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Jeffrey S. Gray, Bar No. 5852
Rebecca D. Waldron, Bar No. 6148
Assistant Attorneys General
JAN GRAHAM, Bar No. 1231
Utah Attorney General
Attorneys for Defendant
160 East 300 South, 5th Floor
Salt Lake City, Utah 84114-0872
Telephone: (801) 366-0310
IN THE UNITED STATES DISTRICT COURT
|AMERICAN TARGET ADVERTISING, INC., a Virginia corporation,
FRANCINE A. GIANI in her official capacity as Division Director of the Utah Division of Consumer Protection, Department of Commerce for the State of Utah,
Civil No. 2: 97CV 0610B
MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AND IN SUPPORT OF DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
TABLE OF CONTENTS
TABLE OF CONTENTS . . . . . . . . . . (ii)
STATEMENT OF MATERIAL FACTS AS TO WHICH
A GENUINE ISSUE EXISTS . . . . . . . . . . (iv)
STATEMENT OF MATERIAL FACTS AS TO WHICH
NO GENUINE ISSUE EXISTS . . . . . . . . . . (iv)
ARGUMENT . . . . . . . . . . 1
I. Overview of the Utah Charitable Solicitations Act . . . . . . . . . . 1
A. Professional Fund Raising Counsel or Consultants Defined . . . . . . . . . . 1
B. Registration Requirements . . . . . . . . . . 1
C. Grounds for Denial . . . . . . . . . . 3
D. Enforcement Provisions . . . . . . . . . . 3
II. Constitutional Challenges to the Act . . . . . . . . . . 4
A. The Charitable Solicitations Act Does Not Violate the First Amendment . . . . . . . . . . 5
1. Regulation of Charitable Solicitations Survives First Amendment
Scrutiny if the Regulation Serves a Substantial Government Interest
and Is Narrowly Tailored to that Interest . . . . . . . . . . 5
2. The Utah Charitable Solicitations Act Meets the Schaumburg Test . . . . . . . . . . 7
(A) The State’s Interest in Protecting the Public and Charities
from Fraud and Other Harmful or Injurious Acts Is Substantial . . . . . . . . . . 7
(B) The Act is Narrowly Tailored to the State’s Interest in
Protecting the Public . . . . . . . . . . 8
B. The Charitable Solicitations Act Does Not Violate the Due Process Clause . . . . . . . . . . 12
1. The Act, On its Face, Is Valid Under the Commerce Clause . . . . . . . . . . 12
2. The Act, As Applied, Is Valid Under the Commerce Clause . . . . . . . . . . 13
C. The Charitable Solicitations Act Does Not Violate the Commerce Clause . . . . . . . . . . 18
1. The Act, On its Face, Is Valid Under the Commerce Clause . . . . . . . . . . 19
2. The Act, As Applied, Is Valid Under the Commerce Clause . . . . . . . . . . 20
3. A Substantial Nexus with the State Is Not Required
Under the Commerce Clause . . . . . . . . . . 24
CONCLUSION . . . . . . . . . . 25
Selected Pages of the Deposition Testimony of James E. B. Carney, Vice President, American Target Advertising, Inc.
Agreement between Judicial Watch, Inc. and American Target Advertising, Inc.
The defendant, Francine A. Giani, in her official capacity as director of the Division of Consumer Protection of the Utah Department of Commerce (“Director”), by and through her attorneys, Jan Graham, Utah Attorney General, and Jeffrey S. Gray and Rebecca D. Waldron, Assistant Attorneys General, and pursuant to Rule 56-1(b) of the Local Rules of Practice, hereby submits the following Memorandum of Points and Authorities in Support of Defendant’s Motion for Summary Judgment and in Opposition to Plaintiff’s Motion for Summary Judgment.
STATEMENT OF MATERIAL FACTS AS
TO WHICH A GENUINE ISSUE EXISTS
1. A genuine issue exists as to whether American Target conducts business in the State of Utah as asserted in paragraph 5 of the “Statement of Material Facts” in plaintiff’s Memorandum in Support of Motion for Summary Judgment.
2. A genuine issue exists as to whether American Target’s services under the agreement with Judicial Watch are performed in Utah as asserted in paragraph 14 of the “Statement of Material Facts” in plaintiff’s Memorandum in Support of Motion for Summary Judgment.
STATEMENT OF MATERIAL FACTS AS
TO WHICH NO GENUINE ISSUE EXISTS
1. Among the interests sought to be advanced by the State under the Act is the protection of Utah residents (and charities who solicit in the State) from harmful or injurious acts, including fraud, by those who participate in the charitable solicitation process, including professional fundraisers and professional fund raising counsel or consultants (“consultants”). See Utah Code Ann. § 13-1-1 et seq. (1953, as amended); Affidavit of Francine Giani (“Giani Affidavit”), ¶ 3.
2. The annual registration fee for professional fundraisers and consultants is $250.00. Giani Affidavit, ¶ 5.
3. Approximately twenty-nine (29) professional fundraisers registered with the State during the 1994 fiscal year. In the 1997 fiscal year, ninety (90) professional fundraisers and consultants registered with the State. Giani Affidavit, ¶ 6.
4. The fees adopted by the Division are set so as to defray the costs of regulating professional fundraisers and consultants. Factors considered in assessing the fees include the resources expended by the Division in regulating professional fundraisers and consultants, responding to consumer inquiries and complaints, investigating possible violations of the Act, and enforcing the Act. The Division also reviews the registration fees charged in other jurisdictions. Giani Affidavit, ¶ 7.
5. Ten to fifteen (10 - 15) hours are spent on average by Division staff on each registration application (initial and renewals), which includes, but is not limited to, work in receipting registration applications, processing fees, reviewing applications (including the review of contracts and tax documents), cross-referencing charity affiliations, data entry, necessary follow up, and issuing of the permits. Giani Affidavit, ¶ 8.
6. In addition to the hours expended on registration applications, additional hours are expended by Division staff in responding to consumer inquiries and complaints, updating registration information, investigating possible violations of the Act, and otherwise enforcing the Act. Giani Affidavit, ¶ 9.
7. The Division’s review of application fees by other states revealed that registration fees ranged from $0.00 to $1,000.00. Of those states that charged an application fee, approximately one- half (½) assessed fees of $200.00 or more. Giani Affidavit, ¶ 10.
