This week, the U.S. Court of Appeals for the D.C. Circuit upheld the Federal Election Campaign Act’s long-standing ban on contributions from federal government contractors to federal candidates and parties. We have followed the case since the District Court’s decision in 2012.

The ban has been in a place since 1940. Pointing to a history of federal and state corruption scandals involving government contracts, the court ruled that the ban continues to further the government’s interest in preventing quid pro quo corruption and removes political pressure on government employees. Some of the most important things about the ruling for government contractors are: 

  • The court cites state “pay-to-play” laws as evidence supporting restrictions on contributions by federal government contractors. These state laws typically restrict (or outright ban) contributions not only by government contractors, but also by their affiliates, principal owners, and officers. The federal appeals court ruling will likely be relied on by state judges to reject challenges to these laws and may fuel interest in adopting pay-to-play laws in those jurisdictions that do not have them.
  • At the federal level, the ruling may encourage President Obama to issue a long-debated Executive Order requiring federal contractors to publically disclose their political spending, which numerous lawmakers and public interest groups have called for.
  • The Court rejected arguments that the ban is over-inclusive because, among other things, it is not limited to entities holding large contracts (as many state pay-to-play laws are) and bars contributions to political parties, which unlike elected officials, have no ability to influence the award of a contract. The Court wrote: “[T]he First Amendment does not require the government to curtail as much speech as may conceivably serve its goals.”
  • There are many loopholes in the federal contractor ban, but the Court concluded that these are not constitutionally fatal. For instance, while an individual consultant doing work for the government may not use her personal funds to make a contribution, the executives of a corporate contractor may make personal contributions, and a corporate contractor may form a “connected PAC,” which may be funded by donations from corporate employees. The Court also noted that the law may allow an individual contractor to evade the ban by forming and becoming the sole employee of an LLC.
  • Lingering and more difficult constitutional questions are left for another day. For instance, the Court did not decide whether the contractor ban may be constitutionally applied to contributions made to PACs formed by advocacy groups, which in turn contribute to candidates. Nor did the Court decide whether contractors may contribute to Super PACs, a question that the FEC dodged last year in resolving an enforcement matter.

The D.C. appeals court ruling suggests that pay-to-play laws are likely to be around for the foreseeable future and may well become more robust. Government contractors should bear in mind that the penalties for violating these laws can be severe — disqualified bids, voided contracts, and civil or criminal penalties. An effective compliance plan is essential to help manage the substantial legal and reputational risks in this area.