Third-party settlement payments, misused by Obama, violate Constitution

OPINION:

Editor’s note: This is one in a series examining the Constitution and Federalist Papers in today’s America. Click HERE to read the series.

One of the more troubling evasions of constitutional protections in the arena of environmental issues is the use of supplemental environmental projects in settlements of government enforcement actions.

In these projects, known as SEPs, the enforcing agency, usually the Department of Justice but sometimes the Environmental Protection Agency, the Department of Interior or other agencies, force settling defendants, usually big companies such as Bank of America or ExxonMobil, to donate to unrelated third parties, usually nonprofit organizations that are politically friendly to the administration in power (e.g., left-wing environmental, social justice or community organizations).

These third parties are usually not directly involved in the litigation nor directly harmed by the defendants’ conduct. They are the administration’s political cronies.

Recently, the EPA’s acting enforcement chief, Lawrence E. Starfield, issued an internal memo that abruptly reverses existing EPA policy limiting injunctive punishments to what is actually allowed by the applicable statutes or regulations. Mr. Starfield is not just returning the EPA to the Obama-era practice of going beyond what could be legally required. He appears to want even more extra-statutory/regulatory punishment options.

Mr. Starfield also wants the EPA to return to the Obama-era practice of misusing SEPs. He admits that current Justice Department policies do not permit this type of shakedown, but he appears optimistic that things will soon change. His memo dryly states that SEPs may be included in a settlement if a settling party “voluntarily agrees” to undertake it. As Don Corleone might have said, “That’s a nice company you have there, it would be a shame if we had to destroy it, when all you have to do is ‘volunteer’ to ‘donate’ lots of money to our politically allied groups. We’ll even reduce the overall fine and allow you to take a tax deduction on it.”

Mr. Starfield is optimistic because President Biden early on in his administration issued three documents that, read together, show that he intends to move quickly on restarting improper third-party settlement payments. These third-party settlement agreements have been prohibited since June 2017, and even the Carter and Clinton administrations determined them to be highly questionable.

Third-party settlement payments rarely are appropriate, regardless of who is president or to which party that president belongs. Presumably Democrats or liberals would not want to see a Republican administration forcing companies to “donate” hundreds of millions of dollars to nonprofits such as the National Rifle Association or the National Right to Life Committee.

That is why then-Attorney General Jeff Sessions issued a June 2017 memo prohibiting them and said that “when the federal government settles a case against a corporate wrongdoer, any settlement funds should go first to the victims and then to the American people — not to bankroll third-party special interest groups or the political friends of whoever is in power.”

This should be common sense, but unfortunately, prior to June 2017, administrations of both parties engaged in this sordid behavior, although the Obama administration elevated it to a fine art, taking advantage of the bank settlements resulting from the 2008-2009 financial crisis to reward its political allies.

For example, the Leadership Conference on Civil and Human Rights, with allied groups, received sizable third-party settlement payments from JPMorgan Chase (and perhaps other banks) as a result of lobbying and nonpublic communications with high-ranking Justice Department officials of that era, such as then-Associate Attorney General Tony West (Vice President Kamala Harris’ brother-in-law and currently Uber’s chief legal officer). As the Hawaii Justice Foundation’s executive director emailed to multiple recipients, “Frankly, I would be willing to have us build a statue [of Tony West] and then we could bow down to this statue each day after we get our $200,000+.”

The group is an egregious example among the many entities that received third-party settlement money because their then-president and CEO was Vanita Gupta. If that name sounds familiar, it should. The Senate recently confirmed her as Mr. Biden’s associate attorney general. Also, on March 26, Mr. Biden announced his intention to nominate Seema Nanda to be the Labor Department’s top lawyer. Ms. Nanda previously served as the group’s executive vice president and chief operating office and then was the Democratic National Committee’s CEO.

Moreover, Obama-era third-party settlement recipients not only successfully lobbied the DOJ for settlement funding, but they also made sure that nonprofit organizations that were not aligned with the Obama administration’s political preferences, such as the Pacific Legal Foundation, did not receive nor benefit from the money, further demonstrating that third-party settlement payments are political.

For all the Obama administration’s rhetoric about the “predatory” banks, its Justice Department reduced the banks’ monetary fines based on how much they paid to the administration’s favored and politically allied third parties, calling the reductions “enhanced credits.” For example, congressional investigators discovered that the Obama DOJ’s 2014 settlement agreements with Citi and Bank of America gave them “double credit” against their penalty obligations for every dollar they “donated” to third parties.

The main constitutional problem with third-party settlement agreements is that they violate Congress’ exclusive appropriations power (“power of the purse”) and therefore also violate appropriations statutes such as the Antideficiency Act. The Constitution requires that only Congress may choose how much is spent where and on whom. For example, in 1976, the Supreme Court in United States v. MacCollom stated that the “established rule is that the expenditure of public funds is proper only when authorized by Congress, not that public funds may be expended unless prohibited by Congress.”

Executive branch agencies may not, on their own, choose which entities receive money taken from taxpayers; otherwise, the executive branch could ignore Congress and spend money on things that Congress explicitly disallowed, engage in cronyism while avoiding transparency and congressional oversight, and essentially create an unconstitutional slush fund. Congress and the American people have the right to know about the existence, extent, use and effects of such “mandatory donation” third-party settlement payments.

Republican Reps. Bob Goodlatte of Virginia and Jeb Hensarling of Texas (both of whom retired in December 2018) and their respective committees did significant bipartisan work on this issue. For example, in 2016 and again in 2017, the House passed the “Stop Settlement Slush Funds Act,” but it languished in the Senate Judiciary Committee.

Further investigation and research are needed regarding third-party settlement payments, especially those that appear to have been politically motivated, and their constitutional and statutory infirmities. A February 2021 white paper, “Improper Third-Party Payments in U.S. Government Litigation Settlements,” of which I am a co-author, goes into further detail on this vital topic.

The Biden administration is at substantial risk of repeating the Obama administration’s mistakes on this issue because so many former Obama administration officials are returning to power, such as Ms. Gupta and Ms. Nanda. Hopefully the Biden administration, and Attorney General Merrick Garland in particular, instead will continue the prohibition on third-party settlement payments as the DOJ’s internal rules, those of other agencies, and, most importantly, the Constitution all require. Doing so would show that the administration is truly committed to full transparency and to following the law.

• John Shu is a professor and lawyer in Newport Beach, California, with extensive experience in litigation, corporate, antitrust and constitutional law. He served both President George H.W. Bush and President George W. Bush.