U.S. Supreme Court Decides to Review Charity Telemarketing Case

In a case that could alter the way states regulate charitable fund raising, the U.S. Supreme Court has agreed to review a lawsuit charging an Illinois telemarketing company with fraud.

At issue is whether a professional solicitor can be prosecuted for fraud for not disclosing to potential donors how much of their gift goes to the solicitor and how much to a charity.

The Illinois attorney general appealed to the Supreme Court after that state’s highest court dismissed a fraud case against a telemarketing company.

The state court based its ruling on a series of U.S. Supreme Court decisions in the 1980s that laid out ground rules restricting state regulation of charitable fund-raising activities. Those decisions held that, because for many charities the processes of raising money and educating the public are often intertwined, both activities should be considered forms of free speech and thus protected by the First Amendment.

But in a sign that state regulators have become increasingly frustrated by the restrictions they face in cracking down on unscrupulous telemarketers, 18 states joined Illinois in asking the U.S. Supreme Court to review the case.

The court’s move to hear the case indicates that the justices may be willing to reconsider the laws that apply to charitable fraud, says Frederick Schauer, a professor of constitutional law at Harvard University’s Kennedy School of Government.

“If you look at most of the regulation of charitable solicitation from the ‘30s through the ‘80s, the court’s general view was that it was pretense in order to let people shoo away Jehovah’s Witnesses and others they considered annoying,” Mr. Schauer said. “The court may now be convinced that there are some cases in which actual fraud is a genuine problem.”

15 Percent to Charity

In the Illinois case, the attorney general sued Telemarketing Associates, of River Grove, Ill., in 1991, accusing it of committing fraud when it sought donations for VietNow, a Rockford, Ill., charity that works on issues that affect veterans. Under VietNow’s contract with Telemarketing, the charity receives 15 percent of the money raised, with the remainder going to cover the professional solicitor’s expenses (including publishing a newsletter for VietNow) and profit.

Floyd Perkins, chief of the charitable-trust bureau in the attorney general’s office, said the state’s main concern was that telephone solicitors did not tell potential donors how much of their money actually was going to the charity.

“A fund raiser who is collecting money for a charitable cause has a duty to disclose material facts when they’re making representations to people,” Mr. Perkins said.

The telemarketing company also acted fraudulently, the state alleged, because as the company built a list of donors who were willing to give repeatedly to VietNow, its expenses were reduced but it continued to keep the same percentage of donations for itself — a fact that he said also should have been revealed to donors.

The attorney general’s complaint also alleged that the fees charged by Telemarketing Associates were excessive, unreasonable, and a “waste of charitable assets.”

But Telemarketing’s lawyer, Michael Ficaro, said that in the course of the lawsuit the state had agreed that the company had not said anything false to potential donors.

The state’s case, he said, is based solely on the fact that the fund raisers had not told potential donors that 85 percent of the money collected would not go to VietNow.

“What the state wants is to tell a solicitor, ‘When you make a call you have to say: “Let me tell you that 85 cents of every dollar you give will not go to the charity. Would you please send us a check?” ’ No one would give any money,” said Mr. Ficaro, who used to head the attorney general’s charitable-trust bureau.

He added that the percentage fee charged by Telemarketing Associates was not unreasonable, as the attorney general charges, because of the expenses involved in running a fund-raising campaign.

Past Rulings Set Limits

The U.S. Supreme Court rulings from the 1980s forbid states from telling fund raisers what they must say because such steps would violate the First Amendment.

The court also has held that limiting the percentage of donations a charity could pay a professional solicitor would prevent unknown or controversial groups from being able to raise money, because their solicitors have to make more phone calls and spend more time convincing donors to give than would fund raisers for better-established charities.

Citing those rulings, state courts threw out the Illinois attorney general’s lawsuits three times before the state Supreme Court affirmed those rulings in November of last year.

This month, the U.S. Supreme Court accepted the Illinois attorney general’s appeal of that decision.

Whether the Supreme Court’s decision to hear the case signals its intent to relax any of the restrictions on state regulation of charitable fund raising is unclear, say legal experts.

One important distinction between the Illinois lawsuit and the earlier cases is that the latter involved statutes and ordinances that regulated solicitations before they were made, said Harvey Dale, director of New York University’s National Center on Philanthropy and the Law.

“This is a fraud case after the fact,” Mr. Dale said. Even so, he added, the court would be unlikely to accept a high percentage paid to a telemarketing company as adequate proof of fraud. “A percentage test would be a relevant factor, but I would be surprised if the Supreme Court didn’t say you have to have other factors as well.”

Errol Copilevitz, a Kansas City lawyer who successfully argued one of the key cases before the Supreme Court in 1988 on behalf of the National Federation of the Blind of North Carolina, said he thinks the current makeup of the court is even more sympathetic to First Amendment concerns than the justices were 14 years ago, which would make it unlikely that the court will agree that the state can tell a fund-raising company what it must say when it solicits donations.

The court has not set a date for hearing oral arguments in the Illinois case, and is not expected to issue its ruling on the case before the spring.

The case is known as Ryan v. Telemarketing Associates (No. 01-1806).