D.C. Circuit Dismisses Major Case Concerning Attorney-Client Privilege in Congressional Investigations

The long saga of the legal challenge by Carl Ferrer, CEO of Backpage.com, to a subpoena issued by the Senate’s Permanent Subcommittee on Investigations (“PSI”) appears to have reached a conclusion.  A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit this week dismissed the case as moot and additionally vacated a series of prior rulings by the district court in the case.  The D.C. Circuit’s ruling effectively wipes the slate clean, erasing a district court action that seemed to open the door to a rare adjudication of Congress’s ability to compel the production of documents covered by the attorney-client privilege, while possibly making it significantly more difficult for individuals and companies to assert the privilege before Congress.

Although it may come as a surprise to many observers, including experienced litigation attorneys, both the Senate and House maintain that they are not required to respect the attorney-client privilege or the related attorney work product doctrine.  Congressional lawyers contend that such privileges are judicial, common law privileges that do not bind legislatures.  Congress’s position is rooted in the Constitution’s separation of powers and the inherent legislative authority to conduct investigations.

Congressional investigators often use this dynamic as a source of leverage over corporations and others from whom they seek to obtain documents or testimony.  Although it is relatively rare for a committee actually to compel production of privileged documents, it does happen.  For example, Congress did so in a high profile case involving Bank of America some years ago.  Over the years, Congress, corporations, and the courts have managed to steer clear of opportunities to test Congress’s position that it need not respect the attorney-client privilege, and there has never been a definitive court ruling on the topic, even though Congress has staked out this position for more than a century.

In Ferrer’s case, the company withheld attorney-client privileged documents, as well as other documents, but PSI contended that the company had not explicitly asserted the attorney-client privilege until relatively late in the process.  The district court agreed and held that Backpage had waived its ability to object based on the attorney-client privilege, and it ordered the company to produce documents.  PSI’s arguments, however, opened potentially dangerous ground for Congress.  In finding that Ferrer had waived the privilege, the court’s ruling seemed to suggest that such a privilege existed before Congress.  After all, how could Ferrer have waived something that did not exist?

During the weeks and months that the litigation and appeal developed, PSI completed its investigation, issued a final report, and held its final hearing in January 2017.  In the D.C. Circuit, PSI informed the court that it would not certify its continued interest in enforcing the subpoena, which was required in this instance because a new Congress convened in January, and it advanced the mootness argument, perhaps in recognition of the risk associated with an appellate ruling on the attorney-client privilege before Congress.  Although Ferrer, with the support of various amici, continued to press the appeal, the Court determined that the case was moot because PSI no longer was seeking to compel production of documents.  The Court then went one step further and actually vacated the decisions of the district court below, so that the lower court’s decisions will not have precedential value in future cases involving congressional investigations.

This outcome essentially restores the status quo ante, in which congressional investigation committees and those under investigation will bargain around Congress’s position on the attorney-client privilege without any real guidance from a controlling court decision.  Given the dramatic impact that would have been felt if the Backpage case had led to a ruling on the applicability of attorney-client privilege in congressional investigations, it is not altogether surprising that PSI in the end sought to avert a ruling by the court on the issue, and that the D.C. Circuit was very willing to oblige.

California AG Becerra Hints at Crackdown on Nonprofit Political Activity

Nonprofits that are active in California politics, already facing one of the most complex regulatory environments in the country, now have another thing to worry about: the state’s Attorney General.  In remarks Wednesday, Attorney General Xavier Becerra announced his intent to pursue nonprofit organizations that he believes “abuse” their nonprofit status for political purposes.  With the federal government long bogged down in how to handle these political nonprofits, California could become the leading antagonist of nonprofits that wade into politics.

