CRAIN LAW GROUP, PLLC

Legal Memo
FROM: Larry L. Crain, Esq.

TO: Tennessee Stands

RE: SB 1005; HB 1201

DATE: April 14, 2022

Question

On February 10, 2021, SB 1005 was filed for introduction in the Tennessee
General Assembly. This Senate Bill calls for certain amendments to the following
state statutes dealing with campaign finance and disclosure laws: Tenn. Code Ann.
§ 2-10-110, Tenn. Code Ann. § 2-10-203, Tenn. Code Ann. § 3-6-103, Tenn. Code
Ann. § 3-6-205; Tenn. Code Ann. § 4-55-101; Tenn. Code Ann. § 2-10-117; Tenn.
Code Ann. § 2-10-107; Tenn. Code Ann. § 2-10-105; Tenn. Code Ann. § 2-10-106;
Tenn. Code Ann. § 2-10-131; Tenn. Code Ann. § 2-10-203; Tenn. Code Ann. § 2-
10-112; and Tenn. Code Ann. § 8-50-502.

The Senate version of this bill passed the Senate on April 14, 2022. Its
companion bill in the House, HB 1201, has been recommended for passage and
referred to the Finance, Ways, and Means Committee for further study. The
question presented is whether this proposed legislation is unconstitutional, and
whether it is an unreasonable government restraint on the exercise of free speech.

Opinion

Yes. The statute, as presently phrased, poses an impermissible infringement

on the constitutionally protected right of free speech rights as guaranteed under the
First Amendment of the United States Constitution.

ANALYSIS

In 1980, the Tennessee General Assembly enacted Tenn. Code Ann. § 2-

10-110, et seq., which creates a “Class 1” misdemeanor offense for the late filing
of any report or statement required by the Registry of Election Finance and
providing for civil penalties in the amount of twenty-five dollars per day and a
maximum of seven hundred and fifty dollars.

The proposed amendment constitutes a major overhaul of these statutes

governing disclosure and reporting requirements for individuals and specifically,
501(c)(4) organizations, requiring that they register as political action committees
(“PACs”), by imposing a $25,000 civil penalty for non-compliance with these
enhanced reporting requirements. For example, the first section of SB 1005, would
amend Tenn. Code Ann. § 2-10-110, by providing as follows:

SECTION 1.

(g) The registry shall not accept a settlement in which the aggregate
amount of assessed civil penalties exceeds twenty-five thousand dollars
($25,000) unless the settlement proposal is considered at either a regular
meeting or, notwithstanding § 2-10- 203(f), a special meeting called by
the chair in which at least twenty-four (24) hours' notice is given to each
member of the registry and each party seeking a settlement proposal. If
a special meeting is called pursuant to this subsection (g), an agenda for
the meeting must be placed on the registry's website at least twenty-four
(24) hours prior to the meeting. The agenda must include the style of any
matter to be considered, and the special meeting must be limited to
consideration of only the matters listed on the agenda.

The amendment also eliminates the $100 thresh hold of any contribution as
a condition of the reporting requirement, and would provide:

SECTION 7. Tennessee Code Annotated, Section 2-10-107(a)(2)(B),

is amended by deleting the language "including the full name and address
of each person to whom a total amount of more than one hundred dollars
($100) was paid during the period for which the statement is submitted"
and substituting "including the full name and address of each person to
whom an expenditure was paid during the period for which the statement
is submitted"; and is further amended by deleting the last sentence of the
subdivision and substituting instead the following: The statement must
list the expenditures by category and amount.

Of particular concern for 501(c)(4) organizations, HB 1201 contains the following

provision and reporting requirement:

SECTION 30. Tennessee Code Annotated, Section 2-10-132, is amended

by designating the existing language as subsection (a) and adding the following as
a new subsection (b):
(b) Notwithstanding another law to the contrary, an organization
that is tax exempt under United States Internal Revenue Service Code §

2
 501(c)(4) (26 U.S.C. § 501(c)(4)) is deemed to be a political campaign
committee for purposes of reporting expenditures in accordance with § 2-
10-105(c)(1) and (h) and for filing an appointment of treasurer form if:

(1) The organization expends an aggregate total of at least five

thousand dollars ($5,000) in organizational funds, moneys, or credits for
communications that expressly contain the name or visually depict the
likeness of a state or local candidate in a primary or general election; and

(2) Such expenditures or communications occur within sixty (60)

calendar days immediately preceding a primary or general election in which
the named or visually depicted candidate appears on the ballot.

As worded, this portion of the amendment directly implicates the free

speech rights of 501(c)(4) organizations and imposes potential civil penalties if
those in leadership positions within these organizations utter or mention a candidate
for political office within sixty (60) days of an election.