8. Attached to the Affidavit of Francine Giani as Exhibit A is a true and correct copy of the current Professional Fund Raiser, Counsel, or Consultant Permit Application. Giani Affidavit, ¶ 11.
9. American Target is a corporation organized under the laws of Utah. First Stipulated Facts in Support of Motions for Summary Judgment (“Stipulated Facts”), ¶ 1.
10. American Target is located in Virginia. Stipulated Facts, ¶ 2.
11. American Target is not registered as a foreign corporation with authority to do business in Utah under Utah Code Ann. § 16-10a-1501 (1953, as amended). Stipulated Facts, ¶ 3.
12. American Target does not have offices, employees, directors, agents, bank accounts, or real property in Utah. Stipulated Facts, ¶ 4.
13. Exhibit 1 to American Target’s complaint is a true and correct copy of the contract entered into on or about November 25, 1996 by and between American Target and Judicial Watch, Inc. (“ATA Contract”) Stipulated Facts, ¶ 5.
14. Judicial Watch, Inc. is a non-profit corporation located in Washington, D.C. Stipulated Facts, ¶ 6.
15. American Target is currently not registered in Utah under the Charitable Solicitations Act, Utah Code Ann. §§ 13-22-1 et seq. (1953, as amended). Stipulated Facts, ¶ 7.
16. Judicial Watch is currently registered under the Act. Stipulated Facts, ¶ 8
17. The letters attached to the First Stipulated Facts are samples of a number of types of letters prepared under the ATA contract, and have been mailed since Judicial Watch and American Target entered into the ATA contract. Stipulated Facts, ¶ 9.
18. Annual maintenance or handling fees in the industry for standby letters of credit range from between one to two percent (1%–2%) of the face amount of the letter of credit. In addition to the annual maintenance fee, a nominal, one-time maintenance fee is also assessed. Affidavit of Gary Christensen, ¶ 6.
19. Under American Target’s contract with Judicial Watch, approximately 1.2 million pieces of mail have been mailed nationwide and approximately $700,000.00 has been received in contributions. Deposition of James E.B. Carney, Vice President at American Target Advertising, Inc., (“Carney Deposition”), p. 157, ¶¶ 18–23; p. 158, ¶¶ 4–6.1 6.
20. The mailing lists used by American Target as a consultant for Judicial Watch include names of individuals from throughout the country, and, therefore, presumably include names of Utah residents. Moreover, American Target has the ability to identify those names appearing on such lists who reside in Utah. Carney Deposition, p. 97, ¶¶ 22–23; p. 98, ¶¶ 1–12.
I. OVERVIEW OF THE UTAH CHARITABLE SOLICITATIONS ACT
The Utah Charitable Solicitations Act regulates charitable solicitations made by charities, professional fundraisers, solicitors, and consultants. At issue in this action is the Act’s regulation of consultants who provide consulting services to charities soliciting contributions in Utah. Following, therefore, is a brief overview of those regulations which are at issue in this action.
A. Professional Fund Raising Counsel or Consultants Defined.
Under the Act, a consultant is generally defined as any person who “for compensation[,] plans, manages, advises, counsels, consults, or prepares material for, or with respect to, the solicitation in this state of contributions for a charitable organization, whether or not at any time the person has custody of contributions from a solicitation.” U.C.A. § 13- 22-11(a)(i). Those who may otherwise provide such consulting services, but who also solicit contributions or hire another to solicit contributions on behalf of a charity, are not regarded as a consultant under the Act (although they may be deemed a professional fundraiser). U.C.A. § 13-22-2(11)(a)(ii) & (iii).2
B. Registration Requirements.
Consultants who provide services to charities soliciting contributions in Utah are required to register with the Division before solicitation begins.3 U.C.A. § 13-22-5(4). Upon receipt of the application for registration, the Division has ten (10) business days within which to approve or deny the application. Utah Admin. Code R152-22-4(3) (1996). To register, an applicant must pay an application fee of $250.00, secure a bond or letter of credit in the sum of $25,000.00, and submit a written application under oath. U.C.A. § 13-22-9. In its application, the consultant must disclose:
(1) simple identifying information about the consultant, its officers, directors, registered agent, and affiliates (e.g., name, address, telephone number, facsimile number, and the type of entity) (U.C.A. § 13-22-9(1)(b)(i), (ii), (iv), (v), & (vi));
(2) whether or not any injunction, judgment, administrative order, or criminal conviction involving moral turpitude has been entered against the consultant or against any of its officers, directors, managers, operators, or principals (U.C.A. § 13- 22-9(1)(b)(ix) & (xi));
(3) the purpose of the consulting services, the intended use of the contributions solicited, the method by which the consulting services will be organized, and the projected length of time of the solicitation (U.C.A. § 13-22-9(1)(b)(viii)(A) & (B));
(4) the total fees charged by the consultant and the expenses the consultant anticipates it will incur for its services, including the payment of commissions, salaries, and collection costs (U.C.A. § 13-22-9(1)(b)(viii)(C) & (D));
(5) the projected percentage of contributions that will be available to the charity after the payment of expenses, including fees paid to the consultant (U.C.A. § 13-22- 9(1)(b)(viii)(D)); and
(6) certain historical information about the consultant, including the nature of the consultant’s business during the preceding three years and the total net fees earned and expenditures made by the consultant in the previous calendar year (U.C.A. § 13- 22-9(1)(b)(iii) & (viii)(E)).
In addition to the foregoing disclosures, the consultant is required to provide copies of various documents reflecting its status and its relationship with the charity.4
C. Grounds for Denial.
A consultant’s application for registration may be denied or revoked in only a limited number of circumstances. Indeed, the Act leaves no discretion with the director in her decision to approve, deny, suspend, or revoke a registration. Under the Act, the director may deny, suspend, or revoke a registration only if such action is in the public interest and upon a finding that: (1) the application is incomplete or misleading in any material respect, (2) the consultant has violated the Act or failed to pay a fine imposed under the Act, (3) the consultant has been convicted of a crime involving moral turpitude, (4) an injunction or administrative order has been entered against the consultant in which there was a finding or admission of fraud, breach of fiduciary duty, material misrepresentation, or where the injunction or order was based on a finding of a lack of integrity, dishonesty, or mental incompetence of the applicant, (5) the consultant has materially misrepresented or caused to be misrepresented the purpose and manner in which contributed funds and property will be used in connection with any solicitation, (6) the consultant has failed reasonably to supervise its agents or employees, (7) the consultant has used, or attempted to use a name that either is deceptively similar to a name used by an existing registered or exempt charitable organization, or appears reasonably likely to cause confusion of names, or (8) the consultant has failed to secure and/or maintain a $25,000 bond or letter of credit. U.C.A. § 13-22-12.
