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Liu v. New York City Campaign Finance Board

United States District Court, S.D. New York

March 31, 2015

JOHN LIU, et al., Plaintiffs,
v.
THE NEW YORK CITY CAMPAIGN FINANCE BOARD, et al., Defendants.

Plaintiffs are represented by Richard D. Emery, Alison Frick, and David A. Lebowitz of Emery Celli Brinckerhoff & Abady LLP, New York, New York.

Defendants are represented by Thomas B. Roberts, Assistant Corporation Counsel, for Zachary W. Carter, Corporation Counsel of the City of New York, New York.

OPINION AND ORDER

RICHARD J. SULLIVAN, District Judge.

Plaintiffs John Liu, the former Comptroller of the City of New York who unsuccessfully ran for mayor in 2013, and his political fundraising committee, "Friends of John Liu, " bring this action against Defendants The New York City Campaign Finance Board (the "CFB" or the "Board") and The City of New York, alleging two distinct constitutional violations pursuant to 42 U.S.C. § 1983. First, Plaintiffs allege that the CFB violated their First Amendment rights when it denied them public matching funds and seek damages and a declaration that a CFB rule governing the distribution of campaign matching funds violates the First Amendment. Second, Plaintiffs seek damages on the grounds that the CFB treated Plaintiffs differently than similarly situated candidates, in violation of the Equal Protection Clause of the Fourteenth Amendment. Now before the Court is Defendants' motion to dismiss Plaintiffs' Complaint, pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. No. 27.) For the reasons set forth below, Defendants' motion is granted in part and denied in part.

I. BACKGROUND

Because Plaintiffs' allegations concern Defendants' role in administering various statutes and regulations relating to the financing of political campaigns in New York City, the Court will begin with an overview of that statutory and regulatory framework before turning to the specific allegations contained in Plaintiffs' Complaint.[1]

A. Relevant Statutes and Regulations

In 1988, the New York City Council enacted the Campaign Finance Act (the "Act" or the "CFA"), which established a program of optional, public "matching" funds to participating candidates for Mayor, Comptroller, Public Advocate, Borough President, or City Council. N.Y.C. Admin. Code § 3-701, et seq. The CFA's matching funds program (the "Program") is administered by the CFB, an independent, nonpartisan five-person city agency with rule making authority. Id. § 3-708(1), (7); N.Y.C. Charter § 1051-52; see id. § 1057 (noting that the CFB is obligated to "conduct all... activities in a strictly non-partisan manner"). CFB Rule 1-02 notes that a "participant" in the Program "includes the candidate, the principal committee authorized by the candidate..., the treasurer of such committee, and any other agent of the candidate." CFB R. 1-02 (emphasis added).

The CFA imposes certain obligations - not at issue here - on all candidates regardless of Program participation, including requiring participants to report contributions and expenditures, limit donations from any single contributor, and respond to the Board's requests to ensure Program compliance. N.Y.C. Admin. Code § 3-703(6), (1)(f), (1)(d). The CFA imposes additional requirements - also not at issue here - on participants seeking to participate in the Program, including, inter alia, the presence of an opposing candidate, proof of a threshold level of support, submission of a written certification by June 10 that the candidate will comply with all applicable laws and Board rules, and the maintenance of records sufficient to verify compliance with the Act. Id. § 3-703(1), (2); ( see also Compl. ¶¶ 33-35). Before a candidate can receive public matching funds, the Board must determine that the candidate has "met all eligibility requirements of the Act and [CFB enforcement rules]." CFB R. 5-01(a)(1).

In addition to the above criteria, the Rule at issue in the case at bar, CFB Rule 5-01(f), provides a non-exhaustive list of ten factors upon which the Board can find a candidate ineligible for public matching funds. In the Rule's introduction there is a catch-all phrase: "The Board shall determine whether public funds shall not be paid to a participant for reasons that include, but are not limited to...." CFB R. 5-01(f). The ten non-exhaustive reasons include:

(1) if there is reason to believe that the participant has committed a violation of the Act or these Rules... [and] (7) if the participant or an agent of the participant has been found by the Board to have committed fraud in the course of Program participation or to be in breach of certification pursuant to Rule 2-02....

CFB R. 5-01(f)(1), (7); ( see also Compl. ¶¶ 39-41). Rule 2-02, referenced in Rule 5-01(f)(7), provides an additional non-exhaustive list, which details "fundamental breaches" of the required written certification for candidates seeking public matching funds. CFB R. 2-02; ( see Compl. ¶ 38). The two relevant "fundamental breaches" that are enumerated in Rule 2-02 are:

(a) submission of a [CFB report] which the participant knew or should have known includes substantial fraudulent matchable contribution claims;... [and] (e) submission of substantial information which the participant... knew or should have known was false, or the submission of substantial documentation which the participant or limited participant knew or should have known was fabricated or falsified, which would avoid a finding of violation....