Even before Becerra’s remarks, California has been a leader in states’ efforts to disclose (some would say discourage) nonprofit political activity.  The state’s Fair Political Practices Commission (“FPPC”) already has a complete regulatory regime dedicated to uncovering the political activity of what it calls “multipurpose organizations,” including 501(c)(3) charities, 501(c)(4) social welfare groups, and 501(c)(6) trade associations.  Under the regime, multipurpose organizations may have to publicly disclose their donors and their expenses to influence state elections.  Failure to comply with the state’s disclosure rules carries a steep price tag — the FPPC settled with a 501(c)(4) for $1 million in 2013 for failing to meet the state’s disclosure expectations.  Even some nonprofits that are not politically active must disclose their donors privately to the Attorney General.  Professional fundraisers may need to register as well.

If his course of action against allegedly fraudulent veterans’ charities is any indication, Becerra means business.  Last month, he sued a pair of charities that allegedly served the personal interests of its officers, seeking unspecified damages, penalties, and to have the organizations dissolved.  Becerra’s new focus on politically-active nonprofits, combined with his office’s role in policing nonprofit finances and the regulatory powers of the FPPC, means that organizations participating in California state politics would do well to reassess their compliance with the state’s political and charitable regulations.

Corporate Political Disclosure Fight Shifts to Mutual Funds

Corporate political disclosure activists this week launched a new tactic in their fight to pressure companies to publicly disclose information about their political and lobbying activities.

For more than a decade, public pension funds and others have aggressively pushed shareholder resolutions that call on public companies to self-disclose information about contributions to trade associations and other non-profit groups that pay for election-related advertisements.  These efforts have been largely unsuccessful.  Since 2006, according to the Manhattan Institute’s ProxyMonitor, only one such proposal has received majority shareholder support, with average support over the last two years at just 23 percent.

These relatively low levels of shareholder support have come as other corporate political disclosure efforts have fizzled.  In 2015, Congress prohibited the Securities & Exchange Commission from using appropriated funds to promulgate a rule requiring public companies to disclose their political spending.  And just this week Congress voted to keep these restrictions in the latest appropriations bill.

Stymied in these efforts, the advocacy group Public Citizen yesterday published a report arguing that major mutual fund companies like The Vanguard Group, BlackRock Inc., and Fidelity Investments could change this trend if they used their shares to vote for corporate political disclosure shareholder resolutions.  According to the report, “64 percent of political spending disclosure shareholder resolutions at companies where mutual funds own more than 5 percent of common stock would have received majority support in 2016 if those mutual funds had voted their shares in support [of] the resolutions.”  The report comes in connection with a  grassroots advocacy campaign aimed at mutual funds and efforts by Senator Bob Menendez (D-NJ) to rally support for the cause.

It is unclear how successful these groups will be at convincing mutual funds to weigh in.  Mutual funds often defer to the experience and judgment of corporate boards and, to date, mutual funds have not supported these proposals.  They may be reluctant to reverse course now given the traditionally low levels of shareholder support, the fact that much of the requested information is already publicly disclosed, and criticisms that corporate political disclosure efforts can harm shareholder value.

Virginia Makes Key Adjustments to Law Governing Gifts to Officials, Adds New Lobbyist Gift Notification

Organizations represented by lobbyists in Virginia should be aware of a new law enacted today.  The law eliminates a controversial exception to the state’s $100 limit on lobbyist gifts to legislators and officials, adds a key new exception to that law, and also includes an additional gift notification requirement for lobbyists.  The changes represent Virginia’s continued efforts to tweak its ethics laws in the wake of Gov. Bob McDonnell’s now-vacated corruption conviction.

First, all registered state lobbyists will have three weeks from the end of each legislative session to send statewide elected officials, cabinet secretaries, and legislators a summary of any gifts the lobbyist gave to that person or their family between January 1 and the end of the legislative session.

Second, the lobbyist gift rule exception for  large events open to “individuals who share a common interest” was eliminated.  These events are now subject to the $100 limit on gifts from lobbyists, their principals, and persons seeking state business.  This exception was widely criticized as a “loophole” that allowed a senior state official to attend a luxury suite at a football game.  Other exceptions for large events, such as those attended by members of a civic organization or from a particular industry, are still valid.

