Corporate Inversions and the Unbundling Of Regulatory Competition

Several prominent public corporations have recently embraced a noteworthy (and newsworthy) type of transaction known as a “tax inversion.” In a typical inversion, a U.S. multinational corporation (“MNC”) merges with a foreign company. The entity that ultimately emerges from this transactional cocoon is invariably incorporated abroad, yet typically remains listed in U.S. securities markets under the erstwhile domestic issuer’s name. When structured to satisfy applicable tax requirements, corporate inversions permit domestic MNCs eventually to replace U.S. with foreign tax treatment of their extraterritorial earnings—ostensibly at far lower effective rates.

Most regulators and politicians have reacted to the inversion invasion with alarm and indignation, no doubt fearing the trend is but a harbinger of an immense offshore exodus by U.S. multinationals. This reaction, in turn, has catalyzed myriad calls for tax reform from a variety of quarters, ranging from the targeted tightening of tax eligibility criteria, to moving the United States to a territorial tax system, to declaring (yet another) tax “holiday” for corporate repatriations, to reducing significantly (if not entirely) American corporate tax rates. Like many debates in tax policy, there remains little consensus about what to do (or whether to do anything at all).

This Article analyzes the current inversion wave (and reactions to it) from both practical and theoretical perspectives. From a practical vantage point, I will argue that while the inversion invasion is certainly a cause for concern, aspiring inverters already face several constraints that may decelerate the trend naturally, without significant regulatory intervention. For example, inversions are but one of several alternative tax avoidance strategies available to MNCs—strategies whose relative merits differ widely by firm and by industry. Inversions, moreover, are invariably dilutive and usually taxable to the inverter’s U.S. shareholders, auguring potential resistance to the deals. They virtually require “strategic” (as opposed to financial) mergers between comparably sized companies, making for increasingly slim pickings when searching for a dancing partner, and a danger of overpaying simply to meet the comparable size requirements. They involve regulatory risk from competition authorities, foreign-direct-investment boards and takeover panels (not to mention from tax regulators themselves). They frequently provide only partial relief from extraterritorial application of U.S. taxes, especially for well-established U.S. multinationals. And finally, tax inversions can introduce material downstream legal risk, since they move the locus of corporate internal affairs out of conventional jurisprudential terrain and into the domain of a foreign jurisdiction whose law is—by comparison—recondite and unfamiliar.

Moving beyond these practical considerations, I will also consider the inversion wave through a theoretical lens, drawing insights from regulatory competition theories in public finance. Specifically, I will advance the notion that regulatory competition among jurisdictions can play out not only through tax policy, but also simultaneously through other nontax channels, such as corporate law and governance rules. Applying this framework, I will show that a strong domestic corporate governance regime can provide a plausible buffer against a tax-induced incorporation exodus: Although U.S. multinationals clearly dislike high tax rates, they have traditionally valued the strength of U.S. corporate law and governance, particularly within Delaware. And, since U.S. tax policy explicitly ties tax residence to the state of incorporation, domestic tax authorities have enjoyed market power in keeping rates comparatively high while attracting and retaining domestic incorporations. In other words, the United States has for a long time remained somewhat insulated from ruinous tax competition because tax residency was “bundled” with corporate law in a unitary regulatory package. Viewed from this perspective, the most radical tax reform proposals currently being championed seem overzealous at best, and may even prove counterproductive.

Nonetheless, the recent pace of inversion activity plausibly suggests that America’s traditional market power in regulatory competition has begun to slip. Although there are likely many contributing causes for this slippage, I will argue that a seemingly inconspicuous institution has played an under-acknowledged role: securities law. During the last fifteen years, a series of significant regulatory reforms—such as the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010—have suffused U.S. securities regulations with an unprecedented array of corporate governance mandates, ranging from board independence requirements to compensation reforms to internal financial controls to proxy access. Historically, state law served as the dominant (if not sole) arbiter of corporate governance. Federal law’s creeping displacement of state law has consequently “unbundled” domestic tax law from domestic corporate governance regulation, since most U.S. securities regulations apply to all listed companies, irrespective of their tax residence. Hence, regardless of whether recent securities law reforms have been prudent or misguided, I argue that federalization has effectively (if unwittingly) undermined the United States’ ability to withstand tax competition from abroad.