The proponents of these amendments claim that there is no violation of free

speech rights presented because the alleged focus of the amendments is
expenditures made on behalf of a political campaign, as contrasted to “contributions”
to the campaign. In addition, they contend that this statutory scheme does not
burden the free speech rights of a 501(c)(4) organization by merely requiring it to
register as a PAC when the organization refers or mentions the name of a candidate
for office sixty (60) days prior to a scheduled election.

To the extent these amendments require compliance with Tenn. Code Ann. § 2-
10-105(h), a statute dealing exclusively with the reporting of campaign
contributions, they have the pronounced effect of chilling political speech, speech
that is central to the meaning and purpose of the First Amendment.

Tenn. Code Ann. § 2-10-105. Statements of Contributions and

Expenditures; filing; reports, records.

Subsection (h) of this statute, provides as follows:

(h)
(1) During the period beginning at twelve o'clock (12:00) midnight of
the tenth day prior to a primary, general, runoff or special election or a
referendum and extending through twelve o'clock (12:00) midnight of such
election or referendum day, each candidate or political campaign
committee shall, by telegram, facsimile machine, hand delivery or
overnight mail delivery, file a report with the registry of election finance
or the county election commission, whichever is required by subsections
(a) and (b), of:

3
 (a) The full name and address of each person from whom the
candidate or committee has received and accepted a contribution, loan
or transfer of funds during such period and the date of the receipt of
each contribution in excess of the following amounts: a committee
participating in the election of a candidate for any state public office,
five thousand dollars ($5,000); or, a committee participating in the
election of a candidate for any local public office, two thousand five
hundred dollars ($2,500). If the committee is participating in the
election of candidates for offices with different reporting amounts, the
amount shall be the lowest for any candidate in whose election the
committee is participating or in which any committee is participating
to which it makes or from which it receives a transfer of funds; and

(b) Such report shall include the amount and date of each such
contribution or loan reported, and a brief description and valuation of
each in-kind contribution. If a loan is reported, the report shall contain
the name and address of the lender, of the recipient of the proceeds of
the loan, and of any person who makes any type of security agreement
binding such person or such person's property, directly or indirectly,
for the repayment of all or any part of the loan.

The First Amendment mandates that “Congress shall make no law ... abridging
the freedom of speech.” In Buckley v. Valeo, 424 U.S. 1, 96 S.Ct. 612, 46 L.Ed.2d
659 (1976), the Supreme Court held that, although contribution limits do encroach
upon First Amendment interests, they do not encroach upon First Amendment
interests to as great a degree as expenditure limits. In Buckley, the Supreme Court
first delineated the differing treatments afforded contribution and expenditure
limits. In that case, the Court struck down limits on an individual's expenditures for
political advocacy, but upheld limits on contributions to political candidates and
campaigns. In making the distinction, the Court emphasized that in “contrast with
a limitation upon expenditures for political expression, a limitation upon the
amount that any one person or group may contribute to a candidate or political
committee entails only a marginal restriction upon the contributor's ability to
engage in free communication.” Id. at 20–21, 96 S.Ct. 612. However, contribution
limits still do implicate fundamental First Amendment interests. Id. at 23, 96 S.Ct.
612.

Citizens United v. Federal Election Com'n, 558 U.S. 310 (U.S. 2010) involved
a nonprofit corporation that in January 2008 produced a film that was highly critical
of then-Senator Hillary Clinton, a candidate in the Democratic Party's 2008
Presidential primary elections. The film was, “in essence, ... a feature-length
negative advertisement that urges viewers to vote against Senator Clinton for
President.” Citizens United, 130 S.Ct. at 890. As such, the film was subject to the
restrictions of 2 U.S.C. § 441b. That provision made it unlawful for any corporation
or union to use general treasury funds to make independent expenditures as defined

4
by 2 U.S.C. § 431(17) or expenditures for speech defined as “electioneering
communications,” which are certain types of political ads aired shortly before an
election or primary, 2 U.S.C. § 434(f)(3). The Supreme Court declared this
expenditure ban unconstitutional, holding that corporations may not be prohibited
from spending money for express political advocacy when those expenditures are
independent from candidates and uncoordinated with their campaigns. 130 S.Ct. at
913.

The Code of Federal Regulations, §1.501(c)(4), states: “A civic league or

organizations may be exempt as an organization described in section 501(c)(4) if:
it is not organized or operated for profit; and it is operated exclusively for the
promotion of social welfare.”

