Supreme Court Hears Arguments in Controversial Telemarketing Case

In a case that could alter the way fund raisers do business, lawyers for the State of Illinois faced contentious questions from the justices of the U.S. Supreme Court this month during an hourlong session in a packed courtroom. But the court provided mixed signals about how it will eventually rule on the case, Madigan v. Telemarketing Associates.

At issue is whether the Illinois attorney general can prosecute a telemarketing company for telling prospective donors their gifts would be used for charitable purposes, even though it kept 85 percent of all funds contributed (The Chronicle, March 6). Forty state regulators, the Federal Trade Commission, and the Better Business Bureau’s Wise Giving Alliance, a charity watchdog group, sided with Illinois. Independent Sector, a national coalition of charities and grant makers, and scores of nonprofit organizations submitted legal briefs in favor of Telemarketing Associates.

The Illinois attorney general accused Telemarketing Associates of intentionally misleading donors by creating the false impression during telephone solicitations that contributed dollars would be used for charitable purposes by VietNow, a Rockford, Ill., veterans organization, when the fund-raising company knew that an overwhelming percentage of donated funds would never be used that way.

The company denied any wrongdoing and won three state-court rulings that held that the attorney general was barred from pursuing fraud claims because of the telemarketing company’s free-speech rights.

Precedents From 1980s

During the hearing, several justices expressed concerns about overturning three Supreme Court decisions from the 1980s that give charitable organizations broad latitude over what they choose to tell prospective donors about their fund-raising expenses. Those rulings noted that for many charities, the process of raising money and educating the public are often intertwined, so both activities should be considered forms of free speech and thus protected by the First Amendment.

Justice David H. Souter asked the lawyers for Illinois, “How can we sanction charities without requiring the very disclosure we said previously would not be required?” He added: “The court would be forced to re-evaluate precedent.”

“That would be fine with us, sir,” responded Richard S. Huszagh, assistant attorney general of Illinois, producing a laugh from the crowd.

Justice Antonin Scalia weighed in most forcefully against Illinois’s case. He said that most charities pay “substantial” fees for fund raising, and suggested that it would be wrong for states to force them to disclose how much of the money they raise goes to charity.

“Who’s to say how much is too much?” he asked. “It’s not a misrepresentation if there are good reasons why 90 percent of the money goes toward fund raising.”

Justice Stephen G. Breyer agreed, citing examples of start-up charities and other organizations that have high fund-raising expenses.

Mr. Huszagh distinguished those examples from the case of Telemarketing Associates, in which, he argued, solicitations were made with “unquestionable fraud.” Even if the telemarketer did not explicitly lie to prospective donors, Mr. Huszagh said, the company misrepresented the truth because the public “reasonably understood” that substantially more of the money raised would go to the charity.

If the court does not allow Illinois to prosecute Telemarketing Associates for fraudulent activity, the court will invite “open season for charitable fraud,” said Paul D. Clement, the deputy solicitor general of the U.S. Department of Justice, who also argued for Illinois. “There isn’t a First Amendment protection for charitable solicitation fraud. It must not go unpunished.”

The justices had questions for the telemarketers as well.

Errol Copilevitz, a lawyer for Telemarketing Associates, told the court, “High fund-raising costs and a failure to disclose those is not an indication of fraud.”

But Justice Ruth Bader Ginsburg said something was “not quite right” about Telemarketing Associates’ activities. She questioned why, for example, VietNow allowed Telemarketing Associates to keep the names and phone numbers of people who contributed to the charity. “It seems to me if they were in business to collect money for charity,” Justice Ginsburg said, “they would give the charity the names of the donors.”

She also wondered how the federal government could allow a 100-percent tax deduction by a donor if only a small amount of the money raised went to charity. She suggested a system in which the government could provide a full tax deduction to donors for their contributions only if at a minimum 40 percent of the money raised went to programs.

Justice Scalia countered: “Surely we can’t reduce the tax deduction because some expenses appear to be unreasonable,” he said. “It seems if it’s an expense to a charity, it’s an expense to a charity.”

Justice Anthony M. Kennedy suggested, hypothetically, that 95 percent of donors would not have given if they had known how little of the money raised went to charity. Assuming that was the case, he asked, “Is there anything the state can do to protect the public?”

Mr. Copilevitz said fund raisers must tell prospective donors what percentage of money they are raising will go to charitable programs — but only if they are asked.

So the rule is “if ask, must tell,” Justice Ginsburg observed. She added: “The sophisticated person who will ask is protected. But that will disproportionately affect donors who don’t ask.”

The justices are expected to issue a decision in the case by July.