Last week the U.S. Ninth Circuit Court of Appeals upheld key provisions of Hawaii’s campaign finance laws requiring a for-profit company making campaign contributions and expenditures to register as a political committee, and prohibiting government contractors from contributing to state legislators and candidates.

Broad Implications for Companies and Nonprofits Participating in Hawaii Elections

Hawaii requires entities to register and report as noncandidate committees when they have “the purpose of making or receiving contributions, making expenditures, or incurring financial obligations to influence [elections] over $1,000 in the aggregate for an election cycle.”  A-1 A-lectrician, a for-profit corporation that in 2010 contributed over $50,000 to Hawaii candidates and party committees, and spent more than $6,000 on political advertisements, challenged these requirements.  It argued that registration and reporting should only be required of entities with “the primary purpose” of political activity rather than an organization that has “the purpose” to engage in political activity.

The Ninth Circuit rejected A-1’s argument, reasoning that the $1,000 threshold ensures that the reporting and disclosure requirements will not apply to organizations engaged in only “incidental” political activity.  Large organizations, the court noted, may spend only 1% of their funds on political activity and have many other important purposes – but this small percentage may amount to tens or hundreds of thousands of dollars. As the court glosses over, however, there is a big difference between making hundreds of thousands of dollars in contributions and contributing just over $1,000, which is the threshold for registration.

This ruling has broad implications for any company or nonprofit making contributions or expenditures in Hawaii. Although the court left open the possibility that the law may be unconstitutional as applied to an organization engaged in less political activity than A-1, many companies and nonprofits face burdensome state disclosure requirements for relatively modest amounts of political spending. In addition to registering, such companies or nonprofits must file reports disclosing contributions received, contributions made to candidates, political expenditures made, and other financial information.

Hawaii’s Pay-to-Play Law Also Upheld

A-1 also challenged Hawaii’s pay-to-play law on the basis that it prohibits a contractor from contributing to legislators or candidates who will neither award nor oversee state contracts. The court rejected this argument, reasoning that the legislature as a whole deals with procurement matters and that it would be very difficult for a contractor to determine whether a particular officeholder or candidate will become involved in a contract award or oversight process.

This is the second Federal appeals court to uphold contribution restrictions on government contractors, commonly known as pay-to-play laws.  While judicial rulings after Citizens United have tended to loosen restrictions on campaign finance laws, legal challenges to state pay-to-play laws have not fared well.  As such, pay-to-play laws continue to pose compliance challenges for companies that do business with government agencies and for their politically-active officers, directors, and other principals who may also be subject to these laws.