Article Archives >> Lead Stories >> March 1-31, 2010

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Court Voids Restrictions
On Professional Resellers
For-profit clothing collectors who sell and give to charity
can be made to disclose for-profit status, not payment rates

A federal District Court in Texas has stricken major portions of a new state law that sought to require for-profit companies that collect clothing and household goods in the name of charities to disclose the amounts actually paid to the charitable organizations they say benefit from the program.  The Court said it was constitutional to require the companies to disclose their for-profit status, but was unconstitutional to require them to disclose how they paid the charities.  (National Federation of the Blind of Texas v. Abbott, N.D. TX, Dallas Div., No. 3:09-CV-1567, 2/1/10.)

The statute sought to require for-profit entities that solicit and resell donations on behalf of charitable organizations, known as professional resellers, to make disclosures when they collect clothing or other household goods through public receptacles, or through telephone, mail or in-person solicitations.  For those who pay a percentage of the proceeds to charity, the statute sought to require the resellers to disclose the percentage paid.  For those who paid a flat fee, such as a flat fee for each filled receptacle, it sought to require disclosure of the flat fee.   For those who collected goods with the impression that they paid a charity, but did not actually pay a charity, it sought to require disclosure of that fact.

The statute was challenged by several charities that use professional resellers to raise funds for their program.

The state sought to argue that because the speech that it sought to regulate was speech by a for-profit entity, it was commercial speech not subject to the protections for charitable solicitation.  The Court rejected that argument.  “The [U.S.] Supreme Court has indicated that commercial entities may enjoy the same protections as charitable organizations if they are engaged in the same type of speech as charitable organizations,” it said.

The Court agreed that the statute sought to protect a compelling state interest in protecting charities and the public from fraud.  But it concluded that the statute was not “narrowly tailored” to meet that goal. 

Noting that “the First Amendment prohibits the government from compelling speech to the same extent that the government is prohibited from silencing speech it does not like,” the Court cited prior Supreme Court precedent in charitable solicitation cases.  The Supreme Court had stricken disclosure requirements that would “almost certainly hamper legitimate” fundraising by professionals on behalf of charities, and would discriminate against “small or unpopular charities” that must use professionals out of necessity, while larger charities could absorb the costs internally to avoid the disclosure requirements.

The Supreme Court had articulated more narrowly tailored measures that could replace a disclosure rule.  It had suggested that states require professional solicitors to file financial reports about fundraising costs and publish those filings. It said a state could “vigorously enforce” state anti-fraud laws.  And it could put the public on notice that costs were associated with the solicitation that went to a for-profit entity by requiring the solicitors to disclose their identity and status as professional solicitors.

The Texas Court essentially followed the Supreme Court’s lead. It held that the requirement to disclose the fee arrangement was not narrowly tailored and therefore unconstitutional.  It held that the portions of the act that require the professional resellers to identity their name, status as a for-profit entity are narrowly tailored and permitted.

It also held that a requirement to disclose that the donated items will be resold “for profit” was also unconstitutional because the provision was “underinclusive.”  “Although charitable organizations are not-for-profit entities,” the Court said, “they are certainly selling the donations for and at a profit.  As passed, the Act’s disclosure requirements are unconstitutionally underinclusive because they discriminate against charitable organizations who hire professional resellers to solicit and sell donations in favor of charitable organizations who conduct the solicitation and resale in house.  Texas is constitutionally permitted to put its citizens on notice that the clothing and household goods donated are going to be resold instead of being reused or donated.  But if Texas chooses to do so, it must require all organizations engaging in this resale activity to inform the public of this fact, not just some of these organizations.”

The Court had ruled that the charities had no standing to contest the part of the statute that requires resellers to say that no payments will be made to charity and therefore did not rule on the validity of that provision.

YOU NEED TO KNOW

This case follows a long line of Supreme Court precedents protecting charitable solicitation speech as a First Amendment right and limiting what solicitors are required to say. 

Comments from our Readers

I'm not an expert by any stretch, but it seems that in California, the requirements placed on for-profit entities that act as fundraisers for nonprofits are a more significant invasion of first amendment rights than what was proposed in Texas.  The California non-profit integrity act of 2004, which became effective in 2005, requires essentially the same disclosure as what was proposed in Texas.  Why haven't the Federal Courts overturned the law in CA? --T.F. by e-mail

Article Archives >> Lead Stories >> March 1-31, 2010