Telemarketers appear to have high court allies in fraud case

Tuesday, March 4, 2003

WASHINGTON — If any justices of the Supreme Court have had their dinners interrupted by an unwanted phone call from a telemarketer, they weren’t telling.

Instead, they seemed ready and willing yesterday to stand by Court precedents that give telemarketing and charitable solicitation a strong measure of First Amendment protection.

During oral arguments in Madigan v. Telemarketing Associates, most justices seemed to agree that high solicitation fees alone do not constitute the basis for a fraud prosecution by a state against a charitable organization. The case, originally called Ryan v. Telemarketing Associates, took a new name after the election last November of Lisa Madigan as the new Illinois attorney general.

The Illinois Supreme Court struck down the state’s case against Telemarketing Associates, which was collecting 85 cents of every dollar it raised for VietNow, a Vietnam veterans’ group. The veterans’ group did not object to the arrangement, which yielded more than $1 million for its charitable purposes. But the state said the high fee percentage amounted to fraud because typical donors would believe that much more of the money they gave would go to the charity itself.

But the Illinois high court cited a trilogy of U.S. Supreme Court rulings from the 1980s — Riley v. National Federation of the Blind, Maryland v. Munson and Village of Schaumburg v. Citizens for a Better Environment — that struck down laws that sought to limit solicitation fees. Because of those rulings, the Illinois court said, no presumption could be made that the high fee in the VietNow case was misleading or fraudulent.

When the U.S. Supreme Court said it would review the Illinois ruling, nonprofit organizations and the telemarketing industry became fearful that their longstanding First Amendment protection would be weakened. Based on oral arguments yesterday, their fears seem unfounded.

Illinois Assistant Attorney General Richard Huszagh asked the Supreme Court not to give First Amendment protection to “half-truths,” and he said that charities would still be given “breathing room” to pay considerable fees to fund-raising professionals, because the state still has to prove “material misrepresentation of fact.” No set percentage would be fraudulent per se, he said.

But justices hammered away at the state’s position for leaving the state with too much discretion. “Who is to say that 25 percent is too much?” asked Justice Antonin Scalia. He asked whether the state would have to take an opinion poll to determine what percentage the public thinks is a reasonable fee for fund-raisers.

Justice Sandra Day O’Connor asked, “How would anybody know” if a charity crossed the line into fraud? O’Connor also noted that one brief filed in the case said a charity ball put on by the state governor only yielded net proceeds of 17%. Huszagh said that contention was inaccurate.

“What if no misrepresentation is made?” asked Justice David Souter. Under the state’s theory, Souter suggested, the only way for a charity to avoid prosecution would be to disclose its fund-raising fee to every person called, whether asked to or not — which would violate Court rulings against forced disclosure.

Justice Stephen Breyer cited friend-of-the-court briefs filed in the case, in which charities asserted that high fees were perfectly reasonable — to introduce new or unpopular charities, or to educate the people called, for example.

By the time Deputy Solicitor General Paul Clement rose to support Illinois, he seemed more conciliatory, suggesting that if a telemarketer was truthful about the fees when asked by a potential donor, the state would not have a case against it. He said “context does matter,” so that a startup charity should be given more leeway to pay a higher percentage in fees.

Still, Souter said, “the result is a dice throw” for charities.

M. Errol Copilevitz, arguing for the telemarketing firm, said high fees are often appropriate and “an organization receives benefit beyond the net dollars” especially if its goal is to raise awareness of a new or unpopular cause. “Unpopular charities have the same rights as popular charities,” he said.

Copilevitz also argued that consumers’ interests are protected in other ways, through regulations that require truthful disclosure when asked, as well as extensive information available at state Web sites.

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