D. Enforcement Provisions.
Those who violate the Act are subject to administrative, civil, or criminal enforcement action. The director may initiate administrative action to (1) suspend or revoke the registration, (2) order that the consultant cease and desist from its unlawful conduct, or (3) impose an administrative fine. U.C.A. § 13-2-6; §§ 13-22-3, -12. Such action, however, is subject to provisions of the Administrative Procedures Act, U.C.A. §§ 63-46b-1 et seq., which guarantee the consultant’s right to notice and a hearing. The Division may also seek damages, civil penalties, and injunctive relief in state district court. U.C.A. § 13-22-3. Any civil judgment rendered or administrative fine imposed against a consultant for violating the Act may be recovered from the bond or letter of credit posted by the consultant. Utah Admin. Code R152-22-6 (1996). However, the Act also provides that any fine or civil penalty imposed shall be excused unless it appears, by a preponderance of the evidence, that the consultant acted in bad faith or with intent to harm the public. U.C.A. § 13-22- 3(5) (1953 as amended). Finally, the Act makes it a class B misdemeanor for the willful violation of any provision thereof. U.C.A. § 13-22-4.
II. CONSTITUTIONAL CHALLENGES TO THE ACT
In its Memorandum in Support of Motion for Summary Judgment, ATA challenges the facial validity of the Act under the First Amendment, the Due Process Clause of the Fourteenth Amendment, and the Commerce Clause in Article I of the Constitution. Therefore, as a threshold matter, it should be noted that ATA must meet the appropriate burden in establishing the facial invalidity of the Act as set forth in United States v. Salerno, 481 U.S. 747, 107 S.Ct. 2095 (1987). In that case, the Supreme Court observed that “[a] facial challenge to a legislative Act is, of course, the most difficult challenge to mount successfully, since the challenger must establish that no set of circumstances exists under which the Act would be valid.” Id. at 745, 107 S.Ct. at 2100. The Supreme Court then held that the fact that a statute “might operate unconstitutionally under some conceivable set of circumstances is insufficient to render it wholly invalid, since we have not recognized an ‘overbreadth’ doctrine outside the limited context of the First Amendment.” Id. Thus, while ATA’s facial challenge to the Act on First Amendment grounds need not demonstrate that “no set of circumstances exist under which the Act would be valid,” ATA’s challenge based on the due process and commerce clauses must so demonstrate.
A. The Charitable Solicitations Act Does Not Violate the First Amendment.
ATA first argues that the registration requirements and other provisions governing consultants is a violation of its First Amendment rights of free speech. However, the states’ ability to regulate the activities of charitable solicitations in this manner is well settled.
1. Regulation of Charitable Solicitations Survives First Amendment Scrutiny if the Regulation Serves a Substantial Government Interest and is Narrowly Tailored to that Interest.
The seminal Supreme Court decision addressing First Amendment limitations on government regulation of charitable solicitations is Village of Schaumburg v. Citizens for a Better Environment, 444 U.S. 620, 100 S.Ct. 826 (1980). At issue in Schaumburg was the village’s ordinance prohibiting door-to-door solicitations from charities that do not apply at least seventy-five percent (75%) of the contributions to the charitable purpose. Id. at 622, 100 S.Ct. at 829. The Supreme Court recognized that “charitable appeals for funds on the street or door to door, 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.” Id. at 632, 100 S.Ct. at 833. With this in mind, however, the Court noted that “[s]oliciting financial support is undoubtedly subject to reasonable regulation . . . .” Id., 100 S.Ct. at 833-34.
In assessing whether the regulation was reasonable, the Court looked to the interests of the village and whether or not those interests were served by the regulation without unduly intruding upon the rights of free speech. See id. at 633, 100 S.Ct. at 834. The Court concluded that although the interest in preventing fraud was substantial, the regulation only peripherally promoted that interest and the interest “could be sufficiently served by measures less destructive of First Amendment interests.” Id. at 636, 100 S.Ct. at 836. Finally, the Court observed that “[t]he Village may serve its legitimate interests, but it must do so by narrowly drawn regulations designed to serve those interests without unnecessarily interfering with First Amendment freedoms.” Id. at 637, 100 S.Ct. at 836.
Therefore, under Schaumburg, laws regulating charitable solicitations survive First Amendment scrutiny if: (1) they serve a substantial government interest, and (2) they are narrowly tailored to that interest. The regulation will be narrowly tailored if it does not unnecessarily interfere with First Amendment freedoms. The test does not create a “least restrictive means” standard, allowing the state to impose only the least restrictive measure that could effectively protect its interest. That the “narrowly tailored” standard is the appropriate test in assessing such regulation has been confirmed again and again by the Supreme Court. See Secretary of State of Maryland v. Joseph H. Munson Company, Inc., 467 U.S. 947, 961, 104 S.Ct. 2839, 2849 (1984); Riley v. National Federation of the Blind of North Carolina, Inc., 487 U.S. 781, 792, 108 S.Ct. 2667, 2675 (1988).
2. The Utah Charitable Solicitations Act Meets the Schaumburg Test.
(A) The State’s Interest in Protecting the Public from Fraud and Other Harmful or Injurious Acts Is Substantial.
The first issue in assessing the validity of the Act under the First Amendment is whether or not the State’s interest is substantial. As was the case with the laws examined in Schaumburg, Munson, and Riley, one of the purposes of the Act is to prevent fraud, both to consumers and charitable organizations. In a broader sense, however, the purpose of the Act is “to protect [Utah] citizens from harmful and injurious acts.” U.C.A. § 13-1-1. Certainly, laws designed to prevent fraud serve to protect Utah residents from harmful and injurious acts by consultants.
