U.S. Supreme Court Erases Bar to Funding Political Attack Ads

by Gary Beaver

If you think you have seen dirty political campaigns in the past, I opine that “you ain’t seen nothing yet.” On January 21, 2010, in the case of Citizens United v. Federal Election Commission (FEC), the U.S. Supreme Court changed the rules that restricted corporations (profit and non-profit) and unions from funding political ads. The change is likely to result in more money being spent on political advertising, which, in turn, is likely to result in more negative advertising.

Under § 203 of the Bipartisan Campaign Reform Act of 2002 (2 U.S.C. § 441b), corporations and unions were barred from using their general treasury funds to pay for an “electioneering communication” or speech that expressly advocates the election or defeat of a candidate, through any form of media. “Electioneering communications” included any broadcast that referred to a clearly identified candidate for federal office and was made within 30 days of a primary or 60 days of a general election. They could provide funds indirectly through political action groups (“PACs”) but funds into PACs had to come from donations from stockholders or employees of the corporation or members of the union.

The case involved efforts in the 2008 presidential campaign by Citizens United (a conservative non-profit) to distribute a movie entitled “Hillary: The Movie” more widely by offering it through a free video-on-demand channel called “Elections “08.” The 90-minute movie painted an unflattering picture of Hillary Clinton. Citizens United feared running afoul of 2 U.S.C. § 441b and sought declaratory and injunctive relief arguing that the law was unconstitutional as applied to the movie and ads promoting the movie. The District Court denied Citizens United relief and, instead, granted summary judgment to the FEC. The Supreme Court agreed that the movie and ads were “electioneering communications” but applied the First Amendment to invalidate 2 U.S.C. § 441b and hold that corporations and unions are free to spend as much as they want on such speech. Importantly, corporations and unions remain required to identify themselves as the sources of funding the advertisements and to include disclaimers in the ad, and remain barred from making direct contributions to the candidates. In making its holding, the Court overruled Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990), that political speech may be banned based on the speaker’s corporate identity.

The internet was immediately filled with the howls of many, mostly from the left and the public interest advocates, who fear that corporations will greatly outspend the unions and, thereby, influence voters to choose candidates who are business-friendly and not necessarily worker- and consumer-friendly. For example: Ralph Nader called for a constitutional amendment to prevent corporate campaign contributions (note: he also called for a similar restriction on union funds); Senator Leahy (D-Vt. and chair of the Senate Judiciary Committee) blasted the decision in a press release calling the decision a victory for Wall Street at the expense of Main Street; and, President Obama criticized the decision and announced that his administration would work with Congress to pass legislation to vitiate the holding. In contrast, conservative groups praised the decision (e.g., U.S. Chamber of Commerce, Cato Institute). Not surprisingly, the U.S. Supreme Court followed that same pattern in its 5-4 vote in the case with the more conservative judges in the majority. Justice Stevens was especially incensed by the decision and wrote a 90-page dissent.

Another criticism of the decision seen frequently on the internet is that foreign corporations, individuals, and governments can own corporations in the U.S. and use them as vehicles to influence American politics and government.

Obviously, many observers believe (or at least say) that this decision will profoundly affect future political races. We shall see. I am reminded of what happened in the 2008 senatorial campaign in North Carolina when Ms. Dole used an unseemly ad attacking the religious beliefs of Ms. Hagan. The backfire was heard round the country. Perhaps liberal and public interest observers are not giving the voters enough credit for being able to evaluate political speech and determine what constitutes valid positions and arguments and what is unfair or inaccurate criticism. If voters are inundated with heavy-handed advertising campaigns funded by corporations for one candidate or by unions for another, such advertising may have the opposite of its intended effect. American voters do not like to be told what to think, do not like bullying, and may react negatively to a candidate receiving too much support from a particular group, whether corporation or union. American voters are likely to find particularly repugnant political ads from corporations owned by non-Americans. The voters’ political sophistication and ability to look behind canned messages grows with each day the Internet exists. The difficulty remains in gleaning the truth from the many assertions on the Web.

U.S. Supreme Court allows Duke Energy and Catawba River Water Supply Project to intervene in South Carolina v. North Carolina

by Manton Grier, Jr.

