Madigan v. Telemarketing Associates - Oral Argument

Argument of Richard S. Huszagh

Chief Justice Rehnquist: We'll hear argument next in Number 01-1806, Lisa Madigan, Attorney General of Illinois, versus Telemarketing Associates.

Mr. Huszagh.

Mr. Huszagh: Mr. Chief Justice, and may it please the Court:

It cannot be true that charitable solicitors are free to commit fraud just because they are charitable solicitors.

Under long-established common law fraud principles, it is unquestionably fraudulent to induce someone to make a gift of money by saying it will be used for a specific charitable purpose when, in fact, only a nominal amount goes to that purpose and the solicitor keeps the vast majority.

The First Amendment does not...

Justice Scalia: What about...

Mr. Huszagh: displace these principles.

Justice Scalia: What about 25 percent going to the charitable purpose?

Mr. Huszagh: 25 percent may or may not be a misrepresentation, depending upon what the public was told about the ultimate purpose of...

Justice Scalia: The public's told, you know, I'm... I'm soliciting for X charity, would you... would you give money, please, for X charity...

Mr. Huszagh: If the public...

Justice Scalia: to help children in Cambodia.

Mr. Huszagh: Well...

Justice Scalia: 25 percent of the money actually goes to that purpose, 25 percent.

Mr. Huszagh: If the public reasonably understands that significantly more than that amount goes to that purpose...

Justice Ginsburg: I... I...

Mr. Huszagh: then it would be a misrepresentation to rely upon...

Justice Scalia: What do we...

Mr. Huszagh: that assumption...

Justice Scalia: public opinion poll as to whether the public reasonably understood it was going to be more than 25 percent?

Mr. Huszagh: Assumptions form a fundamental part of human communication, assumptions about the meaning of language, assumptions... assumptions about events and conditions.

If somebody were to say that they were soliciting money to... for... for the family of people who died on September 11, and the people they were referring to were their parents who died of natural causes in Topeka, Kansas, on September 11 of 1995, that's a misrepresentation, because people are entitled to make a reasonable...

Justice Souter: Sure.

Mr. Huszagh: assumption about what that language means.

Justice Scalia: That was misleading, but it is not misleading to say, I'm going to... this money is going to go to this charitable cause when, in fact, you acknowledge many charities have to pay substantial amounts, substantial percentages in order to, in order to get organizations to solicit for them, and who... who is to say that the 25 percent is too much.

I've no idea whether it is.

Mr. Huszagh: I think that...

Justice Scalia: You're just going to give that to a jury and leave the fundraising to be liable criminally or not, depending upon whether this jury thinks that 25 percent is too little to go, or... I... I just... I'm not comfortable with that at all.

Mr. Huszagh: I... I think the Court needs to distinguish between two different types of circumstances.

One is the fact that there may be legitimate reasons why a charity could have expenses above a certain level.

It could be that they're an unpopular charity.

It could be that it's a charity that's small, or has recently started up, but those are the types of reasons that the Court used to invalidate laws that declared expenses above a certain threshold to... to establish that the charity was a sham entirely.

Those don't negate...

Justice Scalia: It would still be a misrepresentation even if they had good reasons for... for giving the fundraiser 90 percent of the money.

Mr. Huszagh: And...

Justice Scalia: It would still be a misrepresentation, wouldn't it?

Mr. Huszagh: And that's my point, that the First Amendment should not displace that principle where misrepresentations are determined based upon whether the defendant made a material representation of fact, and it's... i is no different from...

Justice O'Connor: Well, would this prosecution have been brought if the fee, if the amount given to the charity had been more substantial?

Mr. Huszagh: There's a substantial likelihood, or there's less likelihood that such a prosecution would bought, been brought, because...

Justice O'Connor: How would anyone know when the Attorney General would be likely to charge them?

Mr. Huszagh: I think really the ultimate question is not whether they're going to know whether the Attorney General is going to bring the case, but whether they've committed fraud.

Ultimately, the Attorney General is not going to prosecute every case of fraud that exists, and...

Justice O'Connor: Is... is there an intent requirement, an intent to defraud requirement under the Illinois law?

Mr. Huszagh: As to what we've alleged for common law fraud, yes, there is, and we've made that allegation as... with respect to all of the statutory antifraud counts as well, and to the extent that there is a concern about the uncertainty as to whether a specific statement may be a misrepresentation, depending upon the inability to predict exactly what the public may know, then certainly there's no such objection if the defendant, it can be proved knew that they were creating a false impression.

Chief Justice Rehnquist: But one of your affidavits says that one of the solicitees expressly asked and was told that 90 percent or more goes to the vets.

Now, certainly that's a classic misrepresentation, is it not?

Mr. Huszagh: Yes, it is, but our position goes further, which is that there is no constitutional value in intentional half-truths or artificial, contrived ways of stating something that may be literally true...

Justice Souter: No, but the concern that we have is that there's no... there is no way to predict in advance what is going to be treated or what is going to be found as the half-truth.

Let me put the question to you this way.

Leave to the side the moment the particular cases that in... that you include among... among those you have brought in which at least the allegation is that a very specific misrepresentation was made, no labor cost, 90 percent goes to the... to the... the objects of the charity.

Put them aside, and consider only the cases in which no representation is made beyond the fact that we are collecting money for this charity, and no representation is made about the amount of money that's going to go for overhead and the amount that's actually going to get to the charitable donees.

I don't see where any charitable fundraiser could in advance draw a line and say, I don't have to disclose anything under risk of being prosecuted.

I would suppose that any charitable fundraiser, if you win this case, would say, there's only one way I can cover myself, and that is to disclose the percentages when I make the... the solicitation.

Otherwise, I'm vulnerable to a prosecution.

If that is the way the charitable fundraisers are going to be forced to operate, then, in fact, we have totally undercut the precedent that says you can't require that disclosure, so my question is, how can we, how could we sanction a system on your theory that would be fair, without, in practical terms, whether we say it or not, requiring the very disclosure that we have said previously need not be required?

Mr. Huszagh: I would agree that if that were the conclusion as to what would occur in... in... if the law that we advocate were permitted, then the Court would effectively be forced to reevaluate the validity of its precedents, and we are not...

Justice Souter: And maybe we should.