Third, a new “reception exception” was created.  Similar to rules that exist in the U.S. House and Senate, it is no longer considered a “gift” for an official or legislator to attend a reception where “food, such as hors d’oeuvres, and beverages that can be conveniently consumed by a person while standing or walking are offered.”  Thus, such receptions are not prohibited by the law limiting gifts from lobbyists, their principals, and persons seeking state business.

These are the most broadly-applicable changes for lobbyists and their employers, though the law includes technical amendments and smaller changes as well.  Note that the state’s executive order on ethics, governing executive branch officials and employees, remains unchanged.  Most of the changes take effect July 1, 2017.

2016 GAO Annual Lobbying Disclosure Act Compliance Report Issued

On Friday, the Government Accountability Office (“GAO”) released its tenth annual report on compliance with and enforcement of the federal Lobbying Disclosure Act (“LDA”).  The report summarizes the results of GAO’s random audits of lobbyists’ quarterly LD-2 activity reports and semi-annual LD-203 contribution reports, and provides a snapshot of the current enforcement environment.

There are a few key takeaways from this year’s report.  First, the same compliance issues have continued to plague LDA registrants at about the same rates year after year.  Some simple steps could bring many of these registrants into compliance.  Second, the U.S. Attorney’s Office for the District of Columbia, tasked with enforcing the LDA, appears to have focused its efforts on “chronic offenders,” and has set up new processes to pursue them.  Third, GAO, the Clerk of the House, and the Secretary of the Senate have all quietly adjusted their enforcement or audit procedures in the past few years, making it less likely that a registrant will be audited and less likely that certain types of offenders will be referred for enforcement.

Compliance Challenges

 GAO’s audits of LD-2 reports uncover a few simple compliance problems that, year after year, continue to trip up registrants.  This year’s GAO report also shows a jump in the percentage of reports that were not backed up with proper financial and issue documentation.  Those issues, and some simple reporting tips and reminders, are highlighted below.

  • Income and Expense Documentation. This year, registrants were able to provide documentation for their lobbying income and expenses on only 83% of the reports GAO audited, down from 92% last year.  GAO expects that registrants will be able to support their income and expenditures claims with financial records, such as invoices and receipts.
  • Issue Documentation. Similar to the financial documentation issue, registrants were able to provide documentation supporting the issues they reported lobbying for only 77% of the reports GAO audited this year.  This was down from 89% last year.  GAO expects registrants to be able to show evidence of the issue lobbied, such as emails, calendar entries, agendas, or similar documents.
  • Initial LD-2 Reports. As in prior years, about 10% of entities registering for the first time failed to file a quarterly report for the quarter in which they register.  Organizations and individuals that file an LD-1 report for the first time in a quarter must also file an LD-2 report covering their lobbying activity in that quarter.
  • Rounding. In another recurring problem area, 26% of reports failed to round expenses to the nearest $10,000.  GAO speculates that this may be due to the wording of Form LD-2.  The report emphasizes that rounding is the correct approach, as reinforced by new examples on rounding in the House and Senate LDA guidance.
  • Former Positions. Each year, about 15-20% of reports may not properly disclose the prior government positions held by listed lobbyists.  The first time a lobbyist’s name appears on a report for a client or employer, the report must disclose any Congressional or senior level executive branch position the lobbyist has held in the last twenty years.

Focus on Chronic Offenders

The U.S. Attorney’s Office for the District of Columbia (“USAO”) is tasked with enforcing the LDA, and does so via referrals from the House and Senate.  Based on GAO’s report, the USAO appears to have focused its enforcement efforts on “chronic offenders,” those lobbyists who “repeatedly fail to file reports.”  These chronic offenders are referred to an Assistant U.S. Attorney for follow-up action, and the USAO reports it has created a new notice for chronic offenders that lists all of their outstanding referrals.  Per GAO, the USAO has four chronic offender cases under investigation, and expects to resolve all of them this year.  Furthermore, it expects to open more chronic offender cases by the end of 2017.

Shifting Enforcement and Audit Activity

Until the 2015 report, GAO reported auditing 100 LD-2 reports each year.  Then, in 2015, it audited only 80 LD-2s.  The same is true in this year’s report for 2016.  This indicates the drop to 80 audited reports is not an anomaly, but represents a change in methodology at GAO.  The end result is that registrants are now slightly less likely to have their LD-2 reports audited than they were in the past.  GAO did not change its LD-203 practice of auditing 160 LD-203 reports.

