Madigan, Lisa, Illinois Atty. Gen. v. Telemarketing Associates, Inc., et al. (05/05/2003)

Questions presented: Whether the 1st 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 of all funds donated.

BY JANE VAUGHN, MEDILL NEWS SERVICE

More than three decades ago, on a hilltop near Plieku, Vietnam, two soldiers met and discovered they had something in common they were both from Rockford, Ill. They made a pact to find each other back home if they ever got out alive.

From that improbable and precarious bond grew VietNow, a Rockford-based, nationwide organization of "veterans helping veterans," dedicated to forging connections between survivors of wars since 1957.

Beyond offering a social support network, the veterans and their families pride themselves on helping homeless and disabled veterans find food, jobs and housing. To further those efforts, VietNow employed a tried and true American fundraising technique telemarketing.

From 1987 to 1996, VietNow contracted with a telemarketing firm to make calls on their behalf, with considerable success. Telemarketing Associates generated over $7 million during those nine years.

But VietNow only saw about $1 million of that money.

Telemarketing Associates and its broker, Armet, Inc., kept more than 85 percent of the donations they raised for VietNow, in accordance with their contract with the charity. After VietNow paid its overhead costs, only about 3 percent of the telemarketing proceeds went to needy veterans.

The Illinois Attorney General first took notice of this arrangement more than ten years ago, and the state has been battling Telemarketing Associates ever since, calling its fundraising practices fraudulent.

The Attorney General contends that Telemarketing deceived and took advantage of the people it called by not disclosing the way the funds would be distributed.

"What [Telemarketing Associates] said was literally true; its what they didn't say, the so-called 'half-truth,"' said Richard Huszagh, the attorney for the state.

Illinois wants the telemarketers to disclose to the people they call the amount of money actually going to the charity theyre raising funds for. If not, the state wants the right to sue those telemarketing companies for fraud.

In the first complaint, filed in 1991, the Attorney General said telemarketing fees that were "excessive in amount and an unreasonable use and waste of charitable assets" constituted "knowingly deceptive and materially false" business practice.

But the courts in Illinois ruled that Telemarketings 1st Amendment rights protect it from the charge of fraud. A trial court dismissed the complaint, and the Illinois Appellate Court agreed. The Attorney General appealed to the Illinois Supreme Court, which again ruled in favor of Telemarketing Associates.

In its November 2001 ruling, the Illinois Supreme Court cited a previous U.S. Supreme Court opinion that "solicitation is characteristically intertwined with informative and perhaps persuasive speech." That makes solicitation in this case, telemarketing protected as free speech.

The court also noted that the 85 percent fee charged by Telemarketing Associates paid for more than just phone calls. The company paid and supplied its employees, covered administrative costs, and produced 2,000 copies of an advertising magazine aimed at raising awareness about VietNow. Armet also maintained a toll-free number providing information about the charity.

Justice Mary Ann McMorrow wrote that beyond the tangible services rendered, "Charities often reap non-monetary benefits by having their message disbursed by the solicitation process. In fact . . . the solicitation may be so intertwined with informative and persuasive speech that the solicitation itself is part of the charitable purpose."

Given the unique nature of raising money by phone, the court said Telemarketing would be hard-pressed to keep prospective donors on the phone after disclosing how the funds were distributed. Citing a previous case, the court wrote, "the disclosure will be the last words spoken as the donor hangs up the phone."

The court concluded that ruling in favor of the state would put fund-raisers in an unfairly compromised position. "[They] would be at a constant risk of incurring litigation costs, as well as civil and criminal penalties, which could produce a substantial chilling effect on protected speech," McMorrow wrote.

But the Attorney General holds that the only people jeopardized by this case are companies that defraud well-meaning citizens. Huszagh said he believes the case could protect the public from the "more than a handful" of telemarketers that keep the bulk of the money they raise for charities.

VietNows arrangement with Telemarketing stands out as particularly bad practice among charities. The American Institute of Philanthropy, which rates charitable organizations based on the proportion of income going directly toward their cause, has consistently given VietNow failing grades.

AIP uses a standard that charities should spend no more than $35 for every $100 raised. In 2001, VietNow spent $91 to raise $100, according to the AIP.

Bennett Weiner, Chief Operating Officer at the Better Business Bureaus Wise Giving Alliance, said charities sometimes are compelled to take a smaller cut of telemarketing proceeds in exchange for paying nothing up front. Those charities "treat [telemarketing] as found money," Weiner said.

But the drawbacks of that arrangement can outweigh the appeal. "[Charities] dont get the lions share of the proceeds, and they run the risk of disappointing donors," Weiner said.

According to the states petition, charitable solicitors generate more than $200 billion every year, and the calls increasingly are handled by professional telemarketing companies,

"We hope [the case] deters [telemarketers] who have pushed the envelope and crossed the line" of what is fair practice, Huszagh said.

The U.S. Supreme Court granted certiorari in the case on Nov. 4, 2002.

On May 5, 2003, the Court reversed, holding unanimously that Illinois and other states can pursue fraud actions against fundraisers who represent that donations will be used for charitable purposes but in fact keep the vast majority of the funds donated.

Writing for the Court, Justice Ruth Bader Ginsburg concluded that the 1st Amendment is not undermined by a state's effort to combat fraud, even if those efforts involve prior restraints on solicitation.

The reason the 1st Amendment was not violated, the Court noted, is that the case against the fundraiser was not for information that was not conveyed, which might have 1st Amendment implications, but for speech misleadingly represented.

Justice Antonin Scalia wrote a two-paragraph concurring opinion for himself and Justice Clarence Thomas that stressed that the case rests upon a "solid core" of misrepresentations that go "well beyond mere commitment of the collected funds to the charitable purpose."