However, protection not only denotes prevention, but also security in the event of loss–an assurance that one will be made whole in the event of loss. It is an unfortunate reality that the many laws enacted nationwide to prevent fraud are not altogether successful in achieving that goal. In these instances, “preventative” laws do little to protect the public. Therefore, in order to protect Utah residents from harmful and injurious acts by those who participate in the charitable solicitation process , the Act seeks to both prevent fraud and ensure a source whereby those who suffer loss as a result of fraud or other unlawful acts may obtain redress.
It is well settled that these interests are substantial. As held by the Supreme Court in Riley v. National Federation of the Blind, “[t]he interest in protecting charities (and the public) from fraud is, of course, a sufficiently substantial interest to justify a narrowly tailored regulation.” 487 U.S. 781, 792, 108 S.Ct. 2667, 2675 (1988). Indeed, the significance of that interest in Utah is evident by the amount Utah residents contribute to charitable organizations–in 1995 alone, approximately one billion dollars in charitable contributions were reported in Utah tax returns. Giving USA 1997, Update 3: Across America, A Report on Regional and Statewide Contributions, p. 17 (Ann Kaplan ed., 1997). The question then becomes whether the law is narrowly tailored to this interest.
(B) The Act is Narrowly Tailored to the State’s Interest in Protecting the Public.
One way in which the Act attempts to prevent fraud is by requiring that consultants provide the State with general and financial information about the consultant and its relationship with the charity. The Act also requires the consultant to disclose whether or not enforcement action has been taken against the consultant, its operators, principals, directors, officers, or managers. U.C.A. § 13- 22-9. In this way, consumers may access such information from the State to verify representations made in solicitations and to assess the reliability and trustworthiness of those who participate in the solicitation process. Indeed, the Act’s registration disclosures are consistent with the decision in Riley wherein the Court held that “North Carolina may constitutionally require fundraisers to disclose certain financial information to the State, as it has since 1981.” Riley, 487 U.S. at 795, 108 S.Ct. at 2676. These limited disclosures are narrowly tailored requirements which enable the public to protect themselves from fraudulent activity–providing a reliable means to assess the legitimacy of the charitable solicitation–“without burdening a speaker with unwanted speech during the course of a solicitation.” Id. at 800, 108 S.Ct. at 2679.
ATA also challenges the Act as an unconstitutional prior restraint because consultants must register prior to conducting solicitations. While the Court in Riley struck down the North Carolina law in part because the law required the fundraiser to obtain a license before soliciting, the fatal flaw in the North Carolina licensing scheme is not present in Utah’s registration scheme. The Supreme Court observed that licensing requirements affecting speakers “must provide that the licensor ‘will, within a specified brief period, either issue a license or go to court.’” Id. at 802, 108 S.Ct. at 2680 (quoting Freedman v. Maryland, 380 U.S. 51, 59, 85 S.Ct. 734, 739 (1965)). The Court struck down the law because it did not, by statute or administrative regulation, impose a time limitation on the licensor. Id. Utah’s Act does not suffer from a similar defect. By regulation, the division must process registration applications “within 10 business days of their receipt by the division.” Utah Admin. Code R152-22-4(3).5 In this way, the Division can fairly review the application, while preserving the First Amendment rights of the consultant by assuring a prompt decision.
Registration Fee Requirement
ATA also challenges the propriety of the $250.00 annual registration fee and $25,000.00 bond requirement, arguing that the states, through charitable solicitation laws, can make the costs so high that interstate appeals through the mail will become impossible. This challenge, however, merely argues the possible extremes and ignores the limits imposed by the courts. As with any law that regulates speech, to survive First Amendment scrutiny, the licensing fees must serve a substantial governmental interest and be narrowly tailored to that interest. See Cox v. New Hampshire, 312 U.S. 569, 61 S.Ct. 762 (1941). In considering registration fees imposed upon professional solicitors in New York, the Second Circuit Court of Appeals observed:
It is well-settled that charitable solicitation involves a variety of speech interests protected by the First Amendment. "[I]t is equally clear that while the exercise of [c]onstitutionally protected activities may not be taxed, it may be regulated, provided the regulation is narrowly tailored to achieve a legitimate governmental interest, is content-neutral in terms and effect, and does not unduly burden speech." Thus, fees that serve not as revenue taxes, but rather as means to meet the expenses incident to the administration of a regulation and to the maintenance of public order in the matter regulated are constitutionally permissible.
National Awareness Foundation v. Abrams, 50 F.3d 1159, 1164-65 (2nd Cir. 1995) (quoting Center for Auto Safety, Inc. v. Athey, 37 F.3d 139, 144 (4th Cir.1994)) (citations omitted); see also Dayton Area Visually Impaired Persons, Inc. v. Fisher, 70 F.3d 1474 (6th Cir. 1995) (upholding a $200 registration fee for professional solicitors). Therefore, the provisions under Utah law are permissible so long as they serve not as revenue taxes, but as a means to defray the costs associated with the administration and enforcement of the Act. Indeed, the Utah Charitable Solicitations Act itself mandates that the Division set an application fee that is “reasonable, fair, and reflect[s] the cost of services provided.” U.C.A. § 13-22-9(1)(a); U.C.A. § 63-38-3.2(2). Therefore, the application fee, by legislative mandate, is related to the costs of administering and enforcing the Act.
Bonding/Letter of Credit Requirement
Finally, the requirement that consultants maintain a bond or letter of credit is also narrowly tailored to the state’s interest in protecting the public and charities from fraud. Certainly, as explained above, protecting the public from loss is a substantial state interest. A bond or letter of credit acts to protect both the public and charities from loss by providing a fund from which to draw in the event they incur losses as a result of harmful or injurious acts by those who participate in the charitable solicitation process. The bonding requirement also acts as a deterrent to fraudulent or other unlawful acts–if the bond or letter of credit is drawn upon as a result of the consultant’s violation of the Act, the consultant likely will then be obligated to repay the insurer or bank. This very issue was addressed by the Sixth Circuit Court of Appeals in 1995. In upholding Ohio’s $20,000 bonding requirement, the Sixth Circuit Court of Appeals concluded that “because the bonding requirement imposed upon professional solicitors also attempts to deter fraud and to provide a fund from which to compensate charities for moneys lost or misappropriated by the professional solicitors, the district court [correctly] concluded that the requirement was narrowly tailored to serve a legitimate state interest.” Dayton Area, 70 F.3d at 1486.