I'm not saying one way or the other there, but...

Mr. Huszagh: But in this case we are not urging the Court to do so, but it is our... our premise that the... that that conclusion does not necessarily follow, and it has not been established in this case.

Ultimately, these speakers know how much is going to be used for various purposes, or they certainly have the ability to know that, and they are the masters of their own speech, and to suggest that they have no ability to know what the public is going to believe, or be led to believe when they make specific representations about seeking money for charity I think is somewhat unrealistic.

Justice Souter: Okay, let's assume that it's unrealistic in this particular case.

85/15, okay, let's assume you win.

65/35, 60/40, 55-45... it's those cases that we've got to worry about.

Mr. Huszagh: But I think that the... the question then becomes whether the Court should displace common law fraud principles, which already provide a measure of breathing room for that type of uncertainty.

Ultimately...

Justice Kennedy: I suppose the breathing room is that there has to be a false statement, a misrepresentation, let's assume with knowledge of its falsity, which is relied upon by the... by the listener, that there's some... has to be damage and so forth.

Is that what you... what do you tell the jury, what a reasonable person would believe?

Mr. Huszagh: No.

It is important for the jury to decide what, in fact, the donating public did believe as to how much was going to be used for the purposes described, that this is not some normative imposition by the Government as to what's reasonable.

This is an adjudicatory process to determine what the understanding of the public was, and ultimately...

Justice O'Connor: What would the instruction, though, to the jury be under the Illinois law?

What must the State prove here?

Mr. Huszagh: The State would have to prove that there were a material misrepresentation of fact, leaving aside for a moment the intent requirement.

The material misrepresentation of fact includes three elements which provide the defendant with a breathing space for some of the uncertainties that the Court seems to be sensitive to.

First, the assertion must be factual, not some type of representation like, this charity is a humdinger that can't be disproved in a court of law.

The interpretation, the meaning to that statement has to be a reasonable one, which is an objective requirement subject to supervision by the courts, so if somebody believed that 150 percent of every donation was going to go to charity, that is objectively unreasonable, and the Court would eliminate that.

Justice Scalia: Well, what... what you say would be very impressive and would eliminate my problems if you were willing to go further and say, whenever you say, I'm raising money for Vietnamese orphans, oh, 100 percent of the money you collect is understood by the public to be going to Vietnamese orphans, but you're not willing to say that.

Mr. Huszagh: No, because that's not reasonable.

It's not reasonable...

Justice Scalia: Because that's not reasonable.

Mr. Huszagh: It's not reasonable for the public to assume...

Justice Scalia: 25 percent.

Mr. Huszagh: The... there is no...

Justice Scalia: So... so the...

Chief Justice Rehnquist: So it has a reasonable understanding.

Justice Scalia: what does... what does the judge instruct the jury?

Ladies and gentlemen of the jury, if you think it's reasonable to send... or... or what?

No, no, it wouldn't be whether it's reasonable.

It's what you think the average person would have thought, right?

Mr. Huszagh: It's what the Government proves that the donating public understood based upon what they were told, what they were reasonably led to believe.

That may include their background assumptions about how much normally goes to fundraising costs or other administrative overhead, and that can depend upon the nature of the charity, as well as the statements made by the defendants.

The other elements, to finish my answer to Justice O'Connor's and Justice Kennedy's questions, is that there is in addition a materiality requirement.

It is not enough that the statement be technically false, like a difference between 95 percent and 93 percent.

The difference has to be material, and that again provides that certain falsity will go unprohibited because the materiality requirement already gives a buffer zone.

Justice Breyer: Look at all... think of all of the... of the green, dark green briefs.

Those briefs are filled with examples of instances where the telemarketer kept a large, maybe 90, maybe 100 percent, which seem perfectly legitimate.

For example, it's a start-up campaign, and at the beginning they have to keep up more, keep more.

For example, it's an educational campaign, and what the charity thinks is, we want to spend this money so people will have heard our name, or will examine themselves for possible breast cancer, or whatever.

Or, it could even be the Nature Conservancy, where for accounting reasons the money that's going to purchase land is not treated as if it were an expense on behalf of the charity, so they're filled with examples.

Mr. Huszagh: Well...

Justice Breyer: Now, suppose in your case the defendant proved that he was within one of those examples.

Would you then say, if the jury believes that, that you should win, or the defendant, and the reason I ask is that I think most people feel, and the relevance of your case is that the money is going to help the charity, indeed, most of it, and what they will have shown is that the money did go to help the charity, but in this instance, helping the charity was consistent with the telemarketer keeping a very large percentage, so could you explain how, in your view, the law works with all those examples in the dark green briefs?

Mr. Huszagh: I... I think there are two basic answers to your question, Justice Breyer, and one is that the reasonableness of the manner in which the expenditures are made is not a proper subject of the Government's paternalistic bureaucratic oversight to second-guess that judgment, and I think the Court made that clear both in Munson and more specifically in Riley, and we are not arguing that the... whether the... the plaintiff's fraud claim for actual specific misrepresentations turns... they will win or lose, depending upon whether there is some reasonableness element to the manner of the expenditures...

Justice Breyer: No, well, if you're saying that they lose, the telemarketer, even if all the money is being used to help the charity, then I agree with the thrust of the questions that have gone before.

Mr. Huszagh: Well...

Justice Breyer: I don't see how you can possibly prosecute people for fraud where there is no fraud...

Mr. Huszagh: But that leads to...

Justice Breyer: and... and that would seem to me a case where there is no fraud.

Mr. Huszagh: That leads to the second point that I was going to make.

Justice Breyer: And it's a charity, too, so there's a First Amendment right.

Mr. Huszagh: And I don't dispute that, but...

Justice Scalia: Why... why is there no fraud, just because the charge is reasonable?

Fraud exists if you have represented to the public something, whether the something you've represented is reasonable or unreasonable or not.

If the public is unaware that 95 percent is a perfectly reasonable charge for this kind of fundraising, and the public therefore believes, given what you've said, I'm raising money for Vietnamese orphans, that at least 50 percent of that is going to go to Vietnam, then it seems to me you have a fraud case.

Mr. Huszagh: That is my answer to the second part of Justice Breyer's question.

Justice Breyer: All right.