If securities market regulation helped dig this hole, then might it also provide the needed tools to refill it? My analysis will suggest that it does, and that we should consider altering the regulatory landscape in two possible ways: either (1) the United States should begin to tax listed companies (regardless of residence) for their consumption of federal corporate governance law, granting allowances for U.S. corporate income taxes paid; and/or (2) federal law should cede corporate governance back to the states by rolling back the federal governance mandates of the last fifteen years. Which of these alternatives (or combination of them) is most attractive turns on several factors, including practical implementation constraints, the value (if any) created by recent federal governance mandates, and the difficulty of coordinating governmental actors at the state and federal level.

Moreover, to the extent my unbundling hypothesis is valid, it suggests that tax reform responses to “inversionitis” must also anticipate downstream implications for corporate governance. Although some modest tax reforms may be warranted (for example, measured reductions in headline tax rates), the most radical tax reform proposals currently on the table (such as moving to a territorial system, or eliminating U.S. corporate income taxes altogether) are unlikely to help, and could well prove deleterious: Not only do such radical reforms seem likely to cost the U.S. Treasury sizable future tax revenues, but they respond to the unbundling phenomenon not by rebundling tax and governance, but rather by severing the link completely. A plausible long-term effect of such radical reform strategies is that the variety and quality of corporate governance regimes worldwide will atrophy—an outcome that is as undesirable for the global economy as it is for the United States.

Several caveats deserve explicit attention before proceeding. First, this is by no means the lone article to note the simultaneous operation of tax and corporate law within a setting of international regulatory competition. Although most prior contributions compare tax competition and corporate chartering competition in relative isolation, a handful also explicitly consider their mutual interaction. Notable among them is an article by Mitchell Kane and Edward Rock, who observe that the marriage of tax residency rules with corporate law in regulatory competition can have distortive effects, inducing corporations to make inferior jurisdictional choices when incorporating in order to reduce tax liability. Concluding that such distortions undermine a competitive chartering market, they propose “severing” tax residence rules from corporate law regimes, hinging the former on the locus of firms’ real economic activity and the latter on the place of incorporation. Although I commence from a similar motivation as do Kane and Rock, my analysis will depart from theirs in several ways. They do not, for example, consider how the steady encroachment of securities law has materially altered the tax/governance competitive landscape. More significantly, my analysis will suggest that regulatory competitive forces actually push in the opposite direction from the Kane/Rock proposal. In other words, even if differential tax levies “distort” incorporation choices, the bundling of corporate governance and tax regimes can make chartering competition more (not less) robust, affording jurisdictions a means by which to appropriate some of the social value created by their investments in legal/regulatory infrastructure—incentivizing them in the process to differentiate their governance/tax offerings, thereby enriching the portfolio of choices available to companies and adding to overall economic welfare.

Second, as noted above, this Article uses a regulatory competition framework to analyze how tax and corporate law may evolve simultaneously. That framework allows for the possibility that such competition can motivate at least some jurisdictions to “race to the top” by installing and maintaining governance regimes that increase firm value and attract incorporations. While some version of this view is common within the academic literature, others are more pessimistic about the merits of jurisdictional competition in corporate law, arguing, for instance, that because managers steer incorporation decisions, competition will tend to “race to the bottom,” catering to managerial preferences, not overall company value (or even share value). Still others have expressed ambivalence about whether either extreme account tends to prevail categorically. The analytical framework developed below is broad enough to allow for any of these possibilities, including settings where agency costs dominate incorporation choices for some firms, inducing some jurisdictions to use their bundled taxing authority to extract a portion of the managerial value they create. Indeed, at its most general level, my analysis presumes a type of hybrid setting where some companies are attracted to corporate governance regimes that maximize overall company value, while others prefer systems that cosset managerial interests.

