Court to Rule on Solicitors for Charities : Disclosure Laws on Fund-Raisers Lead to Free-Speech Issue

It was a standard charity pitch: Callers representing the Fraternal Order of Police asked for donations a year ago to send underprivileged children to the circus. The residents of Raleigh responded generously, signing up for 5,000 tickets and spending $54,873.

Little did they know that only $7,707 would be turned over to the police group. The rest--86% of the amount collected--went to WRG Enterprises of Sarasota, Fla., which conducted the telephone soliciting, handled the tickets and put on the circus. And only 300 people showed up for the event at a local high school gym in April of last year.

North Carolina had tried to stop such operations in 1985 with a tough disclosure law governing professional fund-raisers such as WRG. But two federal courts have declared that the law unconstitutionally violated the fund-raisers’ right to free speech, and the Supreme Court is expected within a few weeks to give a final opinion on those rulings.

Dozens of Regulations

At stake are dozens of local and state regulations seeking to ensure that charitable donations go for charity. The California Legislature is considering a measure to impose new registration and reporting requirements on charitable fund-raisers, but final action will probably await the outcome of the Supreme Court ruling.

Before the North Carolina law could go into effect, a federal judge struck it down without a trial, concluding that it placed an “undue burden” on the free speech rights of the charities. Potential donors likely will be confused by the financial details disclosed over the phone and dissuaded from giving, Judge W. Earl Britt said.

A three-judge appellate panel upheld this conclusion last year. Both courts cited high court rulings from 1980 and 1984 which seemed to suggest that charities are off-limits to strict government regulation.

In this case (Riley vs. National Federation of the Blind of North Carolina, 87-328), the Supreme Court must face the question of whether a professional fund-raising operation for charity should be viewed as a business or a charity.

Charities Oppose Rules

On one side, the nation’s charities, varying from the Red Cross and the Easter Seal Society to the Optimist Club of North Raleigh, have urged the high court to outlaw rigid disclosure rules that might scare away donors and endanger their financial health.

In an era when the federal government is reducing public spending for worthy projects, they say, state and local governments should not be permitted to “undercut” charitable groups and “disrupt” their message to the public.

“You have five to seven seconds to get someone’s attention on the phone,” said Errol Copilevitz, a Kansas City lawyer who represented professional fund-raisers and charities in this case. “If we have to use up that time with a meaningless garble of financial statistics, we’ll get a dial tone.”

He contends that the smaller, less popular charities must rely on professional fund-raisers because they cannot attract enough volunteers or afford full-time professionals to collect money for them. Although the North Carolina law was never enforced, the attorneys found a particularly sympathetic lead plaintiff in the state federation for the blind.

On the other side of the issue, state officials and business leaders say that some charitable fund raising, especially by aggressive professional solicitors, is akin to fraud. They cite instances in which as much as 95% of money from donors who believe that they are giving to worthy charities is paying for professional fund-raiser costs.

Broad Legal Authority

They argue that since the government has broad legal authority to prevent fraud in areas such as real estate, banking or stock sales by forcing businesses to disclose key facts to potential customers, the same principle should apply to professional solicitors for charity.

“Our hands are tied right now,” said Joseph Bowling, president of the Better Business Bureau of Eastern North Carolina, who says that his office gets more complaints about aggressive solicitors and hit-and-run fund-raising operations than on any other type of business. State officials are virtually powerless to prevent fraud or even to track the donated money, he said.

Ed Edgerton, the official in charge of licensing charities in North Carolina, says he hears the same story over and over again.

First, an agent working for a circus or a company that is marketing a product such as candy, jams or magazines contacts a local charity or community service group such as the Firemen’s Fund or the Jaycees. He describes how the charity can earn thousands of dollars without real effort. His firm can supply the phone solicitors, the ticket printers and the product or performance.

It sounds almost too good to be true.

“It happens all over this state and all over the country,” Edgerton said, pointing to hundreds of reports of charitable fund-raisers. Fayetteville Explorers Post: $19,599 collected, and $1,564, or 8%, turned over to the Scouts. Redwood Volunteer Fire Department in Durham: $14,236 raised, $1,000 turned over the firemen.