In other words, you intend to convict people... you intend to convict them, and this may be one of them.

You intend to convict the Nature Conservancy because 98 percent of its revenue is... is accounted for as... as telemarketing expense, where in reality, they're buying land with that.

Mr. Huszagh: No, I...

Justice Breyer: Or you intend to convict the... the organization that is simply trying to inform women about the importance of self-examination for cancer.

Is that the answer?

Mr. Huszagh: No, it is not.

Justice Breyer: Okay, then... then why don't you elaborate on your answer.

Mr. Huszagh: Let me deal with the Nature Conservancy first.

I think that's an example in which the public who gives money to the Nature Conservancy understands realistically that their money is going to be used for the purpose of buying land, and to suggest in some artificial sense by a prosecutor that no, really they thought it was going to be used in an accounting format to be treated as... as an expense as opposed to a capital acquisition establishes fraud is... is simply unrealistic.

The other example again focuses upon the specific nature of the representation made, and there... there is a wide variety of differences, but if the representation is made that the money is going to be used to feed hungry orphans in Vietnam, it does not somehow become, per se, nonfraudulent if, in fact, those funds are being used to... to get out the word about the plight of Vietnam veterans, which is different, and materially different from what the representation was to the donors.

I think that is our basic...

Justice O'Connor: Counsel, let me ask you this.

Is... is the State taking the position that there is a material misrepresentation of fact here because the amount given to the charity was a trifling amount?

Mr. Huszagh: It... yes, because it was a trifling amount...

Justice O'Connor: Is that... is that how you bill the material misrepresentation?

Mr. Huszagh: Well, materiality doesn't always have to rise to the level that there will only be a trifling amount that would go to the charity, but there was a significant...

Justice O'Connor: But in this case?

Mr. Huszagh: Yes.

Justice O'Connor: And your... the respondent's brief says, well, the Governor had a charity ball, and just 17 percent...

Mr. Huszagh: Well, I... I don't...

Justice O'Connor: was kept and no prosecution.

Mr. Huszagh: I'd rather not use my time to try and explain the misleading...

Justice O'Connor: Uh-huh.

Mr. Huszagh: impression given by that example.

Let me just say that the facts of that case are dramatically different than were represented, and the... the argument that there has been any impermissible selective prosecution in this case based upon some type of discriminatory element that would violate the Equal Protection Clause, there's nothing in the record to that.

If there were such a case, the Court has said that there is a reserved ability to do so.

What I would...

Chief Justice Rehnquist: Do you want to reserve the balance of my time, Mr. Huszagh?

Mr. Huszagh: Yes, I would.

Thank you, Mr. Chief Justice.

Argument of Paul D. Clement

Chief Justice Rehnquist: Mr. Clement, we'll hear from you.

Mr. Clement: Mr. Chief Justice, and may it please the Court:

This Court has repeatedly reaffirmed the Government's authority to protect the public from fraud, even though virtually every representation involves speech.

Indeed, while striking down broad prophylactic laws, every time this Court has addressed the issue of charitable solicitation, it has reaffirmed the constitutional viability of individual fraud actions.

Now, part of the reason that this Court has distinguished between individual fraud actions and broad prophylactic rules is that an individual fraud action can bring into bear the entire context of a misrepresentation.

The difficulty with a statute like that before the Court in Riley was that it necessarily focused on a single factor, fundraising costs, and didn't take into account what was told to individual donors or anything else, and then categorically...

Justice Ginsburg: But isn't that essentially, Mr. Clement, what is happening here?

That is, these are... to the extent that these are telephone calls, and say, like you to contribute to Vietnam, and this money's going to be spent on veterans, and that's the extent of it, it seems that the Illinois Attorney General is measuring the decision whether to bring a fraud claim by the percent that goes to the charity in comparison to this... this portion that goes to the fundraiser.

Mr. Clement: I think that the fundraising costs are part of the analysis of the fraud action, but I wouldn't have read Riley as making that factor wholly immaterial, and I think the important thing is that in the calls in this case, they weren't just saying, we're here to raise money for Vietnam vets.

The record suggests that there was an emphasis on particular charitable services.

We're raising money for food baskets.

We're raising money to help veterans here in DuPage County.

Justice Scalia: Well, that's fine.

I mean, those specific misrepresentations that turned out to be false, and some of them said 90 percent is going to go there, those are no problems.

The ones we're concerned with are the... the fraud allegations that are sustained simply on the basis of the fact this money is going to go to this cause and, in fact, only 15 percent of it is going to go to that cause.

Mr. Clement: Well, two responses, Your Honor.

First of all, since there are these specific misrepresentations in this case, that alone is a reason to reverse the decision, because the Illinois Supreme Court seemed to be laboring under the misimpression that those cases were wholly off-limits because the fundraising percentage...

Justice Scalia: We do have to write an opinion though, you know.

Mr. Clement: Absolutely.

Justice Breyer: Okay.

Mr. Clement: So let me bring you to the second part of the question, which is, I think there are problems when you have a situation where the only thing that is said is, we're here to raise money for charity, but I think in reality, you have to give... you have to trust juries in common law fraud actions a little bit to take into account the broad nature of the representations that are made.

The... the virtue of a fraud action as opposed to a broad prophylactic rule is that a fraud action can take into account the entire mosaic of the representations that are made, and there's no need to focus on one particular tile and see whether it's literally true or literally false.

Justice Scalia: Would you be able to show to the jury how reasonable it is for this particular fundraiser to... to retain 85 percent?

Mr. Clement: I... I think so.

Justice Kennedy: Why?

Mr. Clement: If every...

Justice Scalia: Why?

What does that have to do with what the effect of the representation was upon the public?

Mr. Clement: Because there are other elements of a common law fraud action.

You also have to show materiality, and reasonable reliance.

If every single person raised...

Justice Scalia: How does that go to materiality?

How does it go to reasonable reliance?

Mr. Clement: Because if every single person raising money has had these astronomical fundraising costs, which of course is not true, but if that were true, then a... an individual donor who recognized that might well not have any reasonable reliance on the representations that money is going to charity, because no... no charity, apparently, can get any money to the actual services that money is being raised, but that's not true.