Under Tennessee Law “political campaign committee” is defined as:

(A) Any corporation or any other organization making expenditures, except as

provided in subdivision (4) to support or oppose a measure; or

(C) Any committee, club, association or other group of persons which receives
contributions or makes expenditures to support or oppose any candidate for public
office or measure during a calendar year in an aggregate amount exceeding one
thousand dollars ($1,000)

Tenn. Code Ann. §2-10-102(12).

Currently, Tenn. Code Ann. §2-10-132, which governs PACs provides:

Notwithstanding any law to the contrary, a corporation that uses

corporate funds, moneys or credits for communications expressly
advocating the election or defeat of a clearly identified candidate
which funds, moneys or credits are not used with the cooperation or
with the prior consent of, or in consultation with, or at the request of,
or suggestion of, a candidate or any agent or authorized committee
of the candidate shall be considered a political campaign committee
for purposes of reporting such expenditures. The corporation shall be
required to file reports required by §2-10-105(c)(1) and an
appointment of treasurer form.

The Tennessee Supreme court, interpreting the constitutionality of

disclosure requirements in the context of a referendum campaign, noted “the Act
[the disclosure requirement] does not apply to financing of generalized discussion
of public issues and is triggered only when a group is financing election outcome
specific advocacy in a particular campaign.” Bemis Pentecostal Church v. State,
731 S.W.2d 897, 905 (Tenn. 1987), appeal dismissed, 485 U.S. 930, 108 S.Ct.
1102(1988), reh’g denied, 485 U.S. 1029, 108 S.Ct 1587 (1988) (emphasis added).
The Court noted that this distinction is constitutionally important under Buckley v.

5
Valeo, 424 U.S. 1, 96 S.Ct. 612 (1976), now modified by Citizens United,
established a distinction between “issue advocacy” and “express advocacy.” While
disclosure requirements may constitutionally apply to a group engaged in “express
advocacy,” they may not constitutionally apply to a group engaged only in “issue
advocacy.” 96 S.Ct. at 646-47, 662. In Bemis, the Tennessee Supreme court
addressed the constitutionality of apply disclosure requirements to a church
organization that had broadcast an advertisement opposition adoption of a local
liquor-by-the-drink measure. The Court stated:

The Supreme Court in Tennesseans for Sensible Election L. v. Tennessee

Bureau of Ethics & Campaign Fin., 2019 WL 6770481 (Tenn. Ct. App. 2019);
explained that political campaign committees are required to file disclosure reports
detailing their contributions to candidates pursuant to Tenn. Code Ann. §2-10-
105(c) and (d). These disclosure reports are due at various intervals, and one
particular pre-election report is due seven days before an election. Tenn. Code Ann.
§ 2-10-105(c)(1). The pre-election report must detail contributions “through the
tenth day” before the election. Id.

Unlike the monetary limits on contributions and expenditures, the Court

explained, “disclosure requirements impose no ceiling on campaign-related
activities.” Buckley v. Valeo, 424 U.S. at 64. (1964). Still, the Court recognized that
“compelled disclosure, in itself, can seriously infringe on privacy of association and
belief guaranteed by the First Amendment.” Id. Such encroachments on First
Amendment rights “cannot be justified by a mere showing of some legitimate
governmental interest” and “must survive exacting scrutiny.” Id. There must be a
“relevant correlation” or “substantial relation” between the governmental interest
asserted and the information required to be disclosed. Id. The Court found that the
Act's disclosure requirements survived that level of scrutiny. Disclosure
requirements provide the electorate with information as to where campaign money
comes from and how it is spent; they deter corruption and its appearance by
exposing large contributions and expenditures to the light of publicity; and they
provide data necessary to detect violations of contribution limitations. Id. at 66-68;
Tennesseans for Sensible Election L. v. Tennessee Bureau of Ethics & Campaign
Fin., 2019 WL 6770481, at *15 (Tenn. Ct. App2019).

As Buckley demonstrates, in the campaign finance context, the “degree of

scrutiny turns on the nature of the activity regulated.” Fed. Election Comm'n v.
Beaumont, 539 U.S. 146, 162 (2003). More specifically, “the level of scrutiny is
based on the importance of the ‘political activity at issue’ to effective speech or
political association.” Id. at 161.

Typically, disclosure and organizational requirements receive a further

lessened level of scrutiny than do contributions. To defend disclosure and
organizational requirements, the government must only show a “sufficiently
important governmental interest that bears a substantial relation” to the requirement.
SpeechNow.org v. FEC, 599 F.3d 686, 696 (D.C. Cir. 2010) (en banc) (internal

6
quotation marks omitted); Catholic Leadership Coal. of Texas v. Reisman, 764 F.3d
409, 424-25 (5th Cir. 2014).