CFB R. 2-02(a), (e). The last sentence of Rule 2-02 is a second catch-all provision that notes, "[t]his rule is not intended to be an enumeration of all circumstances that may constitute a fundamental breach of obligations, as may be determined by the Board." CFB R. 2-02. Finally, of the ten bases upon which the Board may find a candidate ineligible for public matching funds pursuant to CFB Rule 5-01(f), some, but not all, of these violations may be cured. For example, a violation of CFB Rule 5-01(f)(4) - failure to submit a required disclosure statement - is curable, but a violation of CFB Rule 5-01(f)(6) - receipt of the maximum amount of public funds permitted by the Act - is not.

B. The CFB and the Liu Campaign

On October 11, 2011, in the run up to the New York City mayoral election, The New York Times published an article noting "irregularities" in the fundraising efforts of Liu's campaign. ( See Compl. ¶¶ 98-100.) Four and a half months later, a federal grand jury indicted Jia "Jenny" Hou, Liu's campaign treasurer, and a Liu fundraiser, Xing Wu "Oliver" Pan, on charges of conspiracy to commit wire and mail fraud, substantive acts of wire fraud, and obstruction of justice in connection with the irregularities. ( See id. ¶¶ 103, 105.) Specifically, the government alleged that Hou worked with a "fundraising intermediary" - Pan - in an illegal fundraising scheme. ( See id. ¶ 105.) On May 2, 2013, Hou was convicted of obstruction of justice, making false statements, and attempted wire fraud ( see id. ¶ 122), and Pan was convicted of conspiracy to commit wire fraud and attempted wire fraud. United States v. Xing Wu Pan, No. 12-cr-153 (RJS) (S.D.N.Y. Oct. 11, 2013) (Doc. Nos. 184-185).

On May 20, 2013, Liu's campaign received a letter from the CFB's Director of Campaign Finance Administration stating that the CFB staff would be recommending that the campaign not be allowed access to public funding. ( See Compl. ¶¶ 125-129.) The Director referenced "information obtained in connection with" Hou and Pan's trial and the Board's own ongoing investigation, and cited CFB Rules 2-02, 5-01(a)(1), (f)(1), and (f)(7), the rules set forth above. ( See id. ¶¶ 126, 129.) The letter noted that the evidence at trial "call[ed] into question the legitimacy of all contributions received by" Liu's campaign. ( Id. ¶ 128.) On July 19, 2013, the same CFB Director notified the Liu campaign in a letter, attaching hundreds of pages of records documenting the CFB's findings, that the CFB had invalidated 1, 751 of the campaign's matchable contribution claims. ( Id. ¶¶ 131, 133.) Plaintiffs first learned about the invalidated reports, which the campaign filed from December 2010 to July 2013, from this letter and attachments. ( See id. ¶ 133.) The Director later said the CFB staff members were troubled that the campaign continued to employ three individuals whom the staff believed were "connected to improper fundraising efforts." ( Id. ¶¶ 139, 141.) Moreover, the Director noted that the CFB had retained a private investigation firm, Thacher Associates, to investigate Liu's campaign. ( Id. ¶ 142.) After interviewing 22 contributors to the Liu campaign and 19 "family members" of Liu contributors, Thacher Associates "found evidence of potential campaign finance law violations, including reimbursed contributions and falsified documents." ( Id. ¶¶ 145-147.)

On August 5, 2013, the CFB rejected the Liu campaign's request for $3.8 million in matching funds and voted to deny public funding to the campaign. ( See Compl. ¶¶ 169-171, 202.) After the meeting, Reverend Joseph Parkes, then-chair of the CFB, said that "there is reason to believe that violations of the [CFA] and [CFB rules] have been committed" by Liu's campaign and that the campaign placed "in a major role at least one person who admitted to a plan to violate campaign finance law." ( Id. ¶¶ 172-173.) Parkes added that the CFB's "choice" to deny public funding was based on the campaign's lack of "a complete and accurate set of records that demonstrates compliance." ( Id. ¶¶ 174-175.) On September 10, 2013, Liu lost the Democratic Party primary, receiving seven percent of the vote. ( See id. ¶ 8.) Currently, the Liu campaign has outstanding debts, which it cannot afford to pay. ( See id. ¶ 184.) The CFB is conducting a final audit of the campaign. ( See id. ¶ 181.)

In addition to the facts described above, Plaintiffs describe the CFB's handling of six other campaigns, all of which sought public matching funds during their respective elections. ( See Compl. ¶¶ 58-93.) The Court will later summarize the alleged facts relating to each of these six campaigns when it considers Plaintiffs' Fourteenth Amendment claim.

