In one of the most watched campaign finance disclosure enforcement cases, last week, the Washington State Supreme Court upheld a trial court’s finding that a trade association intentionally failed to register and report contributions and expenditures in opposition to a ballot initiative that would have required labeling of genetically modified organisms (GMOs) in food.  In 2016, a Washington court imposed what appears to be the largest campaign finance penalty ever imposed in any jurisdiction, ordering the association to pay an $18 million fine ($6 million, tripled after the violations were deemed intentional), plus trial and investigative costs and attorney’s fees.  In late 2018 a state appeals court overturned the trial court’s decision to award treble damages, but left the rest of the ruling intact.  The court remanded the question of whether the resulting $18 million penalty is an unconstitutional excessive fine.

The Supreme Court’s decision is especially important for three reasons.  First, it upheld the trial court’s more relaxed standard for determining when an intentional violation of the campaign finance laws has occurred.  Second, it declined to adopt a “primary purpose” requirement when determining if an entity must register as a political committee, at least in cases where the activity in question involved the raising of funds for political purposes, as opposed to the more common case where the spending of funds is at issue.  Third, it highlights the dramatic variation in levels of enforcement of campaign finance violations at the federal and state level.  While the narrative in the press and among advocacy groups often involves tales of lax enforcement, this is one of a number of instances of the opposite: aggressive enforcement leading to substantial penalties.

Prior to the 2014 election, when the measure was to be considered by the voters, the trade association, the Grocery Manufacturers Association (GMA), solicited over $14 million in contributions from its member companies—above and beyond regular trade association dues—for a “Defense of Brands” account, specifically to oppose the GMO ballot measure.  The trade association then contributed over $11 million to oppose the ballot measure, listing itself, and not its individual member companies, as the donors to the “No on 522” ballot committee.  Washington’s Public Disclosure Commission (PDC) reported its investigative findings to the state Attorney General’s Office, which filed a lawsuit the following day.

The court determined that the trade association was a political committee under the “contribution prong” of Washington’s political committee definition, which covers entities that “expect[] to receive or receiv[e] contributions.”  In assessing if an entity has become a “political committee,” Washington courts have adopted a “segregated funds requirement” for organizations, that are funded primarily by membership dues.  Such organizations trigger political committee status based on contributions only if “the members are called upon to make payments that are segregated for political purposes and the members know, or reasonably should know, of this political use.”  The Supreme Court declined to add a primary purpose requirement to the contribution prong of the political committee definition.  Under the “expenditure prong” of the political committee definition, an entity must have a primary purpose of supporting or opposing a candidate or . . . ballot proposition.  (Note: Covington is also monitoring the PDC’s announcement that it is considering amending its primary purpose guidance for entities making political expenditures.)

The court sided with the trial court on the correct standard for determining an intentional violation, rejecting a more stringent test put forth by the court of appeals.  Rejecting treble damages in this case, the court of appeals held that one must “subjectively intend to violate the law in order to be subject to treble damages.”  The Supreme Court, however, accepted the trial court’s standard that did not require subjective awareness of illegality, but only “whether the person acted with the purpose of accomplishing an illegal act under [the campaign finance law].”

The GMA decision is representative of Washington’s robust campaign-finance enforcement and further solidifies its reputation as one of the most aggressive state regulators in this area.  State Attorney General Bob Ferguson has taken an aggressive enforcement posture against campaign finance violations.  In October 2019, Ferguson’s office filed another lawsuit over alleged failures to disclose ballot measure spending, this time against the Evergreen Freedom Foundation.  Just last week Ferguson filed a lawsuit against Facebook for selling Washington state political ads “without maintaining information for the public as required by Washington state campaign finance law.”

A Growing Trend

This case follows a trend that has emerged in recent years of state enforcement against organizations accused of failing to register and report in compliance with campaign finance laws and/or “earmarking” contributions for political purposes.  As in Washington, these cases have resulted in record fines in multiple jurisdictions around the country.  Both the organizations themselves—and in some cases their donors—face liability for failing to register as political committees and report contributions.  And donors face the risk that regulators may compel public disclosure of donations that the donors thought would never be disclosed.

For example, in 2017, Families for Excellent Schools – Advocacy settled with the Massachusetts Office of Campaign and Political Finance for nearly $430,000 for failing to register as a ballot committee, failing to timely file campaign finance reports, and making contributions designed to conceal the true source of the contribution.  The California Fair Political Practices Committee, famously obtained a settlement of $1 million in fines and $15 million in disgorgement in a 2013 undisclosed ballot measure donation case.

While other cases have resulted in less extreme fines, they nevertheless highlight aggressive – and costly to defend – enforcement of state campaign finance laws.  For example, in 2018, a Montana nonprofit “issue advocacy” organization called the Montana Growth Network settled for $30,000 following six years of investigation and litigation into its failure to register as an independent expenditure committee and failing to disclose political expenditures.

Cautionary Spending

Last week’s Washington State Supreme Court ruling is representative of the unpredictable nature of state campaign finance enforcement.  This can present an especially difficult problem for those responsible for political law compliance across the fifty states as well at the federal level.  Entities making political contributions and expenditures must be vigilant about compliance with the ever more robust regulation of these activities in some states.  Most jurisdictions have a broadly worded statute that requires any entity that makes or accepts political contributions, or makes expenditures for political purposes, to register as a political committee and file disclosure reports.  How those statutes are interpreted can vary greatly, and have significant consequences.  Politically active entities need to be attentive to what will trigger registration before seeking to influence political campaigns or ballot initiatives within a state.

When making contributions to politically active nonprofits and LLCs, it is important for donors to properly vet the recipient organization to gauge whether it is complying with the law, and to assess their comfort with the uneven risk of enforcement across jurisdictions.  Covington has previously issued an advisory concerning “earmarked” contributions to politically active organizations.