It was the first of three cases the court had on its agenda Wednesday.
The court decided by a 5-4 vote that barring Legal Services Corp. lawyers from fighting the 1996 welfare overhaul was an unconstitutional gag order imposed by Congress.
The majority agreed with a coalition of advocates for the poor that the 1996 restrictions imposed by a Republican-led Congress handicap federally subsidized LSC lawyers as they represent poor clients.
"The Constitution does not permit the government to confine litigants and their attorneys in this manner," Justice Anthony Kennedy wrote for the majority.
Kennedy was the key swing vote in the decision. He sided with the court's more liberal wing, which includes the two justices President Clinton named to the court. The other traditional swing vote, Justice Sandra Day O'Connor, joined the three most conservative justices in dissent.
Although the wrenching political fight over Clinton's pledge to "end welfare as we know it" has faded, the ruling opens the door to new challenges from the left to one of Clinton's most divisive policies.
Congress did not have to fund the LSC, and once the LSC was in place Congress was under no obligation to pay for all of its activities, Kennedy wrote.
That said, the government cannot step on the First Amendment in order to protect itself from court challenges, Kennedy wrote.
"The LSC and the United States ... in effect ask us to permit Congress to define the scope of the litigation it funds to exclude certain vital theories and ideas," Kennedy wrote.
Justice Antonin Scalia accused the majority of adopting "a novel and unsupportable interpretation" of previous Supreme Court rulings on the First Amendment.
"The LSC subsidy neither prevents anyone from speaking nor coerces anyone to change speech," Scalia wrote on behalf of himself, O'Connor, Chief Justice William Rehnquist and Justice Clarence Thomas.
'SCARLET LETTER' BALLOT LABEL OVERTURNED
The court is also doing away with so-called "scarlet letter" labels on political candidates.
In a unanimous ruling, the court says states can't use election ballots to brand congressional candidates as opponents of term limits.
The court says the use of such a label in Missouri undermines candidates' chances and "attempts to dictate electoral outcomes."
Missourians voted in 1996 to require their congressional delegation to support and work for term limits or be identified as an opponent on state-issued ballots.
Supporters say the labels provide more information to voters. But critics call them unconstitutional and an improper use of the ballot.
The court says the Missouri ballot label falls outside the power gien to states by the Constitution to regulate elections.
The case is a follow-up to the Supreme Court's five-to-four decision in 1995 that barred states from imposing term limits on members of Congress.
A NEW CHURCH-STATE BATTLE
The justices grappled with a church-state dispute over whether a Christian youth group should be allowed to hold after-school meetings at a public school.
Frank Miller, lawyer for the Milford School District in upstate New York, told the high court that meetings of the Good News Club amount to religious worship and as such are banned by the district, just as it bans partisan political and commercial activity.
The lawyer for the youth group, which has chapters all over the country, argued that denying the group access violates its free-speech rights. Attorney Thomas Marcelle asked why other groups that teach moral instruction, like the 4-H Club and the Boy Scouts, may use the school in tiny Milford, N.Y., and the Christian group cannot.
"This is a free-speech case," Thomas Marcelle said. "We're not asking for special access, just equal access."
Justices seemed particularly interested in what constitutes religious worship. The Good News Club aims to educate children on Christian moral values through Bible study, prayer, songs and games, which the school district maintains violates the Constitutional separation of church and state.
This is the first key church-state case the high court has heard since last June, when justices ruled against prayer at school football games.