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Madigan Supreme Court Decision Not Expected to Have Major Impact

WASHINGTON (AFP eWire - May 9, 2003) - While many in the charitable sector feared that the U.S. Supreme Court's decision in Madigan vs. Telemarketing Associates might erode First Amendment rights for charities, AFP's analysis of the result shows that the case will probably not have broad consequences for the charitable sector.

On Monday, the Supreme Court handed down its decision in Madigan, a case brought by the attorney general of Illinois against Telemarketing Associates, a commercial fundraising and consulting firm. The Court unanimously ruled that the State of Illinois could continue to prosecute the firm for fraud under state law but upheld previously established First Amendment charitable solicitation protections.

In the case, Telemarketing Associates solicited funds for VietNow, a charity that worked on veterans' issues and provided relief and services to Vietnam veterans. The attorney general accused Telemarketing Associates of fraud because it told donors that a significant percentage of the funds it raised would be used for charitable purposes when the firm was actually keeping more than 85 percent of the money raised.

In the past, based on the free speech protections in the U.S. Constitution, the Court has ruled that solicitors for charities are not required to disclose fundraising costs or related information prior to undertaking a charitable solicitation. The Court has also determined that states may not create arbitrary limits on how much a charity could spend on fundraising.

However, with more than 18 states supporting Illinois, coupled with allegations of egregious behavior on the part of the defendant, AFP was concerned that the Court might use the Madigan case to modify these constitutional protections for charities. Accordingly, AFP filed an amicus curiae brief regarding the issues at stake.

In its friend-of-the-court brief, AFP argued that attempts by a state to regulate fundraising costs through imprecise formulas or ratios which purport to establish arbitrary limits on how much a charity can spend on fundraising are unreasonable, unworkable, deceptive and do not pass constitutional muster.

Court Focusing on Fraud, Not Costs

In its decision, the Court reiterated that high fundraising costs by themselves are not an indication of fraud and many legitimate situations exist where fundraising costs might be quite high. After examining the First Amendment defenses raised by Telemarketing Associates, the Court focused on the alleged fraudulent activity of the defendant.

From that perspective, the case was fairly straightforward, and the Court was unanimous in remanding the case to the state courts for further proceedings.

'The decision is very much a vindication of AFP's brief and our Code of Ethical Principles and Standards of Professional Practice,' said AFP President and CEO Paulette V. Maehara, CFRE, CAE. 'It's a good decision for charities in that it upholds the Court's previous rulings while sending a strong message to fraudulent organizations that the states can and will vigorously prosecute you if you are deceiving the public.'

The only potential concern for charities is generated by Footnote 8 in the decision, which states, in part, that '[t]his Court has not yet accepted any percentage-based measure as dispositive' [emphasis added]. Whether or not this tentative statement means that the Court intends to examine the issue of fundraising cost ratios in the future is unclear. AFP intends to continue its public education efforts regarding the costs of fundraising. The Association will also actively monitor further relevant legal developments in the state and federal courts.

'In the end, the Supreme Court rightly focused not on fundraising costs, but on the organization allegedly misleading the public,' Maehara said. 'If the fundraising firm had followed AFP's Code of Ethics, this whole situation would never have occurred.'

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