So too are the bonding requirements at issue here narrowly tailored to serve the substantial interest of the State in protecting charities and Utah residents from harmful and injurious acts. The State has not required consultants to deposit the entire $25,000 with the State or in an escrow account. Instead, the State has imposed the substantially less burdensome requirement that the consultant obtain, at its option, either a bond from a surety company or a letter of credit from the consultant’s financial institution. In this manner, both the public and charities have a source from which to draw in the event of loss and the consultant need only pay a relatively small premium or fee for the maintenance of the bond or letter of credit. For example, in addition to the nominal set up fee, annual fees charged by financial institutions to maintain a letter of credit generally range from one percent to two percent (1%–2%) of the face amount of the letter. Affidavit of Gary Christensen, ¶ 6.
As explained above, therefore, the Act survives constitutional scrutiny in all respects challenged by ATA. The Act serves the substantial interest of the State in protecting charities and the public from harmful or injurious acts and it is narrowly tailored to those interests, not unnecessarily interfering with the First Amendment freedoms of ATA.
B. The Charitable Solicitations Act Does Not Violate the Due Process Clause.
1. The Act, On its Face, Is Valid Under the Due Process Clause.
ATA also contends that the Act violates, on its face, the Due Process Clause of the Fourteenth Amendment. These contentions, however, are not supported by current due process analysis. The seminal case in due process analysis is International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154 (1945). In that case, the Supreme Court observed that historically, “presence within the territorial jurisdiction of [the] court was prerequisite to its rendition of a judgment personally binding him.” Id. at 316, 66 S.Ct. at 158. Noting changes in personal service and other notices, however, the Supreme Court held that “due process [now] requires only that in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’” Id.
As previously observed, Salerno requires that ATA establish that “no set of circumstances exists under which the Act would be valid” under the Due Process Clause. 481 U.S. at 745, 107 S.Ct. at 2100. ATA has failed to meet that burden. The Act generally defines a consultant as any person who “for compensation[,] plans, manages, advises, counsels, consults, or prepares material for, or with respect to, the solicitation in this state of contributions for a charitable organization . . .” U.C.A. § 13- 22-11(a)(i). The Act does not differentiate between a consultant who is located outside the state of Utah from a consultant who is located in Utah. Consultants who are located in Utah must register as do those who are located outside the state. Therefore, there is a large number of circumstances under which the Act would be unquestionably valid. Certainly, those consultants who are located in Utah may be subject to the Act without violating the Due Process Clause. So too may those that are located outside of Utah, but whose contracts are performed within the state. ATA has acknowledged these constitutional applications. See ATA’s Memorandum in Support of Preliminary Injunction, p. 29 (“a state may regulate the contractual relationship of entities within its borders or where performance occurs within its borders”).
Given these clear constitutional applications of the Act, ATA has not demonstrated that “no set of circumstances exists under which the Act would be valid,” and therefore, ATA has failed to establish that the Act is unconstitutional on its face under the Due Process Clause. Moreover, because the Act applies only to those consultants who provide services with respect to solicitations in Utah, it ensures compliance with the mandates of the Due Process Clause. See U.C.A. § 13- 22- 11(a)(i).
2. The Act, As Applied, Is Valid Under the Due Process Clause.
Even a challenge to the Act as applied withstands constitutional scrutiny. ATA asserts that solicitation through interstate mail alone would be insufficient to subject it to jurisdiction in Utah. This argument, however, ignores and does not take into account the role ATA plays in the solicitation of contributions from Utah residents as provided in the contract. Moreover, the full extent of that role has not yet been flushed out through discovery. The argument also ignores the decision of the Supreme Court in International Shoe and in cases decided since. For example, in Burger King Corp. v. Rudeicz, 471 U.S. 462, 105 S.Ct 2174 (1985), the Supreme Court unequivocally rejected the notion that due process requires physical presence in the forum state as ATA now argues. In that case, the Supreme Court held:
Jurisdiction in these circumstances may not be avoided merely because the defendant did not physically enter the forum State. Although territorial presence frequently will enhance a potential defendant's affiliation with a State and reinforce the reasonable foreseeability of suit there, it is an inescapable fact of modern commercial life that a substantial amount of business is transacted solely by mail and wire communications across state lines, thus obviating the need for physical presence within a State in which business is conducted. So long as a commercial actor's efforts are "purposefully directed" toward residents of another State, we have consistently rejected the notion that an absence of physical contacts can defeat personal jurisdiction there.
Id. at 476, 105 S.Ct at 2184. Later, in Quill Corporation v. North Dakota, 504 U.S. 298, 307, 112 S.Ct. 1904, 1910 (1992), the Supreme Court concluded “that if a foreign corporation purposefully avails itself of the benefits of an economic market in the forum State, it may subject itself to the State's in personam jurisdiction even if it has no physical presence in the State.”
The question, then, is whether ATA’s efforts are purposefully directed toward Utah residents or whether ATA has purposefully availed itself of the benefits of an economic market in Utah such that the company is on fair notice it may be subject to suit or regulation in Utah. A review of the Agreement with Judicial Watch (attached to the complaint as Exhibit 1) reveals that ATA plays a substantial role in the solicitation of contributions from the public, purposefully availing itself of the benefits of an economic market in Utah. The charity, on the other hand, plays a more passive role, relying on the expertise and services of ATA to successfully garner contributions on its behalf.
ATA consults and advises the charity regarding its solicitations and other communications to the public. Agreement, § 1.A. Beyond its consulting services, however, ATA is generally responsible for all direct mail packages. Agreement, § 1.B. ATA prepares the creative copy and design of mailings. Agreement, § 1.A. ATA acts as the charity’s disclosed agent in acquiring production services relevant to direct mail solicitations, including the ordering of services and materials from vendors and suppliers. Agreement, §§ 1.A & 2. The charity relies on ATA to select lists for potential donors and identify dates when mailings should occur. See Agreement, § 1.A. ATA is the charity’s exclusive list broker for all solicitations performed under the agreement. Agreement, § 1.A. In addition, ATA is the exclusive list manager of the house file (a list of contributors resulting from mailings under the agreement) in connection with the rental of the list to third parties.6 See Agreement, § 1.A.