Third, my analysis will generally presume that jurisdictions set policies noncooperatively, so as to serve their individual jurisdictional interests. While such an approach is a serviceable description of the status quo, it downplays the possibility of cooperative accords struck between otherwise competing jurisdictions that would effectively neutralize—or at least dampen—the oppositional landscape (for example, international accords among OECD countries setting uniform policies on tax rates or profit shifting). Such cooperative approaches could have desirable characteristics (at least in some circumstances), and they are certainly worth considering. It nevertheless remains an open question whether such accords are attainable in the short term and durable over the medium to long term. In any event, my analysis is perhaps better viewed as assessing an appropriate response for the United States in the absence of (or as a backstop to) such international accords.

Finally, it is important to note that the progressive federalization of corporate law chronicled here has not taken place in isolation. Rather, it is one of several pertinent changes to the strategic landscape surrounding comparative corporate governance and tax over the last decade and a half. Most conspicuously, several developed countries outside the United States have progressively walked down their own headline tax rates during this time, gradually enlarging the evident “gap” between American tax rates and those of its closest international comparators. Along with the stockpile of retained foreign earnings that American MNCs have steadily built up, this widening gap in headline rates has no doubt altered the economic calculus that underlies inversion decisions. My argument is not that the federalization of governance has been more important than these tax changes in driving inversions per se, but rather that it has greatly facilitated and simplified that calculus: Governance federalization has materially reduced the incremental costs of inverting, just as comparative tax changes have gradually enhanced the corresponding benefits. These simultaneous forces, I argue, have reinforced one another (perhaps unwittingly and unnecessarily). An appropriate regulatory response, therefore, should be mindful of both of them as well.

The remainder of this Article will proceed as follows: Part I will provide a high-level overview of how the corporate tax system in the United States interacts with the structuring of both foreign and domestic MNCs. Of particular interest here are the creative (yet fragile) ways that domestic MNCs utilize special ownership structures and intercompany transactions—short of an inversion—to minimize and/or defer tax liabilities. While such strategies can be effective, they can also impose risks and costs. In Part II, I will add inversion calculus to the mix, documenting the advantages such transactions can sometimes have over more traditional tax management techniques. At the same time, however, the relative advantages of inversions simply do not translate to all firms and all settings. The Part will close by describing how securities law has, over the last fifteen years, incrementally displaced and preempted state corporate law through a series of federal corporate governance mandates. Notably, these mandates apply to all public companies, whether incorporated/taxed in the United States or not. Part III will turn to my core conceptual arguments, presenting and analyzing a simple, game-theoretic framework for analyzing multi-attribute regulatory competition in tax and corporate governance offerings. Here I will demonstrate how a leader in providing strong corporate law and governance rules (such as the United States) may be able to withstand even substantial international tax competition without being drawn into a ruinous arms race in setting tax rates. Significantly, however, my analytic framework will expose a key necessary condition for the United States to enjoy such competitive insulation: It must be able to bundle tax and nontax regulatory attributes into a single, conjoined regulatory package. Troublingly, many of the most radical reform efforts recently proposed lose sight of this point, and they would ultimately have the effect of unbundling tax and governance even further. Myopic attention to tax competition, while eschewing its interaction with other regulatory dimensions, is both shortsighted and misguided. Part IV then applies the insights of this framework, considering two plausible reform approaches from a securities market perspective.

Patent Trolls and Preemption

In September 2012, eighty-one companies with nonsensical names such as CleOrv, DucPla, and EntNil began sending letters to over 16,000 businesses throughout the United States. The letters stated that the sender was the “licensing agent” for several U.S. patents that cover the use of an office scanner to send documents via e-mail. The letters noted that the recipient “almost certainly uses” that technology and that, accordingly, the recipient “should enter into a license agreement with us at this time” at a “fair price” of approximately $1,200 per employee. Many recipients of that letter received two subsequent letters from a Texas-based law firm, Farney Daniels. The first letter noted that the matter had been referred to the firm and that its representation “can involve litigation.” The second letter stated bluntly that “if we do not hear from you within two weeks from the date of this letter, our client will be forced to file a Complaint against you for patent infringement in Federal District Court.” This second letter also included a draft complaint against the recipient.