A very important element of common law fraud that I think can provide sufficient protection to legitimate charities is the intent to deceive, and the intent to deceive I think is going to make a big difference, because if you have a legitimate charity that's asked by a donor what percentage of the money goes to the specific service that you're raising money for, let's say, food baskets, and that charity responds and provides forthcoming information, then I don't see how the prosecution or plaintiff can ever show an intent to deceive.

On the other hand...

Justice Souter: Okay, but let's take... let's take the cases, leaving aside the specific misrepresentations here, let's take the case that we've got.

15 percent is going.

I take it you believe that on the basis of that, a... a jury could infer that there was an intent to deceive, from the silence?

Mr. Clement: I... I think that's right, but I... I would say...

Justice Souter: Okay.

Mr. Clement: that part of the evidence I'd like to put before the jury on intent to deceive...

Justice Breyer: May I ask...

Mr. Clement: is when a donor asks that question...

Justice Scalia: But the donor...

Justice Stevens: This is not a jury trial, is it?

Isn't this an equity proceeding?

Everybody's talking about the jury all the way through, but I think it's a...

Chief Justice Rehnquist: A fraud action for damages is a jury...

Justice Stevens: I thought it was a proceeding in... before... in Chancery in this case.

Mr. Clement: I'm reliably informed that this particular proceeding would go as a bench trial, which I think would provide even further protection for free speech.

Justice Kennedy: Yes.

Mr. Clement: I think that... my answer is in terms of the jury because I do think that the... the decision that this Court announces is going to affect jury trials as well, but what I'm saying is, I'd like to get before the jury the fact that when these particular fundraisers were asked the question, well, where does the money go, at least the record suggests that they flatly misrepresented where the money...

Justice Souter: You... you bet, and that's... that's what you've got in this case, but as Justice Scalia said, we've got to write the opinion, and... and if we consider the case in which there were not these quite specific misrepresentations, all you've got is silence about the percentage, and a statement that the object of the charity is Vietnamese orphans or whatever it may be, it seems to me that when you start getting below the 85/25, you get into an area in which the... the result is a dice throw, and if that is the case, the only way the charitable fundraiser can protect himself, with the greatest good faith in the world, is to disclose the percentage, and if that's what we are going to require in fact, then we better face the fact that we're going to have to retreat from... from what we've already held.

What's your answer to that?

Mr. Clement: Well, I would say first that we wouldn't have any objection if you wanted to retreat from what you said in Riley.

[Laughter]

Justice Souter: You wouldn't mind.

Mr. Clement: But... but...

Justice Souter: But isn't that what... that's what we've got to do, isn't it?

Mr. Clement: No, that is not what you have to do, and I think the important thing is the type of hypo of just all they do is call up and say, I'm here to raise money for charity, what that hypothetical tends to do is force the analysis into the single variable analysis that's reflected in broad prophylactic rules, and the answer in these cases, and I think what the opinion should suggest, is that the context does matter terribly, so to take some of the questions...

Justice Souter: Okay...

Mr. Clement: that concern Justice Breyer, if I could, when he's worried about the start-up charity, well, if a start-up charity says, hi, we're a start-up charity, we are trying to raise money for a new cause, and here's what we hope to do with the money, that's very different than if a start-up charity picks up the phone and says, we're a start-up charity, and we're going... if you give us money, we're going to help this particular child in this foreign country.

I mean, if a start-up charity avoids fraudulent statements, then that's going to have a reasonable effect on the mind of the donor, and the donor's going to recognize that, okay, a) start-up charities may have higher cost, but more importantly, the representation that I received was not that you were going to provide food baskets in DuPage County, but that you hoped to provide special services that weren't being provided currently by any extant charity, and I think that context can make all the difference.

And there are many elements of common law fraud actions.

You have to show knowledge of falsity, intent to deceive, materiality, and reasonable reliance.

In Illinois, as is typical, you have to show those factors by clear and convincing evidence.

All of that is going to provide substantial breathing room for First Amendment values.

Indeed, much of this Court's jurisprudence in the libel and deformation area has been a process of taking the requirements of the common law for fraud, which were much more onerous, and superimposing them on the law of libel and defamation, where things like falsity was presumed, and damages could be presumed, upon a showing of defamation, and I think if you put it in that context, that all of the safeguards that this Court has carefully constructed over the years in the libel and defamation context are in place to protect the... the First Amendment rights and provide breathing room, then I think that the idea that the sky is falling is really mistaken in these cases.

And I think to the contrary, if this Court were to suggest in a case where the reality is that not just 85 percent is going to the professional fundraiser, but fully 97 percent is going to something other than program services, because VietNow only spends 20 percent of the money they receive on program services, if this were... Court were to suggest in this case that there's not a fraud action, then it really will be open season for charitable solicitation fraud.

And I think this Court has been particularly concerned about broad prophylactic rules in the First Amendment area.

This is reflected in... in, most critically in its prior restraint doctrine, and that... that instinct is reflected in Schaumburg, Munson, and Riley, but at the same time, there's a corollary principle, which specific instances of fraud can be prosecuted by the Government, and that instinct is also reflected in Munson, Schaumburg, and Riley, and there's simply nothing in the First Amendment that suggests that charitable solicitation fraud need go unpunished, and with respect, I think what the Illinois Supreme Court did here in creating a broad prophylactic immunity for charitable solicitation from the law of fraud is just as unjustified as the broad prophylactic rules limiting charitable solicitation that this Court struck down in Schaumburg, Munson, and Riley.

If there are no further questions...

Argument of M. Errol Copilevitz

Chief Justice Rehnquist: Thank you, Mr. Clement.

Mr. Copilevitz, we'll hear from you.

Mr. Copilevitz: Mr. Chief Justice, members of the Court:

What charities spend or pay for fundraising, whether based upon a percentage or otherwise, are a measure of the charity's judgment about how much to invest in persuasion, a fully protected activity and it cannot be second-guessed.

The First Amendment guarantees the right of unpopular organizations to zealously pursue their causes.

The petitioner comes to this Court having pled one case, but having argued another case.

The petitioner's denial of any intent to impose a cost limitation on charitable appeals, and the petitioner's claim that its only purpose is to combat fraud, is simply not supported in this record.

What is clear is that the petitioner's claim is focused exclusively on the amount of the respondents' fee.