In light of ATA’s role in soliciting contributions from the public as outlined above, it is apparent that ATA’s efforts are “purposefully directed” toward the residents of Utah. It is ATA that is relied upon to select lists of potential donors. Direct mail solicitations are then purposefully sent to Utah residents included on those lists seeking their contributions and support. It is ATA that prepares the creative copy and design of the mailings and it is ATA that arranges for the production of these mail packages and their mailing into Utah.
Moreover, under the Agreement, all contributions from mailings are deposited into a separate banking account established by an escrow agent. Agreement, § 3.A. The escrow agent and the terms of the escrow agreement must be approved by the charity and ATA. Agreement, § 3.A. Contributions must then be disbursed, first, to ATA for cost advances, and second, to vendors and suppliers (including ATA) for the costs associated with the mailings. Agreement, § 3.B. After the payment of all advances and costs, a portion of the balance is to be held in reserve for the payment of future costs and a portion is to be disbursed to the charity. Agreement, § 3.B. In addition, the charity pays ATA eight cents (8¢) for each direct mail solicitation (in Utah and any other state) and seven cents (7¢) for each newsletter or thank you letter. Agreement, § 4.A. The charity also must pay ATA one dollar ($1.00) per month for every person that participates in a monthly giving program established by the parties up to $5,000.00 per month. Agreement, § 4.C. The charity is charged ten cents (10¢) for each name rented by the charity from the “Agency Masterfile” other than those names developed under the agreement. Agreement, § 5.C.
In this manner, ATA avails itself of the benefits of the “economic market” of Utah. For each individual direct mail solicitation into Utah, ATA is paid an eight cent fee. These mailings seek the contributions of Utah residents, and, ultimately, payment for ATA’s services is dependent on the success of those solicitations. In addition, ATA may market the lists of donors developed under the agreement to others seeking contributions. ATA seeks to minimize the impact of direct mail solicitations and its role therein. However, as observed by the Supreme Court in Quill, “[i]n modern commercial life’ it matters little that such solicitation is accomplished by a deluge of catalogs rather than a phalanx of drummers: The requirements of due process are met irrespective of a corporation’s lack of physical presence in the taxing State.” Quill, 504 U.S. at 308, 112 S.Ct. at 1911.
This case is not unlike that considered by the New York Supreme Court (New York’s trial court) in State v. Richard A. Viguerie Company, Inc., 86 Misc.2d 506, 382 N.Y.S.2d 622 (N.Y. S.Ct. 1976), modified on other grounds, 389 N.Y.S.2d 548 (N.Y.S.Ct. 1976). That case involved the Richard A. Viguerie Company (Ravco), the apparent predecessor of ATA (which is also owned by Richard Viguerie). Like ATA, Ravco performed a variety of consulting services in connection with charitable solicitations on behalf of charitable organizations. Ravco contended that because it maintained no offices in New York and did not directly engage in solicitations in New York, it lacked minimum contacts with the State of New York as required by due process. Id. at 509-510, 382 N.Y.S. 2d at 624-25. Similar to the ATA agreement, the contracts executed between Ravco and its client charities required that (1) Ravco render its advice and expertise with respect to direct mail solicitations, (2) the charity pay Ravco a per letter fee for each letter mailed under the contract, (3) the charity pay Ravco a per name fee for use of mailing lists owned or supplied by Ravco, and (4) all contributions from the mailings be deposited into a separate banking account to be disbursed for costs, with the balance to be divided on a stated basis between Ravco and the charity. Id. at 509-510, 382 N.Y.S. 2d at 624. In addition to the foregoing, Ravco supplied and selected the list of potential donors and evaluated responses from contributors. Id.
After noting the foregoing facts, the New York court observed that it appeared “that the charity’s role in direct mail solicitation is at most a passive role with Ravco performing substantially all of the services even to the extent of limiting the manner whereby the funds raised are to be disbursed.” Id. at 510, 382 N.Y.S.2d at 625. In rejecting Ravco’s due process claim, the court held:
It is the primacy of the State's interest to provide for the general welfare of its citizens which sanctions the imposition of reasonable regulations of direct mail solicitations engaged in by non-resident professional fund raisers, professional solicitors or commercial coventurers. Here the legislature in full recognition of the potential abuses inherent in direct mail charitable solicitations has . . . sought to regulate the conduct of organizations engaged in such solicitations by requiring, inter alia, registration and positing of a bond as a condition precedent to the conduct of such activity (see Cantwell v. Connecticut, 310 U.S. 296, 60 S.Ct. 900, 84 L.Ed. 1213). The basis of jurisdiction in this case finds ample support in the decisional law, particularly with respect to state regulations imposed by virtue of the 'blue sky' laws in securities transactions (see, e.g., Travelers Health Ass'n v. Virginia, 339 U.S. 643, 70 S.Ct. 927, 94 L.Ed. 1154; Marrick v. Halsey & Co., 242 U.S. 568, 37 S.Ct. 227, 61 L.Ed. 498). . . . To satisfy procedural due process enabling the court to render a personal judgment, all that is required is that the party sued if not present within the forum state have certain minimum contacts with it such that maintenance of the suit will not offend traditional notions of fair play and substantial justice (see Int'l Shoe Co. v. State of Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95). Ravco allegedly engages in an activity subject to reasonable regulation by this state's legislature through the valid exercise of the estate's [sic] police powers. The mode of service provided under Article 10--A, Section 482 and its subparagraphs does in no manner tend to offend the notions of fair play or substantial justice (Cf. Hanson v. Denckla, 357 U.S. 235, 78 S.Ct. 1228, 2 L.Ed.2d 1283). The reasonable regulation of Ravco's activities within this state pursuant to Article 10--A is made in the interest of protecting the general welfare of its citizens with regard to activities susceptible to abuses being perpetrated on an unsuspecting public, which is obviously a sphere where the state has a genuine and compelling interest.
