Sept. 9 (Bloomberg) -- The U.S. Supreme Court, signaling it may make Sonia Sotomayor’s first case on the bench a blockbuster, questioned the constitutionality of longstanding federal restrictions on corporate election spending.

Hearing an unusual second round of arguments in a case involving a 2008 documentary film critical of then-presidential candidate Hillary Clinton, the court today weighed overturning a 1990 ruling that let corporations be barred from spending general treasury funds on campaign advertisements.

The justices likely to determine the case’s outcome, John Roberts and Samuel Alito, both voiced skepticism about the 1990 decision and limits on corporate spending. Roberts, the chief justice, scoffed at Obama administration lawyer Elena Kagan’s contention that restrictions were needed to protect shareholders who disagree with the company’s political positions.

“Isn’t it extraordinarily paternalistic for the government to take the position that shareholders are too stupid to keep track of what their corporations are doing and can’t sell their shares or object in the corporate context if they don’t like it?” Roberts asked.

The U.S. has banned corporate campaign spending since 1947. Opponents of the restrictions contend they violate the Constitution’s free-speech guarantee, while proponents say a decision overturning the limits would usher in a new era of corporate election spending and political corruption.

‘Rather Disappointed’

“I was rather disappointed in some of the justices’ apparent naivete as to how corporate and union money affects the legislative process,” said Arizona Senator John McCain, a Republican who sponsored the 2002 law at issue in the case and attended today’s session.

The argument suggested the court, as it has in several recent campaign-finance cases, might divide 5-4 in favor of overturning the restrictions. Sotomayor aligned herself with the court’s liberal wing in her questioning, aiming all three of her queries at lawyers who argued in favor of ending the restrictions.

Sotomayor suggested the court would be moving too quickly by taking that step, saying the government hadn’t had a chance to marshal its evidence in defense of the corporate spending limits. “We don’t have any record developed below,” she said.

Today’s case may become a turning point for the court under Roberts. The chief justice and Alito, both appointed to their posts by former President George W. Bush, so far have shied away from explicitly reversing precedents, refusing to go as far as fellow conservatives Antonin Scalia and Clarence Thomas.

New Arguments

The court earlier this year held an hour-long argument that could have resolved the case on narrower grounds. A majority instead decided to schedule a second session to confront the court’s prior rulings governing corporate and union spending.

Scalia, Thomas and Justice Anthony Kennedy have said they would overrule both the 1990 decision, Austin v. Michigan Chamber of Commerce, and the part of the 2003 McConnell v. Federal Election Commission ruling that the court is reconsidering as well.

The Austin ruling said spending limits were warranted to counteract “the corrosive and distorting effects of immense aggregations of wealth that are accumulated with the help of the corporate form.”

Roberts pressed Kagan, making her first argument as U.S. solicitor general, to acknowledge that the government wasn’t defending that reasoning. Kagan ultimately agreed that the government was asking the court to uphold the law using reasoning it had never previously endorsed.

Major Change

Kagan argued that a ruling allowing corporations to spend freely in support of candidates would mark a major change in U.S. election law.

“For over 100 years Congress has made a judgment that corporations must be subject to special rules when they participate in elections and this court has never questioned that judgment,” Kagan said.

The case concerns “Hillary: The Movie,” a 90-minute film that Washington-based Citizens United sought to air on a video- on-demand channel during Clinton’s presidential campaign. Clinton is now President Barack Obama’s secretary of state.

A three-judge panel said the movie was akin to an ad. That made it subject to a 2002 law banning use of corporate or union general treasury funds for broadcast ads that advocate for or against a federal candidate’s election. Citizens United didn’t qualify for an exemption for some non-profit corporations.

Citizens United’s lawyer, Theodore Olson, argued that “robust debate about candidates for elective office is the most fundamental value” protected by the First Amendment.

NRA Brief

Justice John Paul Stevens tried to steer the court toward a relatively narrow decision. He asked both sides about a suggestion in a brief by the National Rifle Association that the court interpret the statute so that non-profit corporations were exempted from the law so long as they paid for ads exclusively from money donated by individuals.

“Why is that not the wisest, narrowest solution to the problem before us?” Stevens asked.

Stevens’s suggestion didn’t get much traction among the justices likely to constitute the majority. Alito voiced concern when Kagan said political pamphlets could be regulated, even as she distanced herself from an earlier contention that the government could restrict the publication of books in the weeks leading up to an election.

“I have no idea where the government would draw the line with respect to the medium,” Alito said.

The case is Citizens United v. Federal Election Commission, 08-205.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

Last Updated: September 9, 2009 15:52 EDT