This past Wednesday, the United States Supreme Court granted motions to intervene filed by Duke Energy and Catawba River Water Supply in South Carolina v. North Carolina, No. 138, an original action filed by South Carolina seeking an equitable apportionment of the Catawba River waters. The opinion was written by Justice Alito for a five-justice majority; the Chief Justice concurred in the judgment in part and dissented in part.

In intra-state disputes brought in the original jurisdiction of the Supreme Court, the Court demands a “compelling interest” before allowing a non-state party to intervene in what is otherwise a sovereign dispute between two states. The Court held, however, that “any equitable apportionment of the river will need to take into account the amount of water that Duke Energy needs to sustain its operations and provide electricity to the region, thus giving Duke Energy a strong interest in the outcome of this litigation.” As to Catawba River Water Supply Project, the Court held that it had unique interests because half of its customers are North Carolina residents and half South Carolina residents. The Project also relies on authority granted by both states to draw water from the Catawba River. The Court rejected the motion to intervene of the City of Charlotte, North Carolina, reasoning that its interest was not sufficiently unique that it could not be effectively represented by North Carolina.

The Chief Justice concurred in the denial of Charlotte's motion to intervene but dissented from the grant of intervention to Duke Energy and the CRWSP on the basis that the Court has never before granted intervention to a non-sovereign entity in an original action for equitable enforcement of water rights.

Fourth Circuit applies Iqbal to affirm dismissal of another complaint

By Gary Beaver

On December 29, 2009, in Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc., the Fourth Circuit again applied the heightened standard for adjudicating a Rule 12(b)(6) motion to dismiss set forth by the United States Supreme Court in Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). In Nemet, the defendant was a website that allowed consumers to comment on the quality of businesses, goods, and services. Plaintiff Nemet took offense to 20 of the comments posted on the website and sued Consumeraffairs.com for defamation and tortious interference with a business expectancy. Consumeraffairs.com countered that the complaint was barred by § 230 of the Communications Decency Act of 1996 (“CDA”), which protected interactive computer service providers liable for the publication of information created and developed by others.

Nemet asserted that the defendant was not protected by the CDA immunity because it was also an “information content provider.” The court reviewed the plaintiff’s complaint to decide whether the allegations plausibly showed that the defendant was an “information content provider.” Nemet alleged that Consumeraffairs.com was involved in creating or developing the posts in four ways: (1) through the structure and design of the website as found in Fair Housing Council v. Roommates.com, LLC, 521 F.3d 1157, 1174 (9th Cir. 2008); (2) by asking the consumer questions about the complaint; (3) by helping the consumer draft or revise the complaint; and (4) by drafting 8 of the 20 posts itself.

The Fourth Circuit distinguished the Roommates.com case by holding that Consumeraffairs.com had not encouraged illegal content and not required consumers to input illegal content. In Roommates.com, the court had adopted a definition of “development” that included “materially contributing” to a piece of posted information’s “alleged unlawfulness. 521 F.3d at 1167-68.

Next, the Court noted that asking questions of the consumer did nothing to “develop” or “create” the posts on the website so those allegations were insufficient. As to the third category, the court held that Nemet had “not pled what Consumeraffairs.com ostensibly revised or redrafted or how such affected the post,” i.e., the allegations were “threadbare and conclusory.” In addition, under Zeran v. America Online, Inc., 129 F.3d 327, (4th Cir. 1997), Nemet was required to, but did not, plead facts to show that alleged drafting or revision was more than the usual editing that website operator performs.

The Fourth Circuit found the last allegation – that Consumeraffairs.com had itself fabricated 8 of the 20 complaints – to be merely Nemet’s speculation because the sole basis for the allegation was that Nemet could not identify the author of those 8 posts. Nemet wanted to take discovery prior to a dismissal but the Fourth Circuit quoted Iqbal in holding that Rule 8 requires “more than conclusions” to “unlock the doors of discovery for a plaintiff.”

This case comes on the heels of the Fourth Circuit’s application, on December 3, 2009, of Iqbal’s heightened pleading standard to affirm dismissal of the complaint in Francis v. Giacomelli. These decisions should make it easier to obtain dismissals of speculative claims – at least in the federal courts of the Fourth Circuit.

