Court - Telemarketers can't lie about where charity money goes

Tuesday, May 6, 2003

WASHINGTON -- It won't stop those annoying phone calls at dinnertime, but the Supreme Court set new limits Monday for telemarketers who solicit money for charities. If the telemarketer lies or misleads about where the contributions go, states can take them to court.

The Constitution's guarantee of free speech does not protect telemarketers or other fund-raisers who intentionally deceive potential donors, the court said in an opinion written by Justice Ruth Bader Ginsburg.

"Like other forms of public deception, fraudulent charitable solicitation is unprotected," she wrote.

The unanimous ruling allows Illinois to go after a telemarketing firm that took in more than $8 million on behalf of a Vietnam veterans' charity, and pocketed 85 percent of the money. That's 2 1/2 times more than the Better Business Bureau considers reasonable administrative cost for a charitable fund-raiser.

Pennies on the dollar

Illinois authorities claimed would-be donors were told their money would go for food baskets, job training and other services for needy veterans, even though only pennies of every dollar were earmarked for those activities.

The court's ruling is limited to fund-raising done in the name of charity, which yields about $200 billion annually. It does not directly apply to commercial sales pitches such as invitations to buy phone services or vacation time shares.

"This is clearly a victory for consumers who want to give to charities and know that their dollars are being spent on the programs they were told about, not on profits for a telemarketing company," said Melissa Merz, spokeswoman for Illinois Attorney General Lisa Madigan.

Charitable solicitation is protected under the First Amendment, and the Supreme Court has three times struck down state or local laws intended to regulate how much charity fund-raisers were paid or what donors must be told about the costs.

The latest ruling makes clear that while fund-raisers have leeway to keep quiet about the high costs of running a charity drive, they may not lie about it.

"While bare failure to disclose that information directly to potential donors does not suffice to establish fraud, when nondisclosure is accompanied by intentionally misleading statements designed to deceive the listener, the First Amendment leaves room for a fraud claim," Ginsburg wrote.

Ginsburg noted court statements from two women who got calls from the telemarketer.

One woman said she asked how much of her donation would go to fund-raising expenses and was told, "90 percent or more goes to the vets." Another woman said the telemarketer told her that the fund drive was run by volunteers, and that her contribution would not be used for "labor expenses."

By focusing on what callers from Telemarketing Associates Inc. allegedly told potential donors, instead of what the firm charged, the court avoided a scenario that had worried charities, political advocacy organizations and fund-raisers.

Charities filed friend-of-the-court briefs warning the court not to draw a line that would leave legitimate fund drives and canvassing open to allegations of fraud just because a fund-raiser takes a large cut.

Charities say fees and overhead costs that telemarketers charge are a cost of doing business, and there is an intangible value in spreading a charity's message through fund drives.

A lawyer for Telemarketing Associates characterized the ruling as a partial victory, even though it probably means Illinois authorities will soon haul his client back to court.

"The Supreme Court affirmed that the decisions of a charity to raise funds and how those funds are raised is protected speech, and that the government can't second-guess that decision by retrospectively claiming expenses are too high," lawyer William E. Raney said.

The firm had argued its activities in the name of the charity VietNow were protected under prior Supreme Court rulings, and lower courts agreed.

The Better Business Bureau's Wise Giving Alliance calculated that VietNow spent 91 percent of what it raised in 2001 for fund raising, and spent only 3 percent on charitable programs.

"VietNow has one of the worst, if not the worst, performances of the charities reviewed," the nonprofit alliance argued in a friend-of-the-court brief.

Wise Giving's standard is that fund-raising and administrative costs should not exceed 35 percent of funds raised from donors, unless the charity provides evidence that its use of a greater percentage is reasonable.

The case is Madigan v. Telemarketing Associates Inc., 01-1806. ------

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