It turns out that CleOrv, DucPla, EntNil, and the other companies asserting patent infringement are all subsidiaries of another company, MPHJ Technology Investments, which is controlled by a Texas lawyer named Jay Mac Rust. Patent holders such as MPHJ have been called “bottom feeder” patent trolls: They assert patents against numerous potential infringers, relying on the high cost of threatened litigation to extract quick settlements. Notably, bottom feeder trolls such as MPHJ have begun to target not the manufacturers of allegedly infringing technology, but the businesses, organizations, and individuals who are the end users of that technology. For instance, patent trolls have sent letters to thousands of hotels and restaurants, claiming that those businesses committed patent infringement by using wireless technology to make Internet service available to their customers. Another patent troll sent letters to numerous construction companies claiming infringement of a patent on the use of a “moisture removal system”—that is, a fan—to dry lumber during construction.

These enforcement campaigns are troubling because, if the patents are as broad as their owners claim, they may be invalid due to the Patent Act’s requirements of novelty and nonobviousness. Yet the nature of the enforcement behavior is also disturbing. Many demand letters are sent to entities, such as nonprofits, municipal governments, and small businesses that are unfamiliar with patent litigation and that may find it too costly to investigate the merit of the patent claims or to fight the infringement allegations. Indeed, the letters sent by bottom feeders are designed to intimidate the recipient into quickly purchasing a license. MPHJ’s lawyers, for example, threatened to file suit unless the recipient responded within two weeks. But those threats often are deceptive or false. MPHJ, for instance, did not file a single infringement suit for several months after the final letters were sent, suggesting that it never intended to litigate at all. When MPHJ finally did file suit, it did so only after numerous state attorneys general had begun investigating the company’s enforcement tactics.

In response to these campaigns, legislatures in over half the states have passed statutes outlawing certain acts of patent enforcement. In a majority of those states, the new laws are modeled after a statute first adopted in Vermont, which prohibits “bad faith” assertions of patent infringement. Other states have outlawed assertions that “contain false, misleading, or deceptive information” or have defined specific acts as illegal, such as making infringement assertions that “lack a reasonable basis in fact or law” or failing to provide, in a letter alleging patent infringement, “factual allegations” about how, exactly, the recipient infringes the patent. Most of the new statutes create a private right of action for the targets of unlawful infringement assertions and all of the statutes allow for enforcement by state officials, such as the state attorney general. In addition, state attorneys general have begun to use long-existing state laws, such as consumer protection statutes and deceptive trade practices laws, to challenge schemes of patent enforcement.

Although patents are usually thought to be the domain of the federal government alone, Congress has only recently begun to consider bills that would outlaw unfair or deceptive patent demand letters. The states’ growing role in the patent system is reflected on the website of the U.S. Patent and Trademark Office, which counsels persons who receive demand letters that are “deceptive, predatory, or in bad faith” to, among other things, “fil[e] a complaint with your state attorney general’s office.” The states, by taking aggressive steps to regulate patent enforcement, are thus poised to erode the federal government’s monopoly over the patent system.

Doctrines of federal constitutional law, however, may invalidate the new state statutes and limit the law enforcement authority of state officials. For decades, businesses and individuals accused of patent infringement have tried to assert state law tort claims against overzealous patent holders, but the U.S. Court of Appeals for the Federal Circuit, which has exclusive appellate jurisdiction over patent cases, has held that those claims are mostly preempted by the federal Patent Act. According to the Federal Circuit, to avoid preemption, the accused infringer must prove not only the elements of its state law claim, it must also prove, by clear and convincing evidence, (1) that the patent holder’s infringement allegations were “objectively baseless,” meaning that no reasonable litigant could have expected to succeed, and (2) that the patent holder made its infringement allegations with knowledge of their inaccuracy or with reckless disregard for their accuracy. Cases challenging the constitutionality of the new state statutes and state law enforcement actions are just getting underway. But the Federal Circuit’s two-part test will almost certainly prohibit the states from condemning any but the most frivolous assertions of patent infringement. This Article argues, however, that the Federal Circuit’s preemption rule is wrong as a matter of doctrine, is misguided as a matter of policy, and ignores important lessons from the history of patent enforcement.