C. Procedural History

On March 12, 2014, Plaintiffs filed their Complaint in the instant action, alleging First and Fourteenth Amendment violations pursuant to 42 U.S.C. § 1983. ( See Compl.) With respect to the First Amendment claim, Plaintiffs primarily seek a declaration that CFB Rule 5-01(f) is facially unconstitutional, as well as an injunction that prevents the CFB from enforcing Rule 5-01(f) in the future, on the grounds that the Rule "gives a government agency substantial power to discriminate against disfavored speakers by suppressing their expression." (Compl. ¶ 207; see id. ¶¶ 195-208.) Plaintiffs also advance an "as-applied" First Amendment challenge seeking damages, although their briefing barely addresses this argument except to note that the facial challenge is their "central claim." (Opp'n at 1). Specifically, Plaintiffs allege in their Complaint that "[t]he denial of all matching funds to Plaintiffs constituted an unconstitutional prior restraint that improperly stifled Plaintiffs' First Amendment right to expression, " and that the Board's "arbitrary decision caused Plaintiffs to lose $3.8 million in matching funds and prevented Plaintiffs from waging a viable campaign for Mayor." ( Id. ¶ 202.)

With respect to the Fourteenth Amendment cause of action, Plaintiffs bring an "as-applied, " "class of one" equal protection claim. Specifically, Plaintiffs allege that the CFB "intentionally treated Plaintiffs differently than [six] similarly situated candidates and campaigns who have been alleged or found to have violated the Campaign Finance Act." ( Id. ¶ 210). Plaintiffs assert that "[t]his different treatment was intentional, wholly arbitrary, and without rational basis" ( id. ¶ 214), and seek damages and attorneys' fees.[2]

On May 15, 2014, Defendants filed their motion to dismiss, which was fully submitted by July 2, 2014.

II. LEGAL STANDARD

To survive a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, a complaint must "provide the grounds upon which [the] claim rests." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007); see also Fed.R.Civ.P. 8(a)(2) ("A pleading that states a claim for relief must contain... a short and plain statement of the claim showing that the pleader is entitled to relief...."). To meet this standard, plaintiffs must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). In reviewing a Rule 12(b)(6) motion to dismiss, a court must accept as true all factual allegations in the complaint and draw all reasonable inferences in favor of the plaintiff. ATSI Commc'ns, 493 F.3d at 98. However, that tenet "is inapplicable to legal conclusions." Iqbal, 556 U.S. at 678. Thus, a pleading that offers only "labels and conclusions" or "a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555. If the plaintiff "ha[s] not nudged [its] claims across the line from conceivable to plausible, [its] complaint must be dismissed." Id. at 570.

III. PLAINTIFFS' FIRST AMENDMENT CLAIMS

The Supreme Court has instructed courts facing simultaneous "as-applied" and facial challenges to first resolve the "as-applied" challenge before addressing the facial challenge in order to avoid "proceed[ing] to an overbreadth [facial] issue unnecessarily." See Bd. of Trustees of State Univ. of New York v. Fox, 492 U.S. 469, 484-85 (1989). As explained by the Supreme Court, this is partially a function of efficiency given that the facial analysis is more taxing "since it requires determination whether the statute's overreach is substantial, not only as an absolute matter, but judged in relation to the statute's plainly legitimate sweep, ' and therefore requires consideration of many more applications than those immediately before the court." Id. (citing Broadrick v. Oklahoma, 413 U.S. 601, 615 (1973)). The Court heeds this advice and addresses first Plaintiff's "as-applied" claim.

A. "As-applied" Challenge to the CFB's Denial of Matching Funds to the Liu Campaign

In their Complaint, Plaintiffs assert an "as-applied" First Amendment challenge seeking damages. Specifically, Plaintiffs allege that "[t]he denial of all matching funds to Plaintiffs constituted an unconstitutional prior restraint that improperly stifled Plaintiffs' First Amendment right to expression, " and that the Board's "arbitrary decision caused Plaintiffs to lose $3.8 million in matching funds and prevented Plaintiffs from waging a viable campaign for Mayor." ( Id. ¶ 202; see id. ¶¶ 103-180.) Plaintiffs nonetheless appear to seek damages exceeding this $3.8 million figure, as they allege that "Liu suffered extreme mental and emotional anguish, along with dignity harms, resulting from being unfairly and unwarrantedly accused of wrongdoing, " and that "[t]he damage to [Liu's] reputation and earning potential, caused by the Board's arbitrary, unfair and erroneous decision to withhold funds from his 2013 campaign makes any future political activity far more difficult." ( Id. ¶ 183.)