It is rare, Edgerton said, to have a charity event run by a professional fund-raiser in which more than 25% of the funds go to charity.

Officials of WRG Enterprises in Sarasota refused to discuss any aspect of the case or their operation.

“I was totally displeased with the experience,” said Officer J. D. White, president of Wake County Fraternal Order of Police. White said he had no explanation about where all of the tickets were sent or how the money was used.

Embarrassing though it may have been to the local police, it was not unusual. The five largest firms operating charitable fund-raisers in North Carolina between 1980 and 1984 turned over between 13% and 22% of their collections to charity, according to a study by the State Bureau of Investigations.

That study, plus pressure from the Better Business Bureau, prompted the state Legislature in 1985 to enact the tough new disclosure law for professional fund-raisers. Professional phone solicitors were required to tell donors who employed them and what their track record was in turning money over to charity. State auditors were given new authority to examine the expenses of professional fund-raisers who kept more than 35% of the amount collected.

State’s Authority Limited

Under the state law, North Carolina officials are limited to merely collecting financial reports from charitable solicitors. Donors themselves can ask for and receive the reports that are sent to the state, but few do. Only a few other states, including Maine, Tennessee and Indiana, have enacted laws requiring financial disclosures during the solicitation, but they too have run afoul of the courts.

In the last decade, the biggest hurdle for states that have tried to regulate charities has been the Supreme Court itself. In the mid-1970s, the village of Schaumburg, Ill., near Chicago, enacted an ordinance forbidding door-to-door solicitations by charitable groups that could not show that “at least 75% of the proceeds” would be used for charity.

A local environmental action group challenged the law. Its members passed out leaflets in the community seeking support for certain environmental causes. At the same time, they solicited donations. The Supreme Court had no trouble concluding that Schaumburg’s law violated the free speech rights of the environmentalists.

The “charitable solicitation for funds involve a variety of speech interests--communication of information, the dissemination and propagation of views and ideas, and the advocacy of causes--that are within the protection of the First Amendment,” the high court said.

Four years later, the justices threw out a Maryland law that prohibited charities and charitable fund-raisers from collecting money if more than 25% of it would be used up by the cost of fund raising. The state would have waived the 25% rule for any charity that could show it was unable to raise money under the limitation.

Nevertheless, the justices relied heavily on their 1980 ruling in the Schaumburg case and reaffirmed their view that states cannot regulate solicitations by charities and their operatives.

Justice William H. Rehnquist, now the chief justice, wrote a stinging dissent in the Maryland case, arguing that professional fund raising is a business that can be regulated just like any other business.

Attorneys for both North Carolina and the charities say they are watching to see whether the high court extends its earlier decisions to outlaw nearly all regulation of charitable activities or whether it narrows the earlier rulings to permit strict disclosure laws.

“Basically, you have only two alternatives,” said California Assistant Atty. Gen. Carole Ritts Kornblum. “You can have limits set by the state on how much must go to charity. Or you can have disclosure requirements.” The lower court rulings in the North Carolina case said both types of regulation violate the First Amendment.

Now before the California Legislature is a measure to impose new registration and reporting requirements on charitable fund-raisers, Kornblum said, but further action will likely await the outcome of the high court ruling.

“Our regulations right now are pretty minimal,” she said. “Unless we can prove it was a fraudulent representation, we can’t really challenge it.”

Government experts say Los Angeles has the best and most effectively enforced law on charitable solicitations. For decades, local officials have required charitable solicitors to register with the city and to make available to the public an information card specifying how much of a donation will go to charity.

“The people of this city have come to rely on that information card. They want to see it and read it before they donate,” said Bob Burns, general manager of the Social Service Department of the city government.

Burns said his office works with fund-raisers to ensure that the information on the card is accurate and fair, adding that few complaints have arisen.

However, he said: “If the Supreme Court crafts a decision that forbids any regulation of solicitations for charity, well, we could have some problem.”