As a matter of doctrine, courts usually identify the Constitution’s Supremacy Clause as the source of preemption law, and the Federal Circuit has sometimes invoked the Supremacy Clause as grounds for immunizing acts of patent enforcement from state law liability. A closer examination of Federal Circuit case law, however, reveals that the most significant constitutional barrier to state regulation of patent enforcement is not preemption pursuant to the Supremacy Clause; it is the Federal Circuit’s erroneous interpretation of the First Amendment’s Petition Clause.

Under an orthodox, Supremacy Clause-based preemption analysis, state laws regulating patent enforcement likely avoid preemption. Although the state laws create some disuniformity in the patent system, they arguably do not conflict with the core objectives of federal patent law, such as incentivizing invention and inducing the disclosure of inventions. And it is difficult to say that federal law fully occupies the field of patent-enforcement regulation: The Patent Act is entirely silent on the issue of unfair or deceptive enforcement—it neither condemns nor immunizes it. Moreover, courts have consistently refused to find field preemption of state law tort claims that impose liability on patent holders. Rather than analyzing preemption under the Supremacy Clause, however, the Federal Circuit has imported as its preemption test the nearly insurmountable requirements imposed by the Supreme Court on plaintiffs who seek to inflict antitrust liability on defendants based on those defendants’ pursuit of litigation. This doctrine, often called the Noerr-Pennington doctrine (or Noerr doctrine, for short), stems from the Supreme Court’s interpretation of the federal antitrust statute, the Sherman Act, in the light of the First Amendment’s Petition Clause.

To strip an antitrust defendant of the immunity conferred by the Noerr doctrine, the plaintiff must show that the defendant’s underlying lawsuit was a “sham” by proving both that the lawsuit was objectively baseless and that it was filed with the subjective intent to impair competition. The Federal Circuit, in adopting as its preemption rule the same requirements of objective baselessness and subjective bad intent, has thus expanded Noerr immunity by allowing patent holders to invoke the doctrine to avoid any type of civil liability, not just liability under the antitrust laws, based on any conduct related to patent enforcement, not just the pursuit of litigation. This expansion of Noerr immunity is a mistake. Letters sent from one private party to another, such as letters threatening patent infringement litigation, are not “petition[s]” to “the government” within the meaning of the First Amendment. Moreover, the Federal Circuit’s use of Noerr as a preemption rule gets the federalism analysis exactly backwards. The Supreme Court has often articulated a presumption against preemption, but the Federal Circuit insists that a patent holder seeking to avoid preemption “has a heavy burden to carry.”

The Federal Circuit’s erroneous expansion of Noerr immunity is not only wrong as a matter of doctrine, it also has several destructive policy implications. For instance, it grants patent holders a license to lie in their demand letters, so long as those letters also contain objectively plausible allegations of infringement. Thus, patent holders can lawfully send letters stating that many recipients have already purchased licenses to the asserted patents even if, in fact, few if any recipients have done so. And patent holders can lawfully claim that the validity of the asserted patents have been upheld in court or in reexamination at the Patent and Trademark Office, even if that is not true. In addition, because the Federal Circuit purports to derive its Noerr-based immunity standard from the First Amendment, that standard makes it unconstitutional for not just states but also the federal government to condemn any but the most fantastical allegations of patent infringement. Thus, although the President, members of Congress, and the Federal Trade Commission have all recently voiced concerns about “patent trolls,” Federal Circuit law significantly limits the regulatory options.

Fortunately, history provides a useful lesson on how courts can strike an appropriate balance between protecting patent holders from liability when they make legitimate allegations of infringement and punishing patent holders when they engage in unfair or deceptive enforcement tactics. Specifically, a long line of federal judicial decisions—which the Federal Circuit has mostly ignored—addresses the precise question of when a patent holder may be held liable for its enforcement conduct. As early as the nineteenth century, courts sitting in equity enjoined patent holders from making infringement assertions in bad faith, which could be established through evidence of the patent holder’s “malicious intent.” Although a patent holder’s intent is a subjective question, courts often inferred subjective intent from objective evidence, such as the patent holder’s threatening a large number of accused infringers and the patent holder’s failure to follow its threats with actual lawsuits. This flexible, equity-based immunity standard—as opposed to the rigid two-part test mandated by the Federal Circuit—would empower all three branches of government at both the state and federal levels to impose reasonable restrictions on patent enforcement. At the same time, cases in which enforcement conduct was enjoined under the traditional standard were usually egregious and often involved claims that were objectively weak on the merits, so a revitalized good faith immunity doctrine would protect patent holders’ ability to provide legitimate notice of their patent rights.