There's no place like your principal place of business: 4th Circuit rules that an LLC is an "unincorporated association" under CAFA.

by Kirsten Small

Affirming the District of South Carolina (Matthew Perry, Senior District Judge), the Fourth Circuit ruled last week that a limited liability company should be treated as an "unincorporated association" for purposes of the minimal diversity provisions of the Class Action Fairness Act. Ferrell v. Express Check Advance of SC

Express Check is an LLC organized under the law of Tennessee; its sole member is QC Financial Services, Inc., a Missouri corporation with its principal place of business in Kansas. QC Financial is owned, in turn, by QC holdings, a Kansas corporation with its principal place of business in Kansas. With the exception of four officers (who are in Kansas), all of Express Check's employees are in South Carolina.

Ferrell, a South Carolina citizen, brought a class action in South Carolina state court alleging that Express Check's "payday loan" business violated SC consumer protection statutes. Express Check removed the action to federal court, invoking the "minimal diversity" standard of CAFA, 28 U.S.C. § 1332(d)(2)(A). Under this provision, diversity jurisdiction is available in a class action when the amount in controversy exceeds $5 million and "any member of a class of plaintiffs is a citizen of a State different from any defendant." For purposes of this provision, CAFA provides that an "unincorporated association" is a citizen of the state in which it is organized and the state in which it has its principal place of business, see 28 U.S.C. § 1332(d)(10).

Express Check asserted that the term "unincorporated association" referred only to business entities lacking a distinct corporate identity under state law. Because the law of Tennessee gave Express Check a corporate form (as an LLC), the company argued that its citizenship--under traditional rules applicable to non-corporate entities--was that of its member, i.e., Tennessee and Kansas, rendering jurisdiction in federal court proper under the minimal diversity standard. The district court disagreed and remanded, holding that § 1332(d)(10) applied to all non-corporate business forms regardless of their status under state law.

In affirming the district court, Judge Niemeyer (joined by Chief Judge Traxler and Judge Agee) traced the history of § 1332(d)(10) and concluded that Congress' purpose in enacting the provision was "to respond to the categorical distinction" between corporations (treated as persons for purposes of diversity jurisdiction) and unincorporated associations (i.e., every other business form), created by the Supreme Court. There was not, as Express Check contended, a third category for non-corporate business forms recognized by state law.

Having concluded that Express Check was a unincorporated association under CAFA, the Court turned to the question of Express Check's principal place of business, argued by Ferrell to be South Carolina (using the "place of operations" test) and by Express Check to be Kansas (using the "nerve center" test). The panel stated that "the nature of the business determines which test is the more appropriate to apply"; when a company has physical operations the "place of operations" test is more appropriate, while the "nerve center" test better suits a company without a specific geographic nexus, such as an investment company. In light of Express Check's business as a payday lender with numerous stores in South Carolina, the court concluded that the "place of operations" test was the more appropriate one and that, under it, Express Check was a citizen of South Carolina. The court therefore affirmed the district court's order of remand.

On the Bench: Kaye Hearn, South Carolina Supreme Court

"On the Bench" is a periodic feature of On the Docket in which we profile an appellate judge from the Carolinas or the Fourth Circuit.

by Kirsten Small


Kaye Hearn was sworn in today as a Justice of the Supreme Court of South Carolina, replacing retiring Justice John Waller. She comes to the Supreme Court bench with a wealth of judicial experience, having served on the South Carolina Court of Appeals, ten of those years as the court's Chief Judge. Prior to that, she was a family court judge for the 15th Judicial Circuit (Georgetown and Horry Counties). Justice Hearn is the second woman on the five-member Supreme Court. She joins Chief Justice Jean Toal and Associate Justices Costa Pleicones, Donald Beattie, and John Kittredge.

Judge Hearn graduated cum laude from Bethany College in 1972 and earned her J.D., cum laude, from the University of South Carolina School of Law in 1977. In 1998, she earned an L.L.M. degree from the University of Virginia.

My first appearance at the South Carolina Court of Appeals was before a panel that included Judge Hearn. I found her to be well prepared, insightful, and fair. I am sure she will be an asset to the Court.