Id. at 510-11, 382 N.Y.S.2d at 625. The facts and issues in the case before the court here are not unlike those in Viguerie, and as in Viguerie, the due process challenge fails. Therefore, given the limited information available from the contract regarding ATA’s role in the solicitation process, its due process claim must fail as unsupported by fact and law. Moreover, based on even the limited information from the contract, the Director is instead entitled to a judgment as a matter of law.
C. The Charitable Solicitations Act Does Not Violate the Commerce Clause.
Finally, ATA argues that the Act violates the Commerce Clause of the United States Constitution. The Commerce Clause provides that “Congress shall have Power . . . [t]o regulate commerce . . . among the several States.” U.S. Const. art. I, § 8. “Although the Clause thus speaks in terms of powers bestowed upon Congress, the [Supreme] Court long has recognized that it also limits the power of the States to erect barriers against interstate trade.” Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 35, 100 S.Ct. 2009, 2015 (1980). However, this limitation on state power, referred to as the “negative” or “dormant” Commerce Clause, “is by no means absolute. In the absence of conflicting federal legislation, the States retain authority under their general police powers to regulate matters of ‘legitimate local concern,’ even though interstate commerce may be affected.” 447 U.S. at 36, 100 S.Ct. at 2015.
1. The Act, On its Face, Is Valid Under the Commerce Clause.
The Supreme Court in Lewis, therefore, recognized the State’s authority to regulate matters of local concern. Thus, ATA’s facial challenge to the Act based on the Commerce Clause must fail under Salerno as it did in its challenge on due process grounds. Because the Act regulates both in- state and out-of-state consultants alike, ATA cannot establish that “no set of circumstances exists under which the Act would be valid” under the Commerce Clause. Salerno, 481 U.S. at 745, 107 S.Ct. at 2100. Clearly, the Commerce Clause does not prohibit the State of Utah from regulating in- state consultants. The valid application of the Act under these circumstances, which is acknowledged by ATA, defeats ATA’s facial challenge to the Act under the Commerce Clause. See ATA’s Memorandum in Support of Motion for Summary Judgment, p. 8 (“American Target does not challenge the ability of the State to regulate purely intrastate commerce. American Target does not challenge Utah’s ability to require registration of nonprofits and their advisors that are located within the State.”). Where, as here, the Act regulates both in-state and out-of-state consultants, ATA’s facial challenge cannot succeed.
2. The Act, As Applied, Is Valid Under the Commerce Clause.
To the extent ATA challenges the validity of the Act as applied under the Commerce Clause, ATA’s “as applied” challenge also fails. As noted above, “the States retain authority under their general police powers to regulate matters of ‘legitimate local concern,’ even though interstate commerce may be affected.” Lewis, 447 U.S. at 36, 100 S.Ct. at 2015 (emphasis added). Under dormant Commerce Clause analysis, the courts apply a virtual per se rule of invalidity to statutes which discriminate by “favor[ing] in-state economic interests over out-of-state interests.” Brown- Forman Distillers Corp. v. New York State Liquor Authority, 476 U.S. 573, 579; 106 S.Ct. 2080, 2084 (1986). In those cases, which are “subject to the strictest scrutiny,” the government bears the burden “to prove both the legitimacy of the purported local interest and the lack of alternative means to further the local interest with less impact on interstate commerce.” Dorrance v. McCarthy, 957 F.2d 761, 763 (10th Cir. 1992). However, as ATA concedes, the law challenged in this matter does not favor in-state consultants over out-of-state consultants, and, therefore, the per se rule of invalidity does not apply. See Memorandum in Support of Motion for Summary Judgment, p. 8 (“American Target does not raise the issue that the Act discriminates against out-of-state entities.”).
“When interstate discrimination is not involved, [the court] assess[es] a dormant Commerce Clause challenge to a local measure under the Pike balancing test.” Blue Circle Cement, Inc. v. Board of County Commissioners for the County of Rogers, 27 F.3d 1499, 1511 (10th Cir. 1994). In Pike v. Bruce Church, Inc., 397 U.S. 137, 90 S.Ct. 844 (1970), the Supreme Court enunciated the following test:
Where the statute regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits. If a legitimate local purpose is found, then the question becomes one of degree. And the extent of the burden that will be tolerated will of course depend on the nature of the local interest involved, and on whether it could be promoted as well with a lesser impact on interstate activities.
397 U.S. at 142; 90 S.Ct. at 848. Therefore, under the Pike balancing test, the court examines: (1) the nature of the putative local benefits advanced by the Act, (2) the burden the Act imposes on interstate commerce, (3) whether or not the burden is clearly excessive in relation to the local benefits, and (4) whether the local interests can be promoted as well with a lesser impact on interstate commerce. Blue Circle, 27 F.3d at 1512.
As discussed in the analysis of the First Amendment challenge, the local benefit advanced by the Act is the protection of charities and the public from fraud and other harmful or injurious acts by those associated with charitable solicitations. In protecting the public and charities from such harmful or injurious acts, the Act attempts to both prevent fraud and provide a fund from which to draw in the event a loss is incurred from such acts. ATA alleges that the burdens on interstate commerce under the Act include (1) the annual application fee of $250.00, (2) the $25,000 bonding requirement, and (3) the information required to be provided in the application.
Having identified the local benefits advanced by the Act and the alleged burden imposed thereby on interstate commerce, we now turn to the final two matters of inquiry: Is the burden clearly excessive in relation to the local benefits, and, in so assessing, can the local interest be promoted as well with a lesser impact on interstate commerce? Unlike a law that discriminates against interstate commerce, the party challenging a neutral statute “bears the burden of showing that the incidental burden on interstate commerce is excessive compared to the local interest.” McCarthy, 957 F.2d at 763. ATA has failed to meet this burden.
As noted above, the interest in protecting both charities and the public from fraud and other harmful or injurious acts is not only legitimate, but substantial. The Supreme Court in Riley acknowledged the importance of this interest, holding that “[t]he interest in protecting charities (and the public) from fraud is, of course, a sufficiently substantial interest to justify a narrowly tailored regulation.” 487 U.S. 781, 792, 108 S.Ct. 2667, 2675 (1988). ATA has failed, however, to demonstrate that the registration and bonding requirements of the Act are clearly excessive in relation to the substantial interest of the state in protecting the public from fraud.