Chief Justice Rehnquist: Well now, I don't read the record quite that way, Mr. Copilevitz.

The affidavit that I mentioned earlier on page 169, where the... the woman said that she specifically asked the question and was told 90 percent or more goes to the vets, that strikes me as a straight common law fraud action.

Are you saying that that... that the State is prohibited by the First Amendment from prosecuting that case?

Mr. Copilevitz: No, I'm not, Your Honor.

What I'm saying is that if that violation had been pled in this case, we would have a different result at the Illinois Supreme Court.

Paragraph 74, at page 104 of the appendix, is the paragraph that incorporates these affidavits, and the allegation is simply that if the fee of the fundraiser had been disclosed, they would not have made contributions.

The Illinois Supreme Court specifically found, as did the Illinois appellate court and the trial court, that there were no affirmative misstatements made.

In order for the petitioner's case to be sustained, it has to have two legs.

We know that cost alone is not an indication of fraud, so it has to have some other positive statement.

Justice Scalia: Well, what if...

Justice Kennedy: Why... why is it that if... if we assume that the donors would not have given the money had this statement been made, that that is not a large part of showing a misrepresentation, I mean, I assume people wouldn't buy automobiles or toasters if they knew that the manufacturer was getting 95 percent of... of the cost and there was... only 5 percent went into raw materials, so there's always some problems here, but let's suppose that 95 percent, 100 percent of the donors would not have given the money if they had known the facts.

Isn't that the beginnings, at least, of a misrepresentation?

Mr. Copilevitz: Well, you're dealing with the lesser of two evils.

High undisclosed fundraising costs are a lesser evil than compelling a point of solicitation disclosure of information that is inaccurate, that this Court has held is not material, and risk creating for smaller...

Justice Kennedy: Well, why isn't it material if... if the money would not have been given had the... had the fact been disclosed?

Mr. Copilevitz: The percentage doesn't...

Justice Kennedy: That doesn't... isn't that another way of saying the person is acting under a misimpression?

Mr. Copilevitz: No, because the whole concept is built on the only return the nonprofit received is the net dollars, and as this Court recognized in Riley, there is a wide range of values that the organization receives from the appeal itself.

Justice Scalia: Mr. Copilevitz, it seems to me you have to respond to Justice Kennedy, no, that it doesn't constitute fraud simply to refuse to tell somebody something which, if he knew, he would not have made the contribution.

I mean, perhaps someone would not have made the contribution if they knew what an inefficient charity this particular charity was, or knew that, you know, for the past several years there had been a lot of organizational problems.

Does the person have to come out with all this upon pain of being guilty of fraud?

Mr. Copilevitz: No.

Justice Scalia: Certainly you don't have to tell someone everything which, if he knew, would make a difference.

That doesn't constitute fraud.

Mr. Copilevitz: I agree.

Justice Ginsburg: But if you ask a question and you give a false answer, the two examples were given... I was struck by another... one of the affidavits' comments.

This is the one at joint appendix 1... 182.

The receipt says it's tax deductible, and now the donor asks, on being told that only 20 percent went to the charity, is it?

Mr. Copilevitz: Is it tax deductible?

Yes.

Justice Ginsburg: Is the 100 percent tax deductible when 80 percent goes to the fundraiser?

Mr. Copilevitz: That presume... the answer to your question is yes.

The organization receives a benefit beyond the net dollars.

The purpose of the organization, and if you look at the appendix, Article 5 of the articles of incorporation at joint appendix 16 says that one of the primary purposes of this organization is to increase the community awareness of the problems faced by Vietnam veterans.

The contract that my client had with the Vietnam veterans incorporated a part of that.

It incorporated a magazine.

It incorporated an 800 number.

It incorporated distributing information.

The difference between the 15 cents on the dollar that was received and the fee is value that this organization received, so certainly the entire amount of any contribution is tax deductible, and it's not fair or proper to say that the organization received no benefit other than the dollars.

Justice Ginsburg: May I ask a question that's not entirely hypothetical?

Suppose Congress, trying to get a handle on fundraising operations that are really operating to line the pockets of the fundraiser, rather than for the benefit of the charity, would say, if more than 40 percent of what is collected goes to the fundraiser, then the donor will get a tax deduction only for the amount that actually goes to the charity.

In other words, taking your theory, up to 40 percent, but saying if the fundraiser gets more than 40 percent, then the donor will not get a deduction for everything the donor gave, but only for the part that went to the charity, would that be... would that violate the First Amendment?

Mr. Copilevitz: Yes.

An organization like Mothers Against Drunk Driving exists to advocate a change of attitude.

They could well enter into a contract that says, every cent you raise I am giving to you to call that many more people in order to... to deliver our message, in which case they would have 100 percent cost of fundraising under the approach of the petitioner in this case, and they would be justified, and your gifts to that organization would be fully deductible, as they should be, and they have the First Amendment right to spend what they believe...

Justice Ginsburg: I'm... I'm sorry, I don't... that may be the purpose of the organization, so that's for the charitable purpose, to spread the word about drunk driving, but the example that I gave you is, the fundraiser says, you're not a very appealing charity.

If you want us to raise money for you, we're going to charge a great deal, and you get... you'll get something, where if you were doing it on your own, you'd get nothing.

In that kind of case, not the example of MADD, where the word about drunk driving is being spread, but just, the economics of it is that the fundraiser takes 80 percent.

Mr. Copilevitz: You presume that the contract is made at arm's length in the marketplace.

Unpopular charities have the same right to have their message circulated as does a popular organization.

Justice Scalia: Well, I... we presume that just as some charities pay too much for fundraisers, some of them may pay too much for their corporate offices.

They may enter into exorbitant leases that they could have gotten for half of that had they been better negotiators.

Surely we wouldn't reduce the tax deduction because some of those expenses were unreasonable.

It seems to me that's simply the way the tax deduction works.

If it's an expense of the charity, it's an expense of the charity.

Mr. Copilevitz: And the charity may have all manners of expense that may be relevant to one donor but not be relevant to another.

Chief Justice Rehnquist: Mr. Copilevitz, a moment ago you said that in the opinion of the Supreme Court of Illinois there was a statement that the defendants had made no affirmative representation.

