The Supreme Court deals with its share of hypertechnical legal matters, but there's nothing abstract about the subject of today's oral argument: telemarketing.
At 11 a.m., the justices will hear Madigan v. Telemarketing Associates, No. 01-1806, which will decide how much power the Constitution gives state governments to combat alleged fraud by those friendly folks who always seem to give you a jingle just as you're sitting down to dinner.
Specifically, the question before the court is whether Illinois can sue a telephone fundraising firm for fraud because it solicited donations for a charity without telling potential givers that the fundraising firm, not the charity, would pocket 85 cents of every dollar.
The case has wide implications for the business of philanthropy, which is already contending with reduced giving due to the economic slowdown and blots on its image. Recent controversies include scandals at the Washington area United Way and questions about the American Red Cross's allocation of donations to families of victims of the Sept. 11, 2001, terrorist attacks.
The fundraising firm in this case, Telemarketing Associates, says its solicitations are protected as free speech under the First Amendment. Such communications include not only a plea for funds, but also a message about a charity's goals and ideas that the government may not chill, the company says.
The company cites three cases in which the Supreme Court invoked the First Amendment to strike down state and local laws that either barred charities and professional fundraisers from doing business if they retained more than a certain percentage of donations or required them to disclose the percentage.
In this case, however, Illinois invoked its general fraud statute, not a specific law aimed at charitable fundraisers. Illinois Attorney General Lisa Madigan says Telemarketing Associates' misleading pitch fits comfortably within the common-law definition of fraud.
But the Illinois Supreme Court agreed with the firm that there was no constitutional distinction. It ruled in 2001 that the state's attempt to sue would have suppressed the broader message of the charity that Telemarketing Associates represents, a Vietnam veterans aid group called VietNow.
The Illinois court ruled that the state was essentially insisting that the telemarketers tell people how much of their money would actually go to veterans in need. And that information, the court concluded, no doubt realistically, "will be the last words spoken as the donor hangs up the phone."
The state has to limit itself to punishing intentional misstatements of fact, the court ruled.
In its appeal to the Supreme Court, the state argues that the legal definition of fraud encompasses a situation in which a telemarketer doesn't affirmatively lie, but knowingly makes a misleading claim. It is not setting a fixed percentage that fundraisers must give to charity, the state says, merely using an extremely low percentage as evidence to support a charge of fraud.
Illinois has been pursuing Telemarketing Associates since 1991. It charges that, of the $7.1 million Telemarketing Associates raised for VietNow between 1987 and 1995, the charity has received only $1.1 million. And of that, a very small amount seems to have trickled down to the homeless and hungry vets that Telemarketing Associates' telemarketers told would-be donors their money would benefit.
According to the Better Business Bureau's Wise Giving Alliance (WGA), VietNow raised $3.6 million from all sources in fiscal 2000, but spent only about $100,000 on programs to benefit veterans.
The WGA recommends that charities keep their fundraising and administrative costs to 50 percent of total income. "VietNow's record is one of the worst of all the charities failing to meet either WGA's fundraising or use of funds standards," the WGA said in a friend-of-the-court brief supporting Illinois.
The state's position is also backed by the Bush administration, 45 states, the District and Puerto Rico, as well as the AARP Foundation, which notes in its friend-of-the-court brief that the elderly are often targets of scam charities.
For its part, Telemarketing Associates argues that a portion of what it is charging VietNow is used to produce 2,000 copies of a magazine about VietNow and its cause, as well as to maintain a toll-free number on VietNow's behalf. Its case, too, is supported by a long list of friends of the court, including such prominent charities as the American Lung Association and the YMCA.
Noting that they do not necessarily "look with favor on the particular contractual arrangements" between Telemarketing Associates and VietNow, these organizations argue that the public is already protected by laws that require charities to submit financial disclosure statements and forbid fundraisers to lie. More vigorous enforcement of these laws is the solution, the organizations argue.
Both Telemarketing Associates and its supporters say that focusing on the percentage of donations that appears to go to a charity can be misleading. Any charity has to be able to cover the costs of fundraising, they note, and those costs may be high for small or politically unpopular charities.
Also, many phone calls to potential donors are "prospecting" calls, designed not so much to raise money as to establish a base of donors who could be contacted again and again.
A decision in the case is expected by July.