Another interesting development is that the House and Senate have not referred any individual lobbyists to the USAO for LD-203 noncompliance since 2013, and have not referred any lobbyist employer for LD-203 noncompliance since 2014.  GAO does not explain why the House and Senate may have ceased referring these matters to the USAO.  The USAO has, however, had difficulty enforcing LD-203 compliance against individual lobbyists because they have often left their employer and thus become more difficult to contact.  It may be that the House, Senate, and USAO decided that resources dedicated to resolving LD-203 noncompliance would be better applied elsewhere.

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The focus on bringing chronic offenders into compliance, and the relative simplicity of resolving some recurring compliance issues, means that now would be a good time for registrants to take stock of their lobbying reporting and recordkeeping practices to determine whether their organization is properly filing LD-2 and LD-203 reports.

What’s Next for the FEC?

Commissioner Ann Ravel’s decision to resign from the Federal Election Commission will have short term and long term effects on an agency empowered to interpret and enforce the federal campaign finance laws and disclose the money raised and spent in federal elections.  Its short term effects should be minimal.  The statute requires four votes for all significant agency actions, and with three Republican and two Democratic commissioners remaining, all decisions will still require a bi-partisan consensus.  The long term effects could be more significant.  Ironically, Commissioner Ravel is the only FEC Commissioner serving a current term.  All other commissioners’ terms expired years ago.  This presents the President with the opportunity to replace the entire FEC, though if history is a guide, the consequences of that may be less dramatic than it first appears.  We discuss both short and long term effects below.

Immediate Effect of The Departure of Commissioner Ravel

Commissioner Ravel has announced that she will send a letter of resignation to President Trump this week.  The FEC will soon have three Republican commissioners and two recommended by Democrats (technically Commissioner Steven Walther is registered as an Independent, though he was recommended by then Senate Majority Leader Harry Reid for a “Democratic” seat).  By statute all rulemaking, enforcement, and similar agency actions require the vote of at least four commissioners, assuring that there is bipartisan support for all agency actions.  While Commissioner Ravel was frequently willing to join Republicans to form a consensus early in her term, over time she has been reluctant to do so. Instead, she has become a vocal critic of the Republicans on the FEC, especially over a lack of support for enforcement.  Currently, Commissioners Walther and Matthew Petersen are more frequently the source of consensus on the Commission.  So the loss of Commissioner Ravel should not significantly impede those few areas where a bipartisan consensus is possible.

Long Term Effect of the Departure of Commissioner Ravel

The departure of Commissioner Ravel presents the President and the leaders of both political parties with some interesting choices.

First:  How many commissioners to appoint?  As noted above, all of the remaining Commissioners are holding over in expired terms.  Commissioner Lee Goodman’s term expired in 2015, Commissioner Caroline Hunter’s in 2013, Commissioner Petersen’s in 2011, Commissioner Walther’s in 2009 and Commissioner Ellen Weintraub’s in 2007.  By statute, none can be re-appointed.  While the President has the ability replace the entire FEC, the backlog of confirmations for other administration positions, and a desire for some continuity may lead the administration to make two or four nominations, instead of six.

Second: How will the President make his selections?  By statute, no more than three FEC commissioners can be of a single political party.  Historically, the President has turned to the opposing party’s congressional leadership for recommendations.  While at least twice in the past, Presidents have refused to honor the opposing party’s recommendation (Carter and Reagan), the confirmation process moves most smoothly if each party picks its own commissioners.  While some have speculated that the President might seek an ideological coup at the FEC by appointing a single non-Republican libertarian, this will spark a messy confirmation fight on issues that put the President at odds with his “drain the swamp” campaign theme.  Instead, we expect President Trump will follow tradition and turn to Congressional Democrats for recommendations.