This Article is the first to consider whether the new state statutes are constitutional. By showing how current Federal Circuit doctrine could quash those innovative reforms, and by offering an alternative to the Federal Circuit’s onerous Noerr-based immunity rule, this Article contributes to an important and on-going policy conversation as additional states, as well as the federal government, contemplate steps to fight abusive patent enforcement.

This Article will begin in Part I by outlining the state laws relevant to patent enforcement, including the new state statutes. Part II will then explore the bodies of federal law that potentially nullify those state laws, namely, preemption doctrine under the Supremacy Clause and doctrines of petitioning immunity derived from the First Amendment. Part III will reexamine the relevant Federal Circuit case law, showing that the key limit on the states’ ability to regulate patent enforcement is not preemption but the Federal Circuit’s flawed interpretation of the First Amendment. Part IV will explore the practical consequences of conferring broad immunity on patent holders’ assertions of infringement, highlighting the limited power that both state governments and the federal government have under Federal Circuit law. Finally, Part V will outline ways in which Federal Circuit law should be reformed to provide governments the ability to outlaw unfair and deceptive schemes of patent enforcement.

Aligning Campaign Finance Law

“You have some ideological extremist who has a big bankroll and they can entirely skew our politics.” –Barack Obama, Press Conference, October 8, 2013

Here are some facts about money and politics in today’s America. At the federal level, campaign spending totaled $7.3 billion in 2012. Almost all of this funding came from individual donors, not corporations or unions.Individuals gave about half of their contributions to specific candidates, a quarter to political parties, and a quarter to Political Action Committees (“PACs”) and Super PACs.  These donors were in no way representative of the country as a whole. They were heavily old, white, male, and, of course, wealthy. They also were far more polarized in their political views than the general population. Most Americans were moderates in 2012, but most donors were staunch liberals or conservatives.

However, there is no evidence that much of this money is traded explicitly for political favors. Proof of quid pro quo transactions is vanishingly rare, and studies that try to document a link between PACs’ contributions and politicians’ votes typically come up empty. But there is evidence that politicians’ positions reflect the preferences of their donors to an uncanny extent. The ideal points of members of Congress—that is, the “unique set[s] of policies that they ‘prefer’ to all others”—have almost exactly the same bimodal distribution as the ideal points of individual contributors. They look nothing like the far more centrist distribution of the public at large.

Suppose a jurisdiction is troubled by this situation and decides to enact some kind of campaign finance reform. What reason might it give? One option is preventing the corruption of elected officials. But the Supreme Court has recently narrowed the definition of corruption to quid pro quo exchanges, and, as just noted, such exchanges do not occur with any regularity in contemporary America. Another possibility is avoiding the distortion of electoral outcomes due to the heavy spending of affluent individuals (and groups). But the Court has emphatically rejected any governmental interest in ameliorating “the corrosive and distorting effects of immense aggregations of wealth.” Yet another idea is equalizing the resources of candidates or the electoral influence of voters. But this equality interest has been deemed invalid in even more strident terms. “[T]he concept that government may restrict the speech of some elements of our society in order to enhance the relative voice of others is wholly foreign to the First Amendment.”

So is our reformist jurisdiction out of luck? Not quite. This Article’s thesis is that there is an additional interest, of the gravest importance, that both is threatened by money in politics and is furthered by (certain) campaign finance regulation. This interest is the promotion of alignment between voters’ policy preferences and their government’s policy outputs. Alignment operates at the levels of both the individual constituency and the jurisdiction as a whole. Within the constituency, the views of the district’s median voter and the district’s representative should align. One step up, the preferences of the jurisdiction’s median voter and the legislature’s median member should correspond. Moreover, at the jurisdictional level, the median voter’s views should be congruent not only with the median legislator’s positions, but also with actual policy outcomes. Preference alignment refers to the former sort of congruence; outcome alignment to the latter.

