world where direct donations are prohibited,” but also because it prevents legislators from implementing nationwide extortion schemes that force corporations to make deals with the extortionists to avoid having to pay greater costs. (1126-27)
Corporations clearly have been, and perhaps still are, the victims of political extortion.23 To say that this explains all or even most corporate political contributions, however, is another matter. It may be that the “old” theory of regulation that explained legislation as the result of bargaining among private corporations with different interests needed to be updated with a “new” theory that sees the legislators as parties with their own interests. That subject is well beyond the purposes of this essay. But turning the “old” theory upside down by turning legislators from passive suppliers of regulation into extortionists preying on passive corporations does not shed much light on the practice and regulation of campaign financing. Corporations have been centers of economic and political power since the late nineteenth century, and portraying their political contributions as extorted payments in a protection racket is no more illuminating than denouncing them as bribes. Indeed, one of the implications of Sitkoff’s collective action explanation for passage of the 1907 Act is that it was not Senator Tillman -- or at least not him alone -- but the turn-of-the-century business community that assumed sponsorship of the bill to ban corporate campaign contributions, and shaped the bill in its own interest.
Sikes and Epstein probably are closer to the truth about why the 1907 Act was passed, and why the Act was neither enforced nor challenged. It’s likely that few legislators believed that the federal and state laws actually would reduce the political influence of corporate money. Their aim probably was less long-term change in the way election campaigns were financed than a short-term need to get corporation political contributions off the editorial pages and off the minds of voters. These laws were not followed by a rash of court cases because corporation money remained an important source of campaign funds, and politicians and corporations alike wanted to avoid scandal. (We do not know how large a percentage of campaign funds were provided by corporations because, apart from the 1904 campaign, which was investigated in 1905 and again in 1912, we do not have enough information about political funding before the 1970s.) These observations bring attention to the fact that the kinds of corporations and political activities that eventually led to enactment of the corrupt practices acts were completely absent from the first cases to deal with those laws. The scandal that prompted Congress and state legislatures to act involved hundreds of thousands of dollars contributed to a presidential campaign by the largest corporations in the country. The first cases tried under the corrupt practices acts involved hundreds of dollars contributed by small corporations to local ballot issue campaigns.
It’s likely that these early cases were not, except in a narrow legal sense, corporation political contributions cases at all, that they were instead Prohibition cases. It would be easier to see them as campaign finance cases if at least a few of them involved contributions from companies other than breweries, and were made to candidates or ballot issues having nothing to do with prohibition. In fact, every single one of the early cases was brought against breweries in the years when the prohibition movement was gaining strength across the country. This fact puts the rulings against the companies in a different light. Instead of being on the wrong side of popular feeling about corporations, the breweries were on the wrong side of a popular movement that was determined to outlaw their industry.24 The political concerns that brought the breweries to court, then, might well have had very little to do with the concerns that prompted passage of the laws they were charged with violating. Without Prohibition, it is possible that most of the breweries would have made no political contributions at all. Had that happened, there would have been no prosecutions under state laws until the Joe Must Go and Cleveland Cliffs Iron Co. cases of the 1950s, and none under the federal law until the Lewis Food case in 1964.

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