Third: What kinds of people will be nominated?  On the Republican side, President Trump’s White House Counsel, Don McGahn, previously served as an FEC commissioner and knows the agency well.  McGahn also has a long and close working relationship with Senator McConnell, who cares more than any other Republican in Congress about campaign finance law.  Senator McConnell and Mr. McGahn share a deregulatory, First Amendment-focused approach to campaign finance law, so we should expect the nominee(s) on the Republican side to follow in that tradition.

The Democrats face a more complicated set of choices.  First, who decides?  In the past, there was a sense that the Democratic side of the FEC had a House seat, a Senate seat and a White House seat.  That tradition eroded over time and in recent years, most decisions were made in the Senate.  So what role does Minority Leader Pelosi play in the process?  Second, Democrats have consistently selected commissioners more concerned with enforcing the restrictions in the law, imposing penalties when wrongdoing is found, and closing loopholes.  But there is a split within the party between the Democrats’ reform wing and its more pragmatic side.  With the fervency of the anti-Trump movement within the party, and the sense among Democrats that the Republicans at the FEC have refused to enforce the law regardless of how clear the evidence was of a violation, does the party select a more combative, reform-minded voice?  While neither Commissioner Ravel nor Weintraub began their tenure at the FEC in that role, they have both migrated to it out of frustration with how difficult it has been to find Republican support for what they thought of as moderate positions.

Finally

Finally, and perhaps most importantly, will President Trump consider the overall make-up of the FEC in selecting new commissioners.  Over the last eight years, the FEC has been a turbulent place, with commissioners turning to talk radio, the blogosphere and comedy shows to take their disputes to the public.  Discord at the top has led to a poisonous atmosphere within the building, and the plummeting of employee satisfaction to the lowest depths of any federal agency.  At the same time, the courts have re-written the scope of what can be regulated, and chastised the agency for not regulating enough.  The amount of money raised and spent has grown, and there is a sense that there is no sheriff in town.

The President has an opportunity to work across the aisle to find commissioners who – even if they don’t agree on all questions of the law – can find an amicable way to provide clear guidance on what laws will be enforced and then do so.  Finding the right commissioner(s) to set that tone takes time and focus, and for too many administrations, the FEC has just not seemed worth it.  Events set in motion by the resignation of Commissioner Ravel will show us if it is different this time.

FEC Increases Contribution Limits to Party Committees, Leaves Candidate Limits the Same

The Federal Election Commission has announced contribution limits for the 2017-2018 election cycle.  The new limits are effective January 1, 2017.

The FEC did not change the limit on the amount an individual can contribution to a candidate, leaving the limit at $2700 per election.  Because the primary and general count as separate elections, individuals may give $5,400 per candidate per cycle.

The limit on contributions from individuals to national party committees has increased from $33,400 to $33,900.  This increase also affects the limit on contributions to additional specialized accounts of the party committees, which were first allowed through legislation passed at the beginning of the last election cycle.  Each of these accounts can receive contributions that are triple the amount that can be given to the main party account, or $101,700 per account per year.  These accounts can be used to pay for expenses related to presidential nominating conventions, headquarters buildings of the party, and election recounts, contests, and other legal proceedings.

The following chart shows more details on the limits for individuals in 2017 and 2018:

An individual may contribute to …
Federal Candidates $2,700 per election
National party committees — main account $33,900 per year
National party committees — convention account (RNC and DNC only) $101,700 per year
National party committees — party building account $101,700 per year
National party committees — legal fund account $101,700 per year
State or local party committees’ federal accounts $10,000 per year
Federal PACs $5,000 per year

Covington Publishes Comprehensive Advisory Comparing Trump and Obama Executive Orders on Ethics

President Donald Trump this weekend signed his promised “drain the swamp” Executive Order, which imposes ethics restrictions on incoming and outgoing Trump Administration appointees. Incoming appointees would, of course, do well to carefully review the provisions of the Executive Order. But companies that deal with the Administration—whether by lobbying the executive branch, by seeing a former executive take a Presidentially appointed position, or by hiring a former Administration appointee—must also be mindful of these, in some cases, extremely restrictive provisions, lest they unwittingly get caught up in an ethics scandal.

