The Derivative Nature of Corporate Constitutional Rights

The role of money and business interests in politics continues to stir controversy. As the nation begins another presidential cycle that is expected to break spending records, we will likely hear analysts argue that the Supreme Court’s decision five years ago in Citizens United v. FEC[1] opened the floodgates by allowing unlimited independent political expenditures from corporate treasuries. A series of calls for reform has followed the decision, including the recent open letter published by former SEC officials asking the agency to require disclosure of corporate political spending. These important issues of our time are rooted in a much longer history that can help us better understand recent cases and the nature of corporate rights.

In our article, The Derivative Nature of Corporate Constitutional Rights (available here),[2] we trace the history of Supreme Court jurisprudence on the rights of business corporations for insight into the contexts and rationales of the Court at the time that it decided some of the key early cases. Was its view of corporations consistent with the population of corporations at the time? How might a different or better understanding of corporations have led to a better outcome of corporate constitutional rights decisions by the Court?

Drawing on more than 200 years of Supreme Court jurisprudence on the constitutional rights of corporations, we find that the Court has relied on two broad categories of arguments to support granting such rights. Throughout the nineteenth century, the Court treated corporations as associations of people organized for specific purposes, and recognized corporations as having constitutional rights when the Court thought it was necessary to protect the rights of the human persons behind the corporation. We refer to this as a “derivative” rationale, because the rights accorded to corporations were derived from rights of an identifiable set of human persons. During this early period of jurisprudence, corporations were generally much more closely identified with specific entrepreneurs, donors, financiers, or investors, than most publicly traded corporations are today.

For example, in holding that diversity jurisdiction could extend to corporations, the Supreme Court looked to the “members” or shareholders. The Court explained that it could look to these natural persons in determining diversity jurisdiction because “[s]ubstantially and essentially, the parties in such a case, where the members of the corporation are aliens, or citizens of a different state from the opposite party, come within the spirit and terms of the jurisdiction conferred by the constitution of the national tribunals.”[3] In ruling that corporations can claim protection under the Contract Clause, the Court reasoned that a corporate charter is a contract as it, in effect, represents an agreement between the people who applied for it and the government body that granted it.[4] Donors to a charitable corporation no longer have a direct interest in the corporate property, but “[t]he corporation is the assignee of their rights, stands in their place, and distributes their bounty, as they would themselves have distributed it, had they been immortal.”[5] Similarly, later in the nineteenth century, the Court noted that corporations are “persons” under the Fourteenth Amendment, explaining: “Such corporations are merely associations of individuals united for a special purpose, and permitted to do business under a particular name, and have a succession of members without dissolution.”[6]

In the mid-twentieth century, the Court adopted an alternative rationale, granting corporate rights to protect natural persons outside the corporation or to achieve some other public purpose. We refer to this alternative rationale as an “instrumental” one. For example, the Court held that advertising is within the scope of First Amendment protection because of consumers’ interest in the “free flow of commercial information.”[7] The Court’s rationale for the commercial speech doctrine relied on the idea that consumers have a right to hear information and that suppression of truthful speech about lawful activity could hurt consumers and their ability to make informed decisions.[8]

The Court extended this instrumental rationale to corporate political spending in First National Bank of Boston v. Bellotti, in which it struck down a state campaign finance restriction, drawing upon the notion that the First Amendment “prohibit[s] government from limiting the stock of information from which members of the public may draw.”[9] Citizens United, in turn, reflected both the derivative rationale, by characterizing corporations as “associations of citizens,” and the instrumental rationale by emphasizing the First Amendment’s protection of the rights of citizens to hear information.[10]

In addition to identifying the derivative and instrumental logic of the Supreme Court’s jurisprudence on corporate rights, we argue that the Court has failed to reconcile this approach with the changed nature of business corporations. This oversight was potentially problematic by the late nineteenth century when the Court decided some of the most important early corporate rights cases, and it has become more problematic over time. The spectrum or diversity of corporations in existence dramatically expanded by the late nineteenth century – while the term corporation included organizations still resembling associations of natural persons, it also included a growing variety of other corporations that could not be fairly characterized that way.