Alignment is a significant—indeed, compelling—interest because of its tight connection to core democratic values. At the district level, it follows closely from the delegate theory of representation. A delegate “must do what his principal would do, must act as if the principal himself were acting . . . must vote as a majority of his constituents would,” as Hanna Pitkin wrote in her landmark work. In other words, a delegate must align his own positions with those of his constituents. Likewise, at the jurisdictional level, alignment is essentially another term for majoritarianism. To say that policy should be congruent with the preferences of the median voter is to say that it should be congruent with the preferences of the voting majority. Of course, majoritarianism is not our only democratic principle. But, as Jeremy Waldron has argued, it is “required as a matter of fairness to all those who participate in the social choice.”

Unsurprisingly, given its democratic roots, the concept of alignment has surfaced repeatedly in the Court’s campaign finance decisions. In a 2000 case, the Court recognized “the broader threat from politicians too compliant with the wishes of large contributors”—and not compliant enough with the wishes of voters. In a 2003 case, the Court warned of “the danger that officeholders will decide issues not on the merits or the desires of their constituencies, but according to the wishes of those who have made large financial contributions.” And in its most recent campaign finance decision, McCutcheon v. FEC, a decision otherwise unremittingly hostile to regulation, the Court strikingly concluded its opinion with a paean to alignment. “Representatives are not to follow constituent orders, but can be expected to be cognizant of and responsive to those concerns. Such responsiveness is key to the very concept of self-governance through elected officials.”

Despite these doctrinal hints, some scholars claim that alignment is a forbidden interest in the campaign finance context. Kathleen Sullivan reasons that alignment reflects a particular theory of democracy, and that speech cannot be restricted based on “one vision of good government.” Similarly, Robert Post contends that in the First Amendment domain of public discourse, public opinion is forever changing shape. Thus “[t]here is . . . no ‘baseline’ from which [misalignment] can be assessed.” These critiques are misplaced. As to Sullivan, it might be controversial for the Court to embrace a specific model of democracy, but surely a popularly elected legislature may do so. In fact, legislatures adopt theories of self-governance all the time, both when they regulate money in politics and when they enact other electoral policies. As to Post, public opinion actually is not as fluid as he suggests, and alignment furthers what he deems the crucial aim of public discourse: making “persons believe that government is potentially responsive to their views.” It is unclear as well why electoral speech should be considered part of public discourse rather than the managerial domain of elections, in which speech may be regulated to serve the domain’s ends.

Even if alignment is not a forbidden interest, it may be a duplicative one. As Richard Hasen has argued, it may be nothing more than a slick repackaging of the anti-distortion or equality interests that the Court already has rejected. This charge also misses its mark. The distortion that cannot justify campaign finance regulation, in the Court’s view, is the skewing of electoral outcomes due to large expenditures. The Court has never suggested that the warping of policy outcomes due to large contributions (or their equivalent) is an illegitimate basis for regulation. The distortion of voters is different from that of representatives.

Alignment also is distinct from equality (in all its guises). One form of equality is the leveling of candidate resources. But candidates need not be equally funded to produce alignment, nor does alignment follow from evenly sized war chests. Another kind of equality is equal representation for all voters. But it is only the median voter, not every voter, who is entitled to congruence under the alignment approach. Alignment at the median can arise only if there is misalignment at all other points in the distribution. A final type of equality is equal voter influence over the political process. But equal influence is, at most, a means to achieving alignment. It is not the end itself. Alignment also is possible under conditions of unequal influence, and equal influence does not necessarily result in alignment.

Assume, then, that alignment is a compelling interest that neither is barred by First Amendment theory nor is identical to goals the Court already has rebuffed. We are not done yet. The next step is to determine whether money in politics can generate misalignment, and whether campaign finance reform can promote alignment. According to a burgeoning political science literature, the answer to both questions is yes, at least sometimes. The relevant empirical evidence fits into three categories.