While some in the media are claiming that the order is a significant weakening of a similar Obama-era Executive Order, the new Trump order is, in several subtle but key respects, much more restrictive than the Obama order.  Today, Covington has published a comprehensive advisory discussing these restrictions in more detail and comparing them to those imposed by President Obama when he assumed office.

Trump Administration Executive Order on Ethics Breaks New Ground

President Trump signed an executive order on ethics this weekend that is similar in key respects to the Obama Administration’s executive order governing ethical conduct by presidential appointees. But in one key respect it is significantly broader in scope than the previous Obama executive order. The Trump executive order incorporates the concept of “lobbying activities,” a defined term that it imports from the federal Lobbying Disclosure Act.

Presidential appointees are required to agree that they will not engage in “lobbying activities” with respect to their agency for five years after the end of their term of office. Lobbying activities is a broad and amorphous term that covers not just actual lobbying contacts that may trigger lobbyist registration but also behind-the-scenes strategic advice and other work related to the lobbying contacts of others. In other words, whereas the restrictions in the Obama executive order applied to individuals who engaged in activities requiring lobbyist registration, the Trump executive order reaches even activity by non-registered lobbyists. This closes one of the major loopholes that President Obama had included in his administration’s executive order on ethics.

The Trump executive order also bars appointees from engaging in “lobbying activities” with respect to any covered executive branch official or non-career Senior Executive Service appointee for the remainder of the Administration.  This provision applies not just to the appointee’s former agency but to the entire executive branch. And again, because it applies to “lobbying activities,” as that term is defined in the LDA, it applies to behind-the-scenes strategic advice that supports someone else’s lobbying contacts.

Incorporating the term “lobbying activities” will have very significant consequences for Trump administration appointees, subjecting them to much broader post-employment restrictions than was so for Obama administration appointees. It would be difficult for Trump appointees who sign the pledge to pursue employment as strategic advisors, much less lobbyists, for a period of time after leaving the administration.

The change in language is quite subtle, probably understood only by Lobbying Disclosure Act aficionados at this point. But it is likely to draw considerable attention as appointees begin to focus on the consequences of signing the pledge.

New Executive Order on Ethics in Missouri Includes Lobbyist Gift Ban, Revolving-Door Provision; Legislature Considering Additional Restrictions

Earlier this month, newly-installed Missouri Gov. Eric Greitens issued Executive Order 2, applying strict ethics rules to executive branch employees in that state.  The order includes a ban on gifts from lobbyists, conflicts of interest rules, and a “revolving door” provision that prohibits employees who leave Greitens’ office from later lobbying his administration.  The state House of Representatives overwhelmingly passed a similar bill, HB 60, banning gifts from lobbyists to legislators and other elected officials.  That bill now awaits action in the State Senate.

The gift rule in the executive order prohibits any employee of the executive branch, except those reporting to separately-elected officials, from soliciting or accepting any gift from a lobbyist.  A gift includes anything of value, but there are some exceptions.  The gift ban does not prohibit:

  • unsolicited tokens or awards of appreciation; honorary degrees; and plaques and similar items, so long as they cannot be converted easily to cash;
  • samples, promotional items, and similar tokens routinely given in the usual course of business to customers and suppliers;
  • gifts from family members;
  • gifts from other state employees;
  • gifts from personal friends not motivated by the employee’s position; or
  • benefits arising from the business or employment of the employee’s spouse, if not enhanced because of the employee’s position.

However, other state laws may limit these gifts.

The order also prohibits employees working directly in the Office of the Governor (not for an agency) who leave government from later lobbying the Greitens administration.  Finally, state employees may not participate in matters where they may have a financial relationship with a participant that would raise questions about their partiality, or receive any benefit from a state contract that is inconsistent with “conscientious performance” of their official job.

The order comes as an important reminder that gift rules are not solely found in state bribery laws or ethics statutes.  More and more states are enacting executive orders on gifts similar to this one.  We have previously blogged on executive orders in Illinois and Virginia, to name just two examples.

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