However, “[w]hen the Government restricts speech, the Government bears

the burden of proving the constitutionality of its actions.” McCutcheon v. Federal
Election Com'n, 134 S.Ct. 1434, 1452, 572 U.S. 185, 210 (U.S. 2014) “The
quantum of empirical evidence needed to satisfy heightened judicial scrutiny of
legislative judgments will vary up or down with the novelty and plausibility of the
justification raised.” Nixon v. Shrink Missouri Gov't PAC, 528 U.S. 377, 391 (2000).
The Supreme Court has “never accepted mere conjecture as adequate to carry a
First Amendment burden.” Id. at 392. However, the Supreme Court has not
specifically provided “further definition of whatever the State's evidentiary
obligation may be.” Id. at 393; Tennesseans for Sensible Election L. v. Tennessee
Bureau of Ethics & Campaign Fin., 2019 WL 6770481, at *15–16 (Tenn. Ct. App.
2019).

“Like individuals, PACs enjoy the right to freedom of speech and

association.” Free & Fair Election Fund v. Missouri Ethics Comm'n, 903 F.3d 759,
763 (8th Cir. 2018) cert. denied 139 S. Ct. 1601 (2019); Tennesseans for Sensible
Election L. v. Tennessee Bureau of Ethics & Campaign Fin., 2019 WL 6770481, at
*16 (Tenn. Ct. App. 2019). Disclosure requirements “ ‘do not prevent anyone from
speaking.’ ” Id. (quoting Iowa Right to Life Comm., Inc. v. Tooker, 717 F.3d 576,
589-90 (8th Cir. 2013)); Tennesseans for Sensible Election L., at *17 (Tenn. Ct.
App.2019). The fact that a statute may arguably encourage compliance with
disclosure laws or prevent circumvention of disclosure laws “does not make it a
disclosure requirement.” Id.

In the years since Buckley, the United States Supreme Court has repeatedly
held that “Congress may regulate campaign contributions to protect against
corruption or the appearance of corruption.” McCutcheon, 572 U.S. at 191. At the
same time, however, the Court has “consistently rejected attempts to suppress
campaign speech based on other legislative objectives.” Id. at 207. For instance, “it
is not an acceptable governmental objective to ‘level the playing field,’ or to ‘level
electoral opportunities,’ or to ‘equaliz[e] the financial resources of candidates.’” Id.
“Congress may not regulate contributions simply to reduce the amount of money
in politics, or to restrict the political participation of some in order to enhance the
relative influence of others.” Id. at 191. In fact, the Court “has identified only one
legitimate governmental interest for restricting campaign finances: preventing
corruption or the appearance of corruption.” Id. at 206. Thus, the Court has “spelled
out how to draw the constitutional line between the permissible goal of avoiding
corruption in the political process and the impermissible desire simply to limit
political speech.” Id. at 192. Still, “the anticorruption rationale itself ‘is not
boundless.’” Catholic Leadership Coal. of Texas, 764 F.3d at 425 (quoting Emily's
List v. FEC, 581 F.3d 1, 6 (D.C. Cir. 2009)). A campaign finance regulation must
target a specific type of corruption – what the Court has called “quid pro quo”
corruption or its appearance. McCutcheon, 572 U.S. at 192. “Campaign finance

7
restrictions that pursue other objectives, [the Supreme Court has] explained,
impermissibly inject the Government into the debate over who should govern.” Id.;
Tennesseans for Sensible Election L. v. Tennessee Bureau of Ethics & Campaign
Fin., 2019 WL 6770481, at *17 (Tenn. Ct. App. 2019).

In summary, the “closely drawn” test requires the Court to consider

“whether the restriction is ‘closely drawn’ to match what [the Supreme Court has]
recognized as the ‘sufficiently important’ government interest in combating
political corruption.” Col. Republican, 533 U.S. at 456 (quoting Shrink Missouri,
528 U.S. at 387-88). The Supreme Court “do[es] not doubt the compelling nature
of the ‘collective’ interest in preventing corruption in the electoral process,” but it
permits Congress “to pursue that interest only so long as it does not unnecessarily
infringe an individual's right to freedom of speech.” McCutcheon, 572 U.S. at 206.

To governmentally condition a 501(c)(4) organization’s right of free speech,

on its registrations as a political action committee serves to undermine political free
speech by requiring that it submit to greater state regulation and oversight. Political
speech of the type regulated under SB 1005 and HB 1201is entitled to heightened
constitutional protection, and, courts have repeatedly held, rests on the highest rung
of the First Amendment.

CRAIN LAW GROUP, PLLC

Larry L. Crain
5214 Maryland Way, Suite 402
Brentwood, TN. 37027
Tel. 615-376-2600
Fax. 615-345-6009
Email: Larry@crainlaw.legal