Monday, May 05, 2003

Madigan v. Telemarketing Associates

This morning the Supreme Court unanimously reinstated a fraud lawsuit brought by Illinois Attorney General Lisa Madigan against a telemarketing firm, Telemarketing Associates, Inc. Madigan seeks to try Telemarketing Associates over the company’s charitable solicitation practices, which she says involves lying to potential donors over how much of their contribution is actually used for charitable purposes.

Within the nonprofit community, it’s well understood that telemarketing campaigns yield only a small percentage of contributions to the actual organization. Most of the contributions—85% in the Telemarketing Associates case, allegedly—are retained by the telemarketer as fundraising costs. Despite the low rate of return, many nonprofit groups willingly use telemarketing. For example, Mothers Against Drunk Driving argued in an amicus brief that simply getting their name and message out via telemarketing was just as valuable as the actual contributions received. For many other groups, telemarketing campaigns produce first-time donors who turn into regular contributors. Nonprofit telemarketing is really more about advertising the group than pure fundraising, thus justifying what sounds like high fundraising costs.

The Supreme Court has repeatedly protected these practices from state interference. For instance, the Court has ruled that a state may not arbitrarily limit the percentage of contributions an organization may pay a telemarketer. Aside from the right of voluntary contract, such actions are considered protected First Amendment activity, since the fundraising is directly related to speech interests.

In this case, however, Madigan is alleging actual fraud. She accuses Telemarketing Associates of telling potential donors that “a significant amount of each dollar donated would be paid over” to a particular charity, when in fact the telemarketers were contractually promised 85% of contributions. Since the underlying charity, a service organization for Vietnam Veterans, was looking to provide services directly to individuals, Madigan claims Telemarketing Associates’ actions should not be exempt simply because their efforts raised awareness or advertised the group’s mission.

Whether Madigan can prove her claims remains to be seen. But this appeal deals only with the Illinois Supreme Court’s decision to dismiss the case before trial. In this respect, the Supreme Court seems to have acted reasonably in reversing the lower court’s decision and remanding the case for trial. Writing for the Court, Justice Ruth Bader Ginsburg makes clear the Court is not trying to weaken the Constitution’s protection of telemarketers:

The Illinois Supreme Court in the instant case correctly observed that “the percentage of [fundraising] proceeds turned over to a charity is not an accurate measure of the amount of funds used ‘for’ a charitable purpose.” 198 Ill. 2d, at 360, 763 N. E. 2d, at 298 (citing Munson, 467 U.S., at 967, n. 16). But the gravamen of the fraud action in this case is not high costs or fees, it is particular representations made with intent to mislead. If, for example, a charity conducted an advertising or awareness campaign that advanced charitable purposes in conjunction with its fundraising activity, its representation that donated funds were going to “charitable purposes” would not be misleading, much less intentionally so. Similarly, charitable organizations that engage primarily in advocacy or information dissemination could get and spend money for their activities without risking a fraud charge. See Schaumburg, 444 U.S., at 636—637; Munson, 467 U.S., at 963; Riley, 487 U.S., at 798—799.

The Illinois Attorney General here has not suggested that a charity must desist from using donations for information dissemination, advocacy, the promotion of public awareness, the production of advertising material, the development or enlargement of the charity’s contributor base, and the like. Rather, she has alleged that Telemarketers attracted donations by misleading potential donors into believing that a substantial portion of their contributions would fund specific programs or services, knowing full well that was not the case. See supra, at 4—5, 15. Such representations remain false or misleading, however legitimate the other purposes for which the funds are in fact used.

We do not agree with Telemarketers that the Illinois Attorney General’s fraud action is simply an end run around Riley’s holding that fundraisers may not be required, in every telephone solicitation, to state the percentage of receipts the fundraiser would retain. See Brief for Respondents 14—19. It is one thing to compel every fundraiser to disclose its fee arrangements at the start of a telephone conversation, quite another to take fee arrangements into account in assessing whether particular affirmative representations designedly deceive the public.

My only concern is that this decision may embolden other state attorneys general (arguably the group of politicians most hostile to individual rights in America) to initiate sham fraud cases against telemarketers and other direct marketing professionals. As we’ve seen from the Federal Trade Commission’s imposition of the Do Not Call list, direct marketers have become the new cash cow for regulators eager to leach off someone. At the same time, however, the Court today did it’s job by properly ruling on the case before it. And possibly with an eye towards my concerns, Justice Antonin Scalia (joined by Justice Clarence Thomas) issued a short concurring opinion which further clarifies the Court’s narrow ruling:

The question presented by the petition for certiorari in this case read as follows: “Whether the First Amendment categorically prohibits a State from pursuing a fraud action against a professional fundraiser who represents that donations will be used for charitable purposes but in fact keeps the vast majority (in this case 85 percent) of all funds donated.” Pet. for Cert. i. I join the Court’s opinion because I think it clear from the opinion that if the only representation made by the fundraiser were the one set forth in the question presented (“that donations will be used for charitable purposes”), and if the only evidence of alleged failure to comply with that representation were the evidence set forth in the question presented (that the fundraiser “keeps the vast majority (in this case 85 percent) of all funds donated”), the answer to the question would be yes.

It is the teaching of Riley v. National Federation of Blind of N. C., Inc., 487 U.S. 781, 793 (1988), and Secretary of State of Md. v. Joseph H. Munson Co., 467 U.S. 947, 966 (1984), that since there is such wide disparity in the legitimate expenses borne by charities, it is not possible to establish a maximum percentage that is reasonable. It also follows from that premise that there can in general be no reasonable expectation on the part of donors as to what fraction of the gross proceeds goes to expenses. When that proposition is combined with the unquestionable fact that one who is promised, without further specification, that his charitable contribution will go to a particular cause must reasonably understand that it will go there after the deduction of legitimate expenses, the conclusion must be that the promise is not broken (and hence fraud is not committed) by the mere fact that expenses are very high. Today’s judgment, however, rests upon a “solid core” of misrepresentations, ante at 16, that go well beyond mere commitment of the collected funds to the charitable purpose.

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