No need to kiss and tell: Second Circuit says defendant not required to tell probation office of "significant romantic relationship"

By Kirsten Small

Citing Mozart, Jane Austen, and Rob Reiner, the Second Circuit on Thursday overturned a sentence that included a condition of supervised release requiring the defendant, upon entry into a “significant romantic relationship,” to inform the probation office and to tell the other party about his conviction for possession of child pornography. United States v. Reeves, No. 08-2966 (2d Cir. Jan. 7, 2010).

Applying a “relaxed plain error” standard of review because Reeves failed to object to the condition but had not received prior notice of it, the court ruled that the condition was both unconstitutionally vague and not reasonably related to the purposes of sentencing.

A district court has discretion to impose additional conditions of supervised release provided those conditions are “reasonably related” to the purposes of sentencing and involve no greater deprivation of liberty than reasonably necessary. Additionally, the Due Process Clause requires that conditions of supervised release be “sufficiently clear to give the person of ordinary intelligence a reasonable opportunity to know what is prohibited.”

The Second Circuit determined that the condition failed on both counts. First, the Court ruled that the condition was impermissibly vague because “people of common intelligence (or, for that matter, of high intelligence) would find it impossible to agree on the proper application of a release condition triggered by entry into a ‘significant romantic relationship,’” noting the varying definitions of such relationships offered by The Marriage of Figaro, Mansfield Park,* and When Harry Met Sally.

The Second Circuit further held, albeit in a less entertaining manner, that the condition was not reasonably related to the purposes of sentencing, in that there was no indication in the record that Reeves was a threat to any romantic partner or a predator towards children, and the condition did not serve a rehabilitative purpose.

*While I would not go so far as to suggest that the parties seek rehearing on this point, my personal view is that Emma would have been a better choice from the Jane Austen oeuvre. See also, e.g., Clueless (Paramount Pictures 1995).

Mohawk Industries-U.S. Supreme Court prohibits interlocutory appeals of discovery orders piercing attorney-client privilege

By Gary Beaver

On December 8, 2009, in Mohawk Industries, Inc. v. Carpenter, the U.S. Supreme Court (in Justice Sotomayor's first opinion) restricted the methods by which an appellant could have the federal appellate courts immediately review a discovery order through which a federal district court overrules the appellant's claim of attorney-client privilege as a basis for withholding discovery information and orders the production of such information. The appeal in Mohawk was taken under the collateral order doctrine of 28 U.S.C. Section 1291 -- an avenue that is now unavailable for interlocutory appeal of such prejudgment discovery orders. In essence, the Mohawk Court held that discovery orders piercing the attorney-client privilege would not imperil "a substantial public interest" or "some particular value of a high order" -- the usual tests for allowing interlocutory appeal of a collateral order. The Court noted that there are other methods of making an interlocutory appeal of a discovery order including: (1) obtaining the district court's certification and appellate court's acceptance of a "controlling question of law" the prompt resolution of which "may materially advance the ultimate termination of the litigation;" (2)petitioning for a writ of mandamus; (3) defying the order and being held in contempt as contempt orders are immediately appealable if the level of a criminal punishment; and (4) defying the order and having your pleadings or defenses stricken. Big dice to roll in using those last two methods.

It is not clear what, if any, impact the ruling will have on state courts as the Mohawk appeal was taken under a federal statute. However, the logic of the Court likely could be applied by state appellate courts. The question of "would be applied" is more difficult to answer. In North Carolina, the Court of Appeals has not shown any reluctance to dismiss appeals of decisions on discovery issues because they are interlocutory and do not deprive an appellant of a substantial right that would be lost unless immediately reviewed. However, there is a line of precedents holding that interlocutory discovery orders like that in Mohawk requiring a party to produce to the opposing party material purportedly protected by attorney-client privilege and/or attorney work product immunity are immediately appealable. The N.C. Court of Appeals rarely dismisses such an appeal. It dismissed such an appeal in Stevenson v. Long, 558 S.E.2d 215 (2002) but only because it concerned refusing to answer deposition questions and the appellant failed to provide the questions to the lower court for review and a decision on the application of the claimed privilege, i.e., the appellant did not carry its burden of showing the privilege applied. I would not expect the NC appellate courts to reject that line of cases and follow the Mohawk Court's lead any time soon.