Attorneys for the state of Maine and two major utility companies argued in federal appeals court Wednesday over the legality of a state law passed by voters last year that bans foreign governments from spending money on state and local races and referendum campaigns.

The U.S. District Court in Portland got it wrong early this year when it granted a preliminary injunction preventing it from being enforced, argued Jonathan Bolton, an assistant attorney general representing the Maine Commission on Governmental Ethics and Election Practices and Maine Attorney General Aaron Frey.

The new law is important to prevent spending by foreign entities similar to what Maine experienced leading up to a 2021 referendum about whether to halt  controversial power transmission corridor, he told the  panel of three justices in the U.S. Court of Appeals for the First Circuit in Boston.

Joshua Dunlap, an attorney for Central Maine Power Co., which first challenged the new law in a suit late last year, told the justices that the government should not be able to silence companies and citizens because of a small amount of foreign ownership.  A foreign government must own or control at least 5% of an entity for it to be prohibited from campaign spending under the law.

“We believe the district court acted within its discretion in finding the act under discussion today is facially invalid under the First Amendment,” said Paul McDonald, an attorney for Versant Power and its owner, Enmax Corp. A second Maine utility, Versant, filed a separate, similar lawsuit at the same time, also challenging the constitutionality of the new law.

The panel of justices heard oral arguments Wednesday and will issue a written decision at a later date.

The hearing follows U.S. District Court Justice Nancy Torresen’s decision to issue a preliminary injunction in February, preventing the state from enforcing the law until she issues a final judgment in the case. Torresen signaled at the time she was likely to reject the new law after a full review.

Attorney General Frey and the state’s ethics commission appealed that action, saying the district court abused its discretion when concluding the law is likely unconstitutional and arguing that the injunction is overly broad.

JUSTICES QUESTION FREE SPEECH IMPACT

The arguments and questions Wednesday focused largely on the 5% threshold the law establishes for determining if an entity is under the influence of a foreign government. The justices, especially Justice Seth Aframe, seemed skeptical that the law was written clearly enough and that it wouldn’t have a chilling impact on free speech.

His questions seemed to echo a concern raised by Torresen in her injunction calling the 5% foreign ownership threshold arbitrary and saying it would prohibit a substantial amount of protected speech.

Aframe pointed out that market fluctuations could lead to inconsistencies in how the law would apply to companies. “Today, I could be able to speak, tomorrow, I, the company can’t, and that depends on the vagaries of the market,” he said. “That seems like an odd way to draw lines. Today we’re at 4.8%. Tomorrow we’re at 5.2%. We have to take our ads down. But the next day we can put them back up.”

He called the threshold a “moving target” and said it is likely to have a chilling effect. “The thing to do is to overcorrect because there are criminal penalties associated with this and just stay away from the line,” he said. “That’s bad because it removes free speech from the system.”

Bolton said the same fluctuations could exist if the threshold was 50%. He said 5% can equate to billions of dollars in interest that a foreign government owns. “And that gives the foreign government the ability to influence corporate affairs, either actively or passively through the fact corporate management may realize they need to appease one of their largest shareholders,” he said.

The justices also raised questions about whether it would be problematic for multiple foreign governments to each own less than 5% but collectively more than 5%. Bolton said it wouldn’t be, and that the law only requires a single foreign government to own less than 5%.

“There’s no reason to think if you have 13 foreign governments that all their interests are going to be aligned and they’re all going to be acting in concert,” he said.

Aframe countered that that seemed problematic. “And yet the problem with the statute is in some sense everyone is likely to be aligned,” he said. “Because the corporation has the goal of maximizing its profits.”

Aframe also said he was troubled by the definition of foreign ownership in the statute. “When I read that definition, I don’t even know if the secretary of state of the United States would know who is covered by foreign government when we’re talking about a de facto group that might have control over one part of one country, including insurgents,” he said. “So somehow a company is supposed to figure out who are these foreign governments… It’s this very nuanced, shifting thing.”

He said the statute seems to present a “classic chill problem.”

“I’m a CEO. This has criminal penalties, right? And so I could go to jail if I don’t get this right… My choice is to stay out of it because I don’t want to go to jail. And isn’t that exactly what we talk about in the First Amendment context when we talk about chill?” he said.

REFERENDUM FOLLOWED CORRIDOR DEBATE

Bolton said Maine has a strong interest in needing to police foreign influence on referendums and there is recent evidence of the issue being a problem. “This is not a law that was dealing with an abstract or hypothetical problem,” he said. “This was a problem that had recently happened in Maine.”

The 5% threshold, he said, is an effective measure to stop foreign influence or the appearance of it. “In every case in which you have a block holder with a significant ownership stake in a corporation, there is going to be at least passive influence in that corporate management is going to be aware they have a major investor that is a foreign government and they are going to be thinking about how to make sure they’re appeasing those interests,” Bolton said.

The 2023 referendum was proposed in response to record spending during a 2021 referendum aimed at halting a controversial power transmission corridor in western Maine. It was approved with 86% of the vote statewide.

Hydro-Quebec, which is wholly owned by Quebec and would use the transmission line to send power from Quebec into New England, spent more than $23.3 million to try to defeat the measure and protect the project. And Avangrid, the Spain-based parent company of Central Maine Power, was part of a group that spent more than $42 million to oppose the measure.

Dunlap, the attorney representing CMP Wednesday, argued against the 5% ownership threshold as a means of determining what constitutes a foreign-influenced entity and said control, and not just ownership of a company should be looked at. “What you need to look at is also other measures of control like voting rights, the ability to appoint directors, board members, other things like that,” he said.

In response to one justice again bringing up concerns about vagueness in the statute, Dunlap said he agrees. “There are many vagueness issues in this statute,” he said.

The circuit executive for the appeals court said Wednesday that written decisions from the court usually take at least three months from the time of oral arguments to be issued. Following the appeal on the injunction the case is expected to return to U.S. District Court in Portland.