I had not read the opinion that way.

Could you either locate it during your argument, or if you can't, file a statement afterwards telling us on what page of the petition for writ of certiorari that... that statement appears?

Mr. Copilevitz: It appears in page 348 of the opinion, and I quote: Further, VietNow has never expressed dissatisfaction with the fundraising services provided by the defendants, and there is no allegation that defendants made affirmative misstatements to potential donors

Justice Breyer: What about the allegation in paragraph 63, from 1987 through the present, in conducting their charitable solicitations, the donors made representations which induced the donors to contribute funds for charitable purposes by representing that the funds they contributed would go to charitable purposes.

Now, that doesn't say what the particular representations were, but they had a lot of affidavits attached which did.

Mr. Copilevitz: But the affidavits were inherently unreliable.

They're... the...

Justice Breyer: No, no, I'm saying, in terms of whether there is an allegation in the complaint.

Mr. Copilevitz: It's not... those... those affidavits are incorporated for the sole purpose of demonstrating that there was not a disclosure of the fee paid.

If those affidavits were true and correct, each one of them would have supported an independent action in violation of a specific statute in the Illinois Charitable Association Act...

Justice Breyer: I'm not understanding.

No.

I thought that the question is simply whether they've alleged that there were specific affirmative representations, and the status, I gather from the SG's brief and what I've just read, is that they allege there were representations, and then they attached affidavits which have in them, and there's a footnote in the SG's brief that list the affidavits, statements as to particular affirmative representations, and... and therefore, I want to know is that, if that issue isn't in the case, fine, but... but I'm somewhat puzzled as to why it isn't.

Mr. Copilevitz: It's not in the case.

There are no allegations... those would have constituted violations of specific sections of the statute.

Chief Justice Rehnquist: But...

Mr. Copilevitz: There was no allegation in the complaint.

The only place they're found are in the affidavits which are incorporated as a reference that the fee was not disclosed and, had it been, they would not have given it.

Justice O'Connor: Yes, but the...

Mr. Copilevitz: That's the sole purpose of it.

Chief Justice Rehnquist: The Supreme Court of Illinois didn't go off on the ground that there was a separate statute regulating solicitation, and that therefore you couldn't have a common law fraud action in Illinois.

Mr. Copilevitz: I'm not sure I understand the Chief Justice's question.

Chief Justice Rehnquist: Well, I... I thought you were suggesting that these allegations would have been a... a violation of a specific statute governing fraud, governing charitable solicitation, but the Supreme Court of Illinois didn't say that because there's a statute governing solicitation you could not bring a common law fraud action in this case.

What they said was that the First Amendment prohibits you from doing it, as I understood their opinion.

Mr. Copilevitz: Yes, sir.

What they said is that the only allegation was that the fees were excessive and they weren't disclosed, that there was no allegation of any affirmative misrepresentation.

They did not say that an action couldn't be brought for fraud if there was an affirmative misrepresentation.

Justice Ginsburg: This case...

Justice Souter: But I took the...

Justice Ginsburg: This is... this case... something you said I thought was not quite right.

This case went off on a motion to dismiss, so there was no trial.

There was no findings of anything and, given the liberality of complaint amendments, even if you're right that they didn't make those allegations, they surely could, so one thing is to say, I thought your position was, no matter what they said in the complaint, this kind of operation must be allowed to go on, not simply that they... they... there's a defect in pleadings here, but no claim could be stated, not that these... these pleadings didn't state a claim.

Mr. Copilevitz: Well, maybe I'm not clear, then.

What I am saying, that high fund-raising costs alone, and the failure to disclose those costs, consistent with Schaumburg, Munson, and Riley, are not an indication of fraud in and of themselves.

The State needed two legs to stand on.

They might have had the high fundraising costs, but they needed some form of misrepresentation connected with the use of the money, and what the Illinois Supreme Court found, what the appellate court found, and what the trial court found on the motion to dismiss, that the second leg did not exist, and therefore, the claim could not stand, because to do so would have been contrary to this Court's holdings...

Justice Scalia: And...

Justice Stevens: Well, why wouldn't...

And supporting your, what you're saying, the question presented gives us the naked question if the 85 percent is enough.

There... there's nothing in the question presented that talks about these fringe issues.

You're... you're dead right on that.

Mr. Copilevitz: Thank you.

Justice Souter: Well, why can't... why... why isn't it appropriate for us to say that the affidavits can function for First Amendment purposes like a bill of particulars, and that the Illinois Supreme Court ought to consider that, and if, under Illinois practice, they could function as a bill of particulars, then there's nothing in our First Amendment jurisprudence that prohibits the prosecution.

That leaves open the broader question, but in this particular case, why wouldn't that at least be an appropriate response for this Court to make with respect to the affidavits?

Mr. Copilevitz: Those violations of the statute are certainly subject to prosecution.

That's not the case that was brought by the State of Illinois.

They amended the complaint two times.

Justice Souter: No, I realize that that's not the way it was originally brought.

All I'm saying is, isn't it appropriate for us to say, if... if we otherwise believe it, that the affidavits can function consistently with the First Amendment, consistently with our First Amendment cases as a bill of particulars...

Mr. Copilevitz: The...

Justice Souter: and... and when you get to that particular level, it's okay to prosecute?

Mr. Copilevitz: The Illinois Supreme Court found as a matter of law that those affidavits were not part of the complaint, and this Court certainly has the authority to...

Justice Souter: So just as a matter of State procedure you can't do that, is what you're saying.

Mr. Copilevitz: That's what the Illinois Supreme Court found...

Justice Souter: I... I see.

Mr. Copilevitz: as a matter of law.

Chief Justice Rehnquist: And they said that in this opinion, too?

Mr. Copilevitz: It's the quote that I just read, Your Honor.

Chief Justice Rehnquist: Could you give me...

Justice Scalia: It's all there, isn't it?

Chief Justice Rehnquist: Give me the citation in the petition... the petition for the certiorari.

If you can't find it now, file it with... file it with the Clerk later.

Mr. Copilevitz: Yes, sir.