The corporate form is used for political units, such as municipalities, for nonprofit organizations ranging from food banks or small environmental action groups to large universities and churches, and for clubs and membership associations. It is used by for-profit business organizations, ranging from closely held businesses (small or large) to huge, publicly traded, multinational corporations. It is even used by corporations to create entities such as “special purpose vehicles” (SPVs) that have no employees and only a single shareholder (the corporation that created it), as a legal way to partition assets and liabilities. It is not accurate to characterize all corporations as “associations of citizens,” as the Court did in Citizens United.

Our article concludes by exploring how the underlying logic of much of the Court’s corporate rights jurisprudence could be used to make more principled decisions, while taking account of the spectrum of modern corporations. At core, we observe that the derivative nature of corporate rights requires the Court to pay attention to distinctions between corporations, to explicitly acknowledge that, for some purposes, some corporations can usefully and functionally be regarded as associations of members from whom rights could be derived, while other corporations serve other purposes, and cannot be regarded as representing any particular natural person or group of natural persons.

Further, we observe that where the Court’s basis for granting rights to corporations is instrumental, it implies that some additional constraint or regulation may be appropriate to carry out such purpose. For example, corporate speech rights relying on the instrumental rationale could be premised on listeners having access to information about who is behind the speech or on restrictions made to curb the drowning out effects of corporate spending.

The Court actually made it clear in Citizens United that it was not striking down the disclaimer and disclosure provisions of the Bipartisan Campaign Reform Act that require televised electioneering communications funded by anyone other than a candidate to include a disclaimer identifying the person or party responsible for the advertisement,[11] and requiring anyone who spends more than $10,000 on electioneering communications in a calendar year to file a disclosure statement with the FEC.[12] The Court has recognized that disclosure requirements “help citizens ‘make informed choices in the political marketplace.’”[13]

This argument applies especially when corporations engage in political communications, because the members, donors, or other funders behind the corporation may not be a matter of public record. The derivative rationale supports requiring disclosure of the natural persons behind a corporation that is making political expenditures because this ties the corporate right more directly to natural persons from whom the right is derived. Such disclosure would also reinforce the instrumental rationale by making the communication substantially more informative to listeners and observers.

Understanding these two rationales still leaves open a number of conceptual challenges in corporate rights determinations. Must we be able to identify every individual from whom the right is derived? Or is it specific enough to identify the group, such as “shareholders of AT&T Corporation,” or “members of the ACLU”? Which corporate participants should count in corporate rights determinations, and why? How should the Court treat competing interests within the corporation? These important issues clearly merit future work.

ENDNOTES

[1] 558 U.S. 310 (2010).

[2] Margaret M. Blair & Elizabeth Pollman, The Derivative Nature of Corporate Constitutional Rights, 56 Wm. & Mary L. Rev. 1673 (2015).

[3] Bank of the United States v. Deveaux, 9 U.S. (5 Cranch) 61, 87-88 (1809).

[4] Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 626-27 (1819).

[5] Id. at 642.

[6] Pembina Consolidated Silver Mining & Mining Co. v. Pennsylvania, 125 U.S. 181, 189 (1888).

[7] Va. State Bd. of Pharmacy v. Va. Citizens Consumer Council, Inc., 425 U.S. 748, 763-65, 773 (1976).

[8] Id.; see also Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of N.Y., 447 U.S. 557 (1981).

[9] 435 U.S. 765, 783 (1978).

[10] 558 U.S. at 339, 349, 356.

[11] 2 U.S.C § 441d(d)(2).

[12] 2 U.S.C. § 434(f).

[13] 558 U.S. at 367 (internal quotation marks and citations omitted).

The preceding post comes to us from Margaret M. Blair, the Milton R. Underwood Chair in Free Enterprise at Vanderbilt Law School, and Elizabeth Pollman, Associate Professor of Law at Loyola Law School, Los Angeles. The post is based on their recent article, which is entitled “The Derivative Nature of Corporate Constitutional Rights” and available here.