By Matthew Sinclair

The argument that high costs of fundraising by themselves constitute fraud was roundly dismissed again by the U.S. Supreme Court, breathing 21st century life into a trio of cases from the 1980s. Yet, the groups arguing against focusing on percentages lost the case.

The court's unanimous decision in Madigan (formerly Ryan) v. Telemarketing Associates (TA) enables Illinois to pursue fraud charges against the telemarketing firm that was fundraising for a charity. The decision was influenced by Illinois's affidavits, mentioned toward the end of the oral arguments in March. That discussion had been surprising to both sides as the argument had focused primarily on fundraising percentages.

Illinois had filed suit against TA in 1991, alleging that donors to Rockford, Ill., veterans group VietNow were deceived by telemarketers, which kept at least 85 percent of what was raised and control of the donor list. TA had argued that the First Amendment barred using percentages as a basis for determining fraudulent fundraising.

More than 200 nonprofits supported TA's argument, concerned about losing First Amendment protections. AARP and the Better Business Bureau's Wise Giving Alliance (WGA) supported the state.

Of the approximately $7.1 million TA raised, VietNow received approximately $1.1 million. The state's case against TA had been dismissed throughout the Illinois court system since 1991, based on the U.S. Supreme Court's previous rulings in other nonprofit cases, those regarding prior restraint and the First Amendment.

Nonprofits on both sides of the argument called the new 9-0 decision a victory for the sector. How future telemarketing and other fundraising campaigns may change, however, remained unclear. There may not be a flood of new cases, but states now understand how to build their cases.

Deborah Zuckerman, the attorney on AARP's amicus brief in support of the state, called the court's decision "a good compromise" that enabled the court to not undercut its precedents and give states direction to combat real fraud. "The attorney general can now go back to court and prove its case," she said. "(It has) a big burden of proof, but before the court's decision they couldn't even try the case."

Zuckerman did not anticipate a flood of new charitable fraud cases as a result of this decision, "But I think states will feel a little freer. They sort of know what the parameters are now."

Bennett Weiner, chief operating officer of the WGA, said the issue was not just the legal concerns, but the ethical ones. "(The decision) could be an incentive for organizations to revisit their own arrangements, that whatever they're saying in their appeals to the public is consistent with what the financial circumstances are."

Louis Mastria, a spokesperson for the Direct Marketing Association, said the DMA and the DMA Nonprofit Federation were heartened by the decision, though their briefs supported TA. "If there's fraud or misrepresentation in any channel of direct solicitation, it poisons the well for everybody," he said. Mastria did not foresee the decision causing industry-wide changes, however. Marketers may redouble efforts to make sure questions are answered accurately and truthfully, "but generally people do that anyway."

Nick Stavarz, president of Synergy Direct Marketing Solutions, based in Akron, Ohio, is a veteran tele-fundraiser. "For me, this was really an unfortunate case for the (nonprofit) industry to have to get behind the telemarketers," he said. "It was clearly a case where there was a long-term contract where the nonprofit got a very tiny percentage of the money (and no) control of the list. … That's the kind of thing we need to eradicate."

He said the industry needs to do a better job of policing itself. "These deals where nonprofits get a percentage of the gross and the telemarketer gets the list are unethical and shouldn't happen," he said. "It traps the nonprofit."

Wrong question

The court essentially altered the question brought by the state, as noted in a short concurring opinion from Justice Antonin Scalia. He wrote that if the only representation made by the fundraiser had been that donations would go to charitable purposes and the only evidence of alleged failure were the high fundraising costs, "the First Amendment would categorically prohibit a state from pursuing the fraud action."

Though the court did not offer an opinion on the case that returns to the Illinois court system, he added that its judgement "rests upon a 'solid core' of misrepresentations."

Those misrepresentations, noted in affidavits gathered more than a decade ago, included comments from donors who alleged they were told their gifts would go to help veterans, for food baskets, that they were told 90 percent would go to the organization, and that there were no labor costs. As detailed in the opinion, the court must assume as a matter of law those allegations are true and could support fraud charges.

Justice Ruth Bader Ginsburg wrote the court's opinion. "Our prior decisions do not rule out, as supportive of a fraud claim against fundraisers, any and all reliance on the percentage of charitable donations fundraisers retain for themselves," she wrote. "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."

Floyd Perkins is the assistant attorney general in Illinois who heads the state's charities bureau. He said, "I think the court was pretty clear that percentages alone are not sufficient to bring an action."

Perkins recalled the oral argument and the Justices' concerns about percentages. "(They were asking) how do we write a rule," Perkins said, "and that's a fair question. … Any standard would be arbitrary. You couldn't give a fair suggestion. There's always an example to show that wouldn't be a fair percentage."

He added, "I think the court spent some time on this. They read what people said. So, I do think it's sort of a win-win for both sides."

Attorney Errol Copilevitz, representing TA, said Illinois won the right to prosecute cases of alleged fraud -- a right that he said was never in dispute. "They didn't get anything they didn't have before."

Copilevitz said Illinois will have a difficult time before this case is finally resolved. There will likely need to be further discovery of donors' reactions to telemarketing calls from the early 1990s. "It's up to the state to present their evidence," he said, noting that the defense still must cross examine the witnesses. "I think they're going to have trouble getting some proof."

Illinois case law requires a plaintiff to prove a defendant knowingly made a false representation of a material fact, with the intent to mislead the listener and succeeded in doing so. The state now must put together a convincing case of fraud from evidence potentially more than a decade old.

The state will need to "dust off the files," Perkins said, but cases that go to the Supreme Court often have years-old evidence. "I don't think it's ideal," he said of such old evidence and unfresh memories of the telemarketing targets. Any affidavits from people who've died, for example, are worthless at this point. "We intend to gather together what people were told and put our facts into the record," said Perkins, who said some evidence may no longer be viable. "This case isn't starting from scratch. … This particular case, we'll have to suffer through the fact that some of this is pretty old."

Ultimately, the hope is that the winner of this case was the American donating public.