First, according to numerous studies, wealthy Americans have more influence on politicians’ voting records and actual policy outcomes than do poor or middle-class Americans. This extra sway is evident whether House or Senate voting records, or state or federal policy outcomes, are considered. It also appears even after non-monetary forms of political participation (voting, volunteering, contacting officials, etc.) are controlled for. Second, as noted at the outset, politicians and donors have nearly identical ideal point distributions: highly bimodal curves in which they cluster at the ideological extremes and almost no one occupies the moderate center. Voters’ views, in contrast, exhibit a normal distribution whose single peak is in the middle of the political spectrum. It is fair to say that donors receive exquisitely attentive representation—and that voters receive virtually no representation at all.

Third, campaign finance regulation can be aligning or misaligning based on its implications for how candidates raise their money. Tight individual contribution limits reduce the funds available from polarized individual donors. They therefore encourage candidates to shift toward the ideological center, the home of the median voter. Conversely, stringent party or PAC contribution limits have the opposite effect. Both parties and PACs are relatively moderate in their giving patterns—parties because their chief goal is winning as many seats as possible, PACs because they want access to incumbents of all political stripes. Reducing the funds available from these more centrist sources thus incentivizes candidates to move toward the ideological fringes. As for public financing, its impact hinges on its treatment of individual donors. “Clean money” schemes that provide block grants to candidates after they receive enough individual contributions are misaligning because of the extremism of the donors who initially must be wooed. But multiple-match systems that offer high matching ratios for small contributions may be aligning because of the more representative pool of donors they attract.

What do these findings mean for the constitutionality of different policies? Individual contribution limits would sit on sturdy legal ground under the alignment approach. Whatever their link may be to the prevention of corruption, they demonstrably further the governmental interest in alignment. Unlike under current law, individual expenditure limits also might survive judicial scrutiny. Since politicians mirror the views of not only individuals who donate directly to them, but also individuals who spend on their behalf, no great significance would attach to the contribution/expenditure distinction. Public financing that relies on individual donors who resemble the general population (or that does not rely on individual donors at all) would be valid as well. On the other hand, contribution and expenditure limits for parties and PACs could not be sustained by reference to alignment. Since these entities are relatively moderate, their funds exert little misaligning pressure. Public financing that requires appeals to polarized individual donors also could be justified only on the basis of other interests.

The Article proceeds as follows. Part I introduces the alignment interest. It describes the different forms of alignment, explains the role the concept has played in earlier campaign finance cases, and responds to the claim that general First Amendment principles proscribe the interest. Part II argues for the distinctiveness of alignment. It compares alignment to the interests the Court already has considered—anti-corruption, anti-distortion, and equality—and shows that it is different from each of them. Part III conveys the current state of knowledge about alignment. It summarizes the many studies on the misaligning influence of money in politics, as well as the fewer studies on the aligning impact of (some) regulation. Lastly, Part IV assesses the implications of this literature for the validity of different policies. Individual contribution and expenditure limits, and certain kinds of public financing, should be upheld because they promote alignment. But contribution and expenditure limits for parties and PACs, and other kinds of public financing, cannot be justified on this basis.

One final question should be answered before proceeding further. Given the array of interests already asserted in the campaign finance context, is there really a need for another one? In fact, the need is dire, for two reasons. First, the only interest the Court currently considers to be legitimate—the narrowly construed anti-corruption interest—neither captures the full extent of the harm caused by money in politics, nor is sufficient to sustain most campaign finance regulation. In recent years, policies have toppled like dominos, rejected by the Court due to a lack of fit with this interest. If the reform project is to avoid collapsing entirely, we must, in Michael Kang’s words, “look[] beyond the prevention of corruption as defined by the Court.”

Second, the misalignment produced by electoral fundraising and spending is not holding steady. Instead, it is getting worse. Over the last generation, the share of campaign funds provided by the wealthiest 0.01% of Americans has surged from about 10% to more than 40%. During the same period, individual donors steadily have become more extreme in their political views, and candidates steadily have become more dependent on their contributions. As a result, the representational gap in favor of the affluent is now five times larger than it was in the 1970s and 1980s. Misalignment thus is not a problem that can safely be ignored. Rather, it is a problem that—increasingly—threatens to swallow American democracy.