Highlights of Supreme Court Rulings on Charity-Appeals Regulation

By Grant Williams

Much of the current thinking about how states regulate charitable appeals has been shaped by three

U.S. Supreme Court cases from the 1980s. Following are highlights of each opinion, condensed from a summary written by the Illinois Supreme Court:

Village of Schaumburg v. Citizens for a Better Environment (1980).

The Village of Schaumburg, in Illinois, had an ordinance that required charities seeking a permit for door-to-door solicitations to provide proof “that at least 75 percent of the proceeds of such solicitations” would be used “for the charitable purpose of the organization.”

The nonprofit group in the case argued against the requirement, saying that charitable appeals should be considered a form of free speech under the First Amendment and enjoy all of its protections. The Supreme Court agreed, saying that “solicitation is characteristically intertwined with informative and perhaps persuasive speech seeking support for particular causes and that without solicitation the flow of such information and advocacy would likely cease.”

The justices said that the village’s 75-percent requirement was “a direct and substantial limitation on protected activity.” The only way such a limit could be sustained, they said, was if the village could show that the ordinance was protecting “a sufficiently strong, subordinating interest.”

The court rejected the village’s contention that the 75-percent requirement was needed to meet the government’s interests in preventing crime, fraud, and undue annoyance. Although the court acknowledged that preventing fraud was important, it said that the village ordinance was drawn too broadly and infringed on First Amendment freedoms.

The court said that requiring that a minimum percentage of receipts go to charitable purposes was not a direct way to prevent fraud because costs incurred by charities conducting fund-raising campaigns can vary substantially depending on a wide range of variables, some of which are beyond the control of the organizations. It said there was no rational reason to conclude that a charity that uses more than 25 percent of the funds it collects on fund-raising expenses, salaries, and overhead should automatically be labeled fraudulent.

Secretary of State of Maryland v. Joseph H. Munson Company (1984).

A Maryland law prohibited charities from paying as expenses more than 25 percent of the amount raised. A provision in the law said the limit could be waived in cases in which it “would effectively prevent a charitable organization from raising contributions.”

But the court struck down the state law, ruling that the constitutional problems identified in the Schaumburg case related to percentage-based limitations applied in this instance and could not be fixed by the addition of the waiver that granted authorities the discretion to drop the limits.

The Supreme Court said that the provisions of the Maryland statute were “too imprecise, so that in all its applications the statute creates an unnecessary risk of chilling free speech.” The court said that the state law “operates on a fundamentally mistaken premise that high solicitation costs are an accurate measure of fraud.” It added: “If an organization indulges in fraud, there is nothing in the percentage limitation that prevents it from misdirecting funds.”

Riley v. National Federation of the Blind of North Carolina (1988).

A North Carolina statute prohibited for-profit fund raisers from charging an “unreasonable” or “excessive” fee, and it outlined three tiers of percentages to define what an unreasonable fee would be for a charity to pay a professional fund raiser.

If the fund-raising fee was 35 percent or more of gross receipts, the fund raiser carried the burden of proving that the fee was “necessary” because the solicitation involved the dissemination of information, discussion, or advocacy related to the charity’s mission, or the charity’s ability to solicit would otherwise be “significantly diminished.”

The law also required professional fund raisers to disclose to potential donors, when appealing for money, what percentage of contributions on average they had delivered to their charitable clients in the previous year.

The Supreme Court said that the percentage-based definition of an unreasonable fee was unconstitutional and pointed to its ruling in Munson “that there is no nexus between the percentage of funds retained by the fund raiser and the likelihood that the solicitation is fraudulent.”

What’s more, the court said that the North Carolina statute suffered from a “more fundamental flaw” than the law in the Munson case: It placed fund raisers at risk of having to defend their practices case by case in response to nothing more than “a loose inference that the fee might be too high.”

Over time, the court said, “fund raisers would be less inclined to contract with many charitable organizations, especially less popular ones, and the ability of charities to speak would be substantially diminished.”

The court said that the law’s requirement that fund raisers disclose the amount of proceeds turned over to charity at the time of the solicitation was a “content-based” regulation of protected speech that was unduly burdensome and not narrowly tailored.

Such compelled disclosure incorrectly presumes that a charity derives no benefit from funds collected in its name but not disbursed to it, the court said, and would “almost certainly hamper the legitimate efforts of professional fund raisers to raise money for the charities they represent.”