Justice Breyer: Could I ask you, taking it just as you want to present it, fine, and I think... I'm... I'm convinced that there are a lot of instances in which somebody keeping 85 percent of the money would be perfectly consistent with a charitable purpose, but there may also be quite a lot of instances where keeping 85 percent of the money serves no charitable purpose, and really, it isn't much of a charity, and there the public is deceived.

Now, is there anything wrong with prosecuting that kind of charity, and if it turns out to be the first instead of the second, you could raise the claim later, after the prosecution, or during the trial, that we don't know what'll happen in such a circumstance?

Mr. Copilevitz: Well, my reservation in answering the question yes is, again, you are focused simply on the value of the net dollars that are received.

Justice Breyer: That... that's correct.

That's exactly my question.

I understand that there are circumstances where that fact, that virtually all the money goes to the telemarketer and little to the charity, is absolutely justified in terms of charitable purpose, but my question, which I'm repeating, is, there may be many, many, many instances where it isn't, and so what's wrong with prosecuting those people for fraud?

Mr. Copilevitz: Well, I would... I would refer to the decision of Judge Posner in the UCC case, where we had virtually that very set of facts, and the Solicitor for the Internal Revenue Service proposed that, in dealing with how would we know, the notice issue and the standard, is there would be a case-by-case analysis, and it would evolve, and Judge Posner, I believe correctly determined that that's no standard at all, and if there's no standard, we're back to the lesser evil.

Justice Breyer: Oh, no, there's a perfectly good standard, that if you're going to keep 85 percent of the money, you better have documents showing that you're doing it for a good, charitable reason, that's all, and the people who will be prosecuted are the people that can't show that.

Now...

Mr. Copilevitz: Well...

Justice Breyer: Now, I'm not saying that's a constitutional standard.

I'm not saying it's a State law standard.

I don't know what standard it would be.

I want to get your answer.

Mr. Copilevitz: I don't believe that you can measure the worth of an organization based upon its financial efficiency.

Justice Kennedy: Would... would you say that the State of Illinois or any State could require charities every 6 months to report the percentage of money going to telemarketers and the percentage going to the ultimate beneficiaries in... in direct payments and file this every 6 months?

Mr. Copilevitz: Yes, sir, and there are some States that do require that.

Justice Scalia: I assume that the State Attorney General or the State Secretary of State can, indeed, close down charities which are being used as... as private money-making ventures.

Aren't... aren't... isn't that possible?

Mr. Copilevitz: There is statutory... yes, Your Honor, there's statutory authority...

Justice Scalia: Not... not through a fraud action, but through investigating the books of the charity.

Mr. Copilevitz: Yes, sir, and under section...

Justice Stevens: The thing I don't understand, though, is the difference between good charities and bad charities doesn't seem to me to have a particle to do with the question of whether the State was a... was a misrepresentation or not.

You can get 85 percent from a good charity, and 85 percent from a bad charity and keep it, but the statement to the public is equally misleading in either case.

I mean, maybe that's not enough, but maybe it is.

Mr. Copilevitz: Well...

Justice Stevens: I don't see how the character of the charity has any bearing on the... on the kind of... whether there's fraud or not.

Mr. Copilevitz: I would agree, and I would point to the petitioner's reply brief at the footnote referring to the brief that was filed by Disabled American Veterans, explaining the problem of donor acquisition mailings, that it can cost $1 or more to acquire $1, and that that should be something that the petitioner should give deference to, and in footnote 13 of the petitioner's reply, they took exactly the opposite position and said the fact that it was donor acquisition mailings, trying to acquire new donors, was not a reason to set aside the principles that they've enunciated in their complaint.

Justice Kennedy: Let make... let's make an assumption that 95 percent of the donors in the case of your client's charity would not have given the money had they known of the amount being kept by the telemarketers.

Is there anything the State can do to protect the people of... of the State from having... from parting with their money under those circumstances?

Mr. Copilevitz: Yes, sir.

The State of Illinois has a series of... of disclosure requirements.

They're content-based, neutral disclosures.

You must, before you ask for a donation in Illinois, if you're a compensated professional fundraiser, disclose your professional status.

You must also disclose that you can obtain copies of financial records for the organization from the Office of the Attorney General.

You must also answer, if asked, what your fee is.

You must disclose it.

You must disclose, if asked, what portion of the monies will go to the charitable organization.

You must disclose the primary purpose of, the charitable purpose of the organization.

The State of Illinois can publish reports, the State of Illinois maintains a web site.

There are 800 numbers.

There are... there is a requirement that, prior to anyone parting with consideration, in the mail piece that is sent, when you are sitting in the privacy of your own home, having made simply a pledge in the mail, in writing, there is a disclosure that you can obtain copies of the financial information.

There is a disclosure...

Justice Ginsburg: You can... you said many times you can ask, you can obtain.

It seems that, then, the sophisticated person is protected, the sophisticated person will ask, but the person who isn't, who doesn't know, I mean, your... your position is, it's okay, if asked, must tell, but if doesn't ask, then it's against the First Amendment to require a statement of how much goes to the fundraising?

Mr. Copilevitz: Yes, Your Honor, because it's the breathing space of New York Times versus Sullivan and Riley and Schaumburg and Munson that we require.

It's the lesser of two evils.

A compelled point of solicitation disclosure will disproportionately adversely affect smaller, newer, and less popular charities.

Justice Ginsburg: And disproportionately affect donors who are unsophisticated, because those are the ones, by and large, that don't ask.

Mr. Copilevitz: I would point to the concurring opinion written by Justice Scalia in the Riley case that the... that it's the normal presumption of people to believe that someone is being compensated.

They know when they get something in the mail that you had to pay for the stamps, you had to pay for the printing.

You have in Illinois a step further, the disclosure of the professional status and the information before you part with any consideration how you can obtain all the information if cost...

Justice Ginsburg: Is it... is it...

Mr. Copilevitz: Excuse me.

Justice Ginsburg: In looking at this picture of this fundraiser, one of the things that was alleged, it seemed to me, is odd.

It said that the fundraiser does not give the names of the donor to the charity, to VietNow.

In other words, the fundraiser keeps the donor list itself, and it seems if it were in business to collect for the charity, rather than in business to collect for itself, it would surely give the charity the... the names of the donors.

Mr. Copilevitz: That's a subject of contract, and I would suggest that that's something Illinois could address.

