By Alina Selyukh and David Ingram
WASHINGTON (Reuters) - A U.S. appeals court ruled on Tuesday that tax-exempt groups spending millions on election-time ads this campaign season can keep their donors secret, turning aside an attempt by a Democratic congressman to force disclosure.
The unanimous decision reversed a ruling by a lower court in March that had sent scores of tax-exempt groups scrambling for ways to protect their donors' names and continue to run ads ahead of the November 6 presidential and congressional elections.
Tax-exempt groups were pioneered as a powerful campaign tool almost a decade ago by Democrats, but Republicans have been outperforming them in recent years. This year, the fundraising prowess of conservative groups has greatly trumped that of liberal groups, feeding the fears of many Democrats that this may cost them seats in Congress or the White House on November 6.
Conceding the complexity of U.S. campaign laws, a three-judge panel of a federal appeals court in Washington ruled that the Federal Election Commission should set the rules or ask the lower court to revisit the case and do so.
"The statute is anything but clear," the ruling said, adding that the appeals court was "in no position" to assess the FEC's interpretation of its intricate regulations.
The FEC, deadlocked along party lines, in the past interpreted its rules to mean that 501(c)s have to disclose only those donors who specifically designate their money to funding particular issue ads in the final runup to an election.
That interpretation triggered virtually no donor disclosure, to the dismay of campaign finance reform advocates who argue that many of the tax-exempt groups exist only to influence elections on behalf of wealthy individuals or major corporations hidden by what they say was too narrow an interpretation.
Chris Van Hollen, the Democratic congressman who originally sued the FEC in 2011 to try to force more disclosure, said Tuesday's ruling "struck a blow against transparency in the funding of political campaigns."
"The Court of Appeals' decision today will keep the American people, for the time being, in the dark about who is attempting to influence their vote with secret money," he said.
His office indicated no immediate plans to ask the full appeals court to take on the case, but said they will keep examining their options.
REPUBLICAN GROUPS WELCOME RULING
Thomas Kirby, a lawyer with Wiley Rein who represented the Center for Individual Freedom -- which alongside another conservative group the Hispanic Leadership Fund had appealed Van Hollen's victory in district court, welcomed the ruling.
"When you've got three judges - and we have judges here from across the political spectrum - and all three judges agree on what the statute means, they're probably right," he said.
The Center for Individual Freedom is pursuing a similar ruling in Illinois, hoping to overturn a state law requiring advocacy groups to disclose donors. In a 2-1 ruling last week, a three-judge federal appeals court panel upheld the Illinois law, but Kirby said the group plans to seek review of the full court.
Tuesday's ruling in Washington was also cheered by two of the biggest-spending outside groups in the 2012 presidential and congressional campaigns: Americans for Prosperity, founded by billionaire brothers Charles and David Koch, and Crossroads GPS, run by former President George W. Bush's aide Karl Rove.
"Americans for Prosperity believes that government should be reined in when it overreaches its legal authority, and here, the appeals court played that crucial role, reining in a district court decision that was judicial activism at its core," said spokesman Levi Russell.
Outside spending groups had argued that the lower court ruling was an infringement upon their right to freedom of speech reaffirmed by a landmark 2010 U.S. Supreme Court decision in Citizens United v. FEC. This ruling lifted limits on corporate and union spending in elections, equating their speech rights to any individual's.
Tuesday's relatively brief five-page decision came four days after a three-judge panel heard oral arguments in the matter, a fast pace for a court that sometimes takes months to issue decisions.
The case is Center for Individual Freedom v. Christopher Van Hollen Jr., U.S. Court of Appeals for the District of Columbia Circuit, No. 12-5117.
(Editing by David Brunnstrom)