Federal Grantee Political Activity and Lobbying Placed Under the Microscope

While existing laws have long restricted the use of appropriated funds for lobbying, political campaign activity, or other partisan purposes, the presidential memorandum underscores the Administration’s focus on heightened enforcement action and raises the specter of increased attention and focus on grantees that engage in lobbying and perform politically controversial work, even where the grantee’s activity may not actually run afoul of the law. This alert highlights the operative rules, potential consequences of noncompliance, and practical compliance steps.

Restrictions on the Use of Federal Funds

Federal law generally criminalizes the use of Congressionally appropriated dollars to pay for any activity “intended or designed to influence” members of Congress or other government officials on legislation or appropriations.[1] Under what is more commonly known as the Byrd Anti-Lobbying Amendment, federal law also prohibits recipients of federal contracts, grants, cooperative agreements, or loans from using appropriated federal funds to pay any person for influencing or attempting to influence a government official in connection with obtaining a federal award and prescribes for civil penalties for failures to comply.[2] In addition, Congress historically includes anti-lobbying provisions in annual appropriations acts that restrict the use of federal funds for activities designed to support or defeat legislation or regulations at both federal and state levels.

In furtherance of the above restrictions, the Office of Management and Budget’s Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, which generally govern the administration of grants, cooperative agreements, and financial assistance awards, expressly list “lobbying” as an unallowable cost that may not be charged, directly or indirectly, to a federal award.[3] The same prohibition flows down to contractors and subcontractors of a federal grantee.[4] Any agreement funded in whole or in part with federal funds must include a clause requiring the contractor to refrain from expending appropriated funds on lobbying activities, and each contracting tier must certify that it “will not and has not used Federal appropriated funds to pay any person or organization for influencing or attempting to influence an officer or employee of any agency, a member of Congress, officer or employee of Congress, or an employee of a member of Congress in connection with obtaining any Federal contract, grant or any other award covered by 31 U.S.C. 1352.”[5] Each contracting tier must also disclose any lobbying with non-federal funds that takes place in connection with obtaining any federal award.[6] Disclosure of lobbying against the Administration’s favored causes, using either appropriated or non-appropriated funds, could reasonably be expected to result in increased attention and scrutiny of federal grant awards under the current Administration.

With respect to federal contracts, FAR 52.203-12, Limitation on Payments to Influence Certain Federal Transactions, and its companion clause, FAR 52.203-11, Certification and Disclosure Regarding Payments to Influence Certain Federal Transactions, are required to be included in every contract award in excess of $150,000.[7] Per the Byrd Amendment restrictions noted above, FAR 52.203-12 prohibits contractors from using appropriated funds to pay any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with the award of this contractor the extension, continuation, renewal, amendment, or modification of the awarded contract, while noting that “appropriated funds” does not include profit or fee received from a covered contract.[8] Under FAR 52.203-11, contractors must furnish certifications and disclosures similar to those required of grantees.

While the above restrictions apply to an organization’s use of federal appropriated funds, the “freedom of speech” clause of the First Amendment to the US Constitution generally protects a private organization’s right to lobby or engage in political speech with non-federal funds.[9] The federal government may not otherwise restrict a private organization’s speech financed with private dollars.[10] To the extent a contract or grant has been pretextually terminated due to the contractor or grantee’s expenditure of non-appropriated funds, the federal award recipient may have a colorable right to appeal the termination and/or have it overturned on First Amendment grounds. While the federal government’s actions are generally entitled to deference, such actions may be overturned by a court where they are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.[11] Following the US Supreme Court’s decision last year in Loper Bright Enterprises v. Raimondo,[12] federal courts have greater authority to overturn an agency’s decision where it runs counter to a federal statute or the US Constitution.