As previously explained, the registration fee, by legislative mandate, must be “reasonable, fair, and reflect the cost of services provided.” U.C.A. § 13-22-9(1)(a); U.C.A. § 63-38-3.2(2). In making this determination, the Division considers the resources it expends in administering and enforcing the Act and the fees charged by other states. Giani Affidavit, ¶ 7. While some applications require more extensive review than others, on average ten to fifteen (10–15) hours are expended on each application. Giani Affidavit, ¶ 8. This does not even factor in time expended in investigation. Yet, in the 1997 fiscal year, the Division only generated $22,500 in registration fees from a total of ninety (90) professional fundraisers and consultants. Giani Affidavit, ¶ 6. In upholding a $100 registration fee for both in-state and out-of-state wholesale drug distributors, the Sixth Circuit Court of Appeals held:
[I]t does not have the earmarks of a measure designed to line the State’s coffers. The $100 fee provides the funding required to administer activities of the Board of Pharmacy. Although paid into the general fund, the fees are credited to the occupational licensing and regulatory fund. The modest amount of the fee, and the fact that it produces only about $100,000 per year for both new applications and renewals, convinces us that the fee provision of § 4729 is not designed as a revenue- raising measure; rather it is a reasonable charge to cover administrative costs. And, the fact that the fee imposed might exceed the administrative costs connected with the statute does not, alone, affect the validity of the statute.
Ferndale Laboratories, Inc. v. Cavendish, 79 F.3d 488, 494 (6th Cir. 1996). Like the fee in Ferndale Laboratories, the fee here is not designed to generate revenue, but rather is reasonably calculated to cover the costs associated with the administration and enforcement of the Act.
The requirement that the consultant maintain a $25,000 bond or letter of credit is also a minimal measure imposed by the State to ensure a fund from which to draw in the event of loss occasioned by fraud. As noted earlier, the State has not required that the consultant deposit $25,000 with the State or in an escrow account. Instead, the State has mandated the significantly less burdensome requirement of bond or letter of credit. In order to further ease any burden such a requirement may impose, the Act permits the consultant to obtain either a bond or letter of credit. In this way, the consultant may shop for the least expensive means of complying with the Act. The costs of letters of credit are relatively minimal, ranging from between one to two percent (1%–2%) of the face amount of the letter of credit per annum. Christensen Affidavit, ¶ 6. Indeed, it is difficult to conceive a less restrictive measure to protect both charities and residents from loss–especially in light of the reported Utah contributions of one billion dollars in 1995.
Finally, the burdens on interstate commerce imposed by submitting the application form are virtually non-existent. The information requested is simple and readily available to the consultant. As ATA points out, much of the information is already contained in either tax forms or in its registration materials in Virginia. ATA argues that if the State can require submission of a 10-page annual registration form, then nothing is to stop it from requiring submission of a 10-page quarterly registration. The latter scenario, however, is not required and not an issue in this matter. Clearly, the information required of consultants is not excessive in relation to the interest served.
3. A Substantial Nexus with the State Is Not Required Under the Commerce Clause.
Finally, ATA has argued that under Quill v. North Dakota, the State is prohibited from regulating ATA because there is no substantial nexus between ATA and the State of Utah. ATA’s reliance on the test set forth in Quill, however, is erroneous. In Quill, the Supreme Court examined the validity of a North Dakota law which taxed the activities of an out-of-state mail order house. In striking down the law as a violation of the Commerce Clause, the Supreme Court developed a four- part test that included a requirement that a state may not tax the activities of an out-of state business unless it has a substantial nexus to the taxing state. The test in Quill, however, has only been applied by the Supreme Court in tax cases, and, therefore, ATA’s reliance on Quill and subsequent tax cases of the Supreme Court is misplaced. No “substantial nexus” requirement has been imposed where the state is merely regulating activities affecting matters of local concern. A similar challenge was rejected by the Sixth Circuit Court of appeals in Ferndale Laboratories. In rejecting the plaintiff’s argument, the court concluded:
We also agree with the defendants that Quill does not mandate a separate finding of a substantial nexus as a requirement for upholding a state statute that does not attempt to tax interstate transactions, but merely has an incidental impact on such trade. Quill involved a tax that directly burdened interstate commerce, and virtually every precedent relied upon by the Court in deciding Quill was concerned with attempts by states to tax interstate commerce directly. In contrast, § 4729 is a statute passed by Ohio under its police powers; it aims to protect Ohio’s citizens from mislabeled or adulterated prescription drugs rather than simply trying to collect a tax.
79 F.3d at 494. As in the Ohio law, Utah’s Charitable Solicitations Act is an exercise of the State’s police powers, aimed at protecting both the public and charities from harmful or injurious acts of those involved in charitable solicitations. The Act is not a taxing statute, and, therefore, the “substantial nexus” test is not applicable.
Summary judgment is appropriate only where “there is no genuine issue as to any material fact” and based on those uncontested facts, “the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). In light of the case law as discussed above and the limited facts available to the Court, ATA has failed to meet the burden required to prevail on a motion for summary judgment. On the other hand, even given the limited undisputed facts, the Director has established that she is entitled to judgment as a matter of law. Now, therefore, the Director respectfully requests that the Court deny ATA’s Motion for Summary Judgment and further requests that the Court grant her Motion for Summary Judgment and dismiss the plaintiff’s Complaint.
Dated this 22nd day of October, 1997.
Utah Attorney General
Jeffrey S. Gray
Rebecca D. Waldron
160 East 300 South - Box 140872
Salt Lake City, Utah 84114-0872
CERTIFICATE OF SERVICE
I hereby certify that I caused to be served a true and correct copy of the attached Memorandum of Points and Authorities in Opposition to Plaintiff’s Motion for Summary Judgment and in Support of Defendant’s Motion for Summary Judgment upon the plaintiff, American Target Advertising, Inc., by depositing the same in the United States Mail, first class postage prepaid, on the 22nd day of October, 1997, addressed to the following:
Mark J. Fitzgibbons
American Target Advertising, Inc.
12500 Fair Lakes Circle, #155
Fairfax, Virginia 22033
Brent O. Hatch
Paul G. Cassell
Johnson & Hatch, P.C.
10 West Broadway, Suite 400
Salt Lake City, Utah 84101