There are State laws in New Hampshire and Arkansas that I can recall off the top of my head that specifically require as a condition of a contract that the list and the names be made available.

There is nothing in this record to refer to the fact that this contract wasn't entered into at arm's length and, in fact, the Attorney General's web site cites the percentage of this contract as being the common amount that professional fundraisers routinely charge, and as the Court addressed in Riley, that the State's paternalistic instinct in protecting attorneys...

Justice Ginsburg: Are we going on that again?

That this is the common amount that fundraisers usually charge, 80 percent?

Mr. Copilevitz: It can be.

That... it's on the web site of the Attorney General, that professional fundraiser fees generally run between 80 and 90 percent.

There's also footnoted in the brief a reference to a report that was done that veterans groups are among the lowest receiving organizations because of the nature of their appeal, and Nation-wide averaged 17 percent, and in this case they allege 15 percent, but the reality is something different than that.

Because of the magazines that were published in the last contract they got $20,000 in addition to their percentage.

If no phone call had been made, they would have received 100 percent of the money.

They got the benefit of a Nationwide 800 number.

They got the benefit of 2,200 magazines.

They got the opportunity to talk to nine of...

Justice Stevens: You're arguing that it's a good charity, and I'll... I'll... we'll assume that for purposes of the decision, that they're... they're perfect, but it still seems to me...

Unidentified Justice: [Laughter]

Justice Stevens: you've raised the suggestion that maybe we should use the New York Times standard, and if that were the case, would it not be arguable that your people knowingly made these statements with the understanding they would believe that they were literally true, and that there was not an over... you know, that the... that the charity was going to get a larger amount of the money.

Mr. Copilevitz: Well, Your Honor...

Justice Stevens: It seems to me the New York Times standard might cut against you, in other words.

Mr. Copilevitz: Well, it... it's for me in the breathing space concept, but what they allege is, in the complaint is that they raised money for the charitable purpose.

What they don't allege is that no money went to the charitable purpose.

It's a question of degrees.

Again, we come back down to what portion of the gross dollar in hard dollars went to the program purpose.

What we can't...

Justice Stevens: No, the question is how... how true was the statement?

What is the reasonable understanding of the person who listened to this solicitation?

I think everybody sort of agrees that if they knew the facts, they wouldn't have given the money and, as Justice Kennedy suggests, therefore they were misled, and then the New York Times standard suggests to me that you knew they would be misled, because you say it in your own brief.

Mr. Copilevitz: No, they would... there was a value... the... one of the primary program services was to raise the awareness of the plight of the Vietnam veteran and, as a result of a phone call, 9 out of 10 people called do not make a contribution, but the organization got the benefit of every one of those conversations, and maybe next year or next month they got a bequest, or they got a donation of a car, or they acquired a donor by direct mail.

They're only focusing on one campaign.

They don't look at every campaign.

In the footnote in the DAV, referring to them, they did not limit themselves.

It can be campaign-by-campaign.

Justice Stevens: Well, that's an argument that the 85 percent is an incorrect figure.

That's... then I think the case that's presented by the... the certiorari position is, assume that 85 percent is the correct figure, then, is it... you know, is it fraud?

Mr. Copilevitz: No, sir.

Justice Stevens: Yes.

Mr. Copilevitz: Thank you.

Rebuttal of Richard S. Huszagh

Chief Justice Rehnquist: Thank you, Mr. Copilevitz.

Mr. Huszagh, you have 3 minutes remaining.

Mr. Huszagh: I'd like to first correct two clarifications in the record.

In fact, the Illinois Supreme Court never said that the affidavit should not properly be treated as part of the complaint.

They refer to the affidavits, but our allegations stand on their own without the need for those affidavits, which would simply be an elaboration of the types of misrepresentations made to donors.

A second, the web site that the Illinois Attorney General keeps does not hold up 90 percent kept by fundraisers as the ordinary and usual thing that's regularly practiced in this area.

They indicate that as another one of several egregious examples that people should be warned against, but that is not the only weapon they should have in their arsenal against actual fraud.

This case is not a claim based upon a mere nondisclosure of a high fee.

It is a claim based upon a particular instance of actual deception based upon statements made to donors that constitute misrepresentations under the common law of fraud, not explicit misstatements as the Illinois Supreme Court said, or affirmative misstatements, not explicit lies, but misrepresentations in the form of half-truths, and we ask this Court not to hold that half-truths are constitutionally protected.

I think the Court said as much in Milkovich and the Masson cases, and no different rule is warranted here.

There is that semantic distinction.

Let me point out, however, that the key allegation in this complaint, in the body of the text at joint appendix page 9, paragraph 34, says that the effect of representations that were made was that people were told that a significant amount of each dollar donated would be paid over to VietNow, and the defendants knew that was false because 15 cents or less of each dollar would be given to VietNow for its purposes.

The allegation is that people were told that their money was going to be paid to VietNow and used to buy food baskets, to provide job training for veterans.

That is an actual representation.

Whether it constitutes a misrepresentation turns upon whether it reasonably led people to believe something that was false, and we ask the Court to continue to uphold those principles in this context.

There is no plausible claim that in this case what these defendants are alleged to have done is beyond the State's power to prohibit by a properly drafted law, that these circumstances are egregious, and there is also no possible claim that... that any law invoked here cannot be applied against anybody.

The fallback position of the defendants in this case is that the Court should take the draconian step of saying that unless there is an explicit misrepresentation of fact, not an implied one, that there should be blanket immunity for charitable fundraisers to lead people to believe that their money is going to be used for specific purposes and have no liability if that is 1 percent true.

That is not something that's justified by the First Amendment.

They have conjured up dire scenarios about all sorts of charities disappearing from the landscape simply by the type of examples that they have given for a chilling effect.

There is nothing in the record to show that, and there is nothing in common experience to show that, but what they're asking the Court is to say no, it's not enough for as-applied claims of that variety to be brought in other cases, but that there should be no prosecution ever.

The State is categorically prohibited from bringing a fraud claim in such circumstances.

That is not a value that the First Amendment supports.

The First Amendment value that's most important here is the donor's right to be able to make informed decisions.

I see the light's on.

Chief Justice Rehnquist: Thank you, Mr. Huszagh.

The case is submitted.