Although the First Amendment generally protects private organizations’ right to lobby and engage in political speech with non-federal funds, tax-exempt status is a matter of legislative grace, and Congress may attach conditions that limit the lobbying and political activities of tax-exempt organizations as a condition of their tax-exempt status.[13]

Restrictions on Tax-Exempt Organizations Under Federal Tax Law

The federal tax law restricts the political campaign activities of most tax-exempt organizations. For example, Section 501(c)(3) organizations are subject to an absolute prohibition on participation or intervention in political campaign activities. 501(c)(3) organizations that violate this ban are subject to the revocation of their tax-exempt status and the imposition of excise tax penalties on both the organization itself and organization managers who approve expenditures used for impermissible political purposes. Prohibited political campaign intervention occurs when a tax-exempt organization participates in, or intervenes in, a candidate’s campaign for public office.[14]

Section 501(c)(4) and 501(c)(6) organizations have more latitude to engage in political campaign activities than Section 501(c)(3) organizations. Section 501(c)(4) organizations may engage in limited political campaign activities, provided political activities are not the organization’s primary activity. Section 501(c)(4) organizations are not subject to an absolute ban on campaign intervention, but instead are permitted to engage in some limited political activities provided they remain primarily engaged in social welfare activities. 501(c)(6) organizations are subject to the same less stringent rules regarding political campaign activities as Section 501(c)(4) organizations and may engage in some political activities on a limited basis, provided such political activities are not the organization’s primary activity.

The federal tax law also imposes restrictions on the lobbying activities of certain tax-exempt organizations.[15] Lobbying for this purpose generally includes any attempt to influence legislation by contacting members of a legislative body or others involved in the legislative process to propose, support, or oppose legislation, or by encouraging the public to do the same.[16] Section 501(c)(3) public charities may only engage in limited amounts of lobbying, and Section 501(c)(3) private foundations are completely prohibited from engaging in lobbying. Certain other tax-exempt organizations (e.g., 501(c)(4) and 501(c)(6) organizations) may lobby without limit, provided lobbying furthers their exempt purpose.

Regardless of tax status, no exempt organization may charge lobbying or political campaign costs to a federal grant.

Government Auditing and Enforcement Tools for Federal Grants

Understanding the legal restrictions outlined above, the federal government has numerous tools at its disposal to review an award recipient’s actions and enforce federal law to the extent of the agency’s authority. The following auditing and enforcement tools are available to the Administration:

• The US Attorney General, Agency Inspectors General, and US Government Accountability Office have broad authority to examine financial records, interview personnel, and review documentation to verify compliance with federal grant restrictions.
• Federal agencies may impose repayment of disallowed costs, withhold future funding, or terminate awards for default.
• Knowingly charging lobbying costs to a federal grant, or certifying compliance when funds have in fact been misused, can constitute a false claim under the False Claims Act,[17]exposing entities to treble damages and civil penalties potentially exceeding $20,000 per violation.
• Contractors and federal award recipients could also potentially face suspension and/or debarment for knowingly violating lobbying restrictions.

Compliance Checklist

In order to mitigate risk and position your organization for the best chances of success in defending against adverse agency action, consider one or more of the following measures.

• Train personnel, especially government relations, marketing, and finance staff, on the scope of prohibited lobbying activities and the documentation required to establish proper cost segregation.
• Conduct a risk-based internal review of current lobbying, public relations, and advocacy projects to verify the funding source and adjust charging practices as needed.
• Prepare in advance for potential audits by ensuring that invoices, time records, and subcontractor certifications are orderly and readily retrievable.
• Identify every source of federal funding and confirm the presence of required anti-lobbying clauses in downstream contracts to verify compliance with federal grant restrictions.
• Consider your entity’s risk or benefit of continuing lobbying or political activities using non-appropriated funds that are inconsistent with the Administration’s priorities given the increased scrutiny and attention such activities might receive. While such activities may constitute legally permissible and protected forms of speech, not every entity has the ability or resources to engage in an ensuing legal fight arising therefrom. In some cases, cancellation of funding may prove an existential threat for a struggling entity.
• Coordinate with industry and trade associations and other organizations of which the organization is a member or participant as to whether the association may be better placed to argue the merits of any challenge to the Administration’s actions.

By reaffirming existing statutory and regulatory restrictions and reminding agencies of their audit and enforcement arsenal, the presidential memorandum elevates the compliance stakes for federal grantees and contractors. Robust internal controls, clear cost segregation, and vigilant monitoring remain the best defense against costly enforcement actions and reputational harm.

ArentFox Schiff’s Nonprofits and Associations and Government Contracts practices are closely monitoring the Trump Administration’s executive orders and presidential memoranda. For additional guidance on how activities should be reported or funded, please contact your AFS attorney or any of the authors of this alert.