1. Applicable Standard

The First Amendment provides that "Congress shall make no law... abridging the freedom of speech, or of the press...." U.S. Const. amend. I. The First Amendment applies to state governments through the Due Process Clause of the Fourteenth Amendment. See Lusk v. Village of Cold Spring, 475 F.3d 480, 485 (2d Cir. 2007). Since it is "well settled that municipal ordinances adopted under state authority constitute state action, " such ordinances are within the First Amendment's prohibition. See Lovell v. City of Griffin, 303 U.S. 444, 450 (1938). Thus, Section 1983 of Title 42 of the United States Code affords Plaintiffs a cause of action against Defendants if, as Plaintiffs allege, Defendants have deprived them of such a constitutional right. 42 U.S.C. § 1983.

The Supreme Court has long distinguished restrictions on speech from denials of government subsidies. "[A]lthough the First Amendment certainly has application in the subsidy context, we note that the Government may allocate competitive funding according to criteria that would be impermissible were direct regulation of speech... at stake." Nat'l Endowment for the Arts v. Finley, 524 U.S. 569, 587-88 (1998); see also Fed. Election Comm'n v. Mass. Citizens for Life, Inc., 479 U.S. 238, 256 n.9 (1986) ("[T]here is no right to have speech subsidized by the Government.").

In Buckley v. Valeo, the Supreme Court found that a federal campaign financing law that provided no public funding to some candidates was constitutional because it was a "congressional effort, not to abridge, restrict or censor speech, but rather to use public money to facilitate and enlarge public discussion and participation in the electoral process, goals vital to a self-governing people." 424 U.S. 1, 92-93 (1976). The Buckley Court rejected the First Amendment challenge to a public financing system, ruling that the system "furthers, not abridges, pertinent First Amendment values." Id. at 93; see also Davis v. Federal Election Comm'n, 554 U.S. 724, 739-40 (2008) (noting that the public funding system in Buckley preserved the candidate's "unfettered right to make unlimited personal expenditures").

With respect to elections, "as a practical matter, there must be a substantial regulation of elections if they are to be fair and honest and if some sort of order, rather than chaos, is to accompany the democratic processes." Storer v. Brown, 415 U.S. 724, 730 (1974); see also Burdick v. Takushi, 504 U.S. 428, 433 (1992) ("Common sense, as well as constitutional law, compels the conclusion that government must play an active role in structuring elections...."). Given the necessity of regulating elections, several courts have rejected First Amendment challenges to different provisions of the CFA that - like the Rules Plaintiffs challenge here - permitted the CFB to withhold matching funds. See Piccolo v. N.Y.C. Campaign Fin. Bd., No. 05-cv-7040 (GBD) (MHD), 2007 WL 2844939, at *15 (S.D.N.Y. Sept. 28, 2007) ("Because the CFB deadline is only minimally burdensome, it is justified if it is a reasonable, non-discriminatory restriction[]' that serves important regulatory interests.' It plainly meets this test.... [T]he overarching goal of regulating campaign contributions to promote fairness and prevent corruption in elections is an important government interest." (quoting Timmons v. Twin Cities Area New Party, 520 U.S. 351, 358 (1997)); Ostrom v. O'Hare, 160 F.Supp.2d 486, 495 (E.D.N.Y. 2001) (approving "one of the primary purposes of the deadline - to allow for a proper audit of the candidate's funds"); Rogers v. N.Y.C. Bd. of Elections, 988 F.Supp. 409, 413 (S.D.N.Y. 1997) (finding that "[t]he program's April 30 application deadline imposes an extremely minor burden on the right to vote" and that the application deadline is a "reasonable, nondiscriminatory restriction[]' that serves important regulatory interests'" (quoting Burdick, 504 U.S. at 434)).

In 2011, the Second Circuit, noting the government's strong interest in regulating elections, rejected First and Fourteenth Amendment challenges to provisions of the New York City Administrative Code concerning, inter alia, campaign contribution limits. See Ognibene v. Parkes, 671 F.3d 174 (2d Cir. 2011). Ognibene addressed the matching funds provisions of the public financing scheme, and is especially instructive in resolving the case at bar. The Second Circuit, in upholding the constitutionality of rules "deny[ing] matching funds for contributions by people who have business dealings with the City, " explained that "[n]on-matching does not prevent someone from making a contribution, " and found that the non-matching provision "is closely drawn to address a sufficiently important governmental interest." Id. at 178, 193. In Ognibene, the Second Circuit also made clear that the CFB's matching funds program is an amplification of speech, which is subject to a "less stringent standard of review" than a prohibition of speech. Id. at 193. Specifically, the Second Circuit explained:

When participation is voluntary and public money is used, stricter restrictions may be imposed, perhaps even restrictions that would normally be impermissible. Candidates who choose not to participate, and their contributors, are not prevented from freely expressing their political speech and associations; the legislature has merely decided not to amplify their contributions with tax dollars. That decision is entirely permissible. Buckley held that Congress "may engage in public financing of election ...

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