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Sam Heldman


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Monday, March 03, 2003
No. 01-1806 Illinois v. Telemarketing Associates, Inc.

The second case argued today is about whether a state may bring a fraud action against a telemarketing company based on its failure to disclose that it keeps 85% of all donations. The main question here is over whether the amount of the telemarketer’s take is material to whether the solicitation was fraudulent.

In general, states may not regulate charitable fundraising by prescribing how the percentages of funds raised are used. The Court has previously held that a state may not prohibit an “unreasonable” fee in charitable solicitations. Riley v. Nat’l Federation of the Blind, Inc, 487 U.S. 781 (1988). In addition, the Court has stuck down regulations that set the maximum percentage of donations a professional fundraiser may keep, Maryland v. Joseph H. Munson Co., 467 U.S. 947 (1984), and regulating the minimum percentage of donations a charity must use for charitable purposes. Schaumburg v. Citizens for a Better Environment, 444 U.S. 620 (1980).

In each of those cases, however, the charity or fundraiser was challenging a state-enacted restriction on charitable fundraising. The Court repeatedly held that such regulations were not narrowly tailored to address the state’s compelling interest in preventing fraud. In this case, however, the state has brought a fraud action, alleging that in light of the percentage of donated funds that the respondent keeps, its assertions to donors of how donated funds will be used were misleading and amounted to fraud.

Unlike the above-cited cases, a fraud suit brought by the state is narrowly tailored to address the state’s compelling interest in preventing fraud. If the prosecution of a single company isn’t narrowly tailored, I have no idea what is.

The respondent in this case acts as if the state’s power to enforce its fraud laws creates an atmosphere in which no charity would be able to raise funds, for fear that it would be prosecuted for fraud. The respondent is wrong because all a charity need do is neglect from making misrepresentations. As for when a charitable solicitation amounts to fraud, that determination is not made by the state, as the respondent’s brief suggests. It is for the jury to decide whether a misrepresentation in fact occurred.

The fallacy of the respondent’s argument is illustrated by taking the case to extremes. If the telemarketers did not have any contract with any charity, then clearly their misrepresentation of a charitable purpose would be actionable fraud.

Now, what if the telemarketers had a contract whereby they were authorized to solicit funds for the charity, so long as the telemarketers turned over one dollar per year to the charity? Thus, a miniscule portion of each donation goes to the charity. Such a case would still constitute fraud, as the fundraisers are not really raising funds for the charity at all. They would be raising funds for themselves, in the name of charity, and turning over a nominal amount to the charity. This is no less true if the contract provided that 0.01% of donations would go to the charity. In such a case, the amount of the donation increases the amount actually received by the charity, but it is laughable to say that the percentage is irrelevant.

However, that is exactly the argument made by the telemarketers. As you might have guessed, I predict the court will REVERSE.