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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, Box 140872
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
REPLY MEMORANDUM TO PLAINTIFF’S MEMORANDUM IN OPPOSITION TO DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
The defendant, Francine Giani (the “Director”), by and through her counsel, 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 the District Court, submits the following reply to American Target’s “Memorandum in Support of Plaintiff’s Reply to Defendant’s Opposition, and Plaintiff’s Opposition to Defendant’s Motion for Summary Judgment” (ATA’s “Reply”).
As a preliminary matter, the defendant disputes the facts set forth in ATA’s Reply under its “Statement of Facts As To Which No Genuine Issue Exists.” In the first instance, the defendant has not consented to their inclusion and the rules do not provide for the inclusion of additional undisputed facts in either a memorandum opposing a motion for summary judgment or a reply. Secondly, the alleged facts do not “refer to those portions of the record on which movant relies” as required under Local Rule 56-1(b). Finally, the Director disputes the specific allegations as follows:
1. The Director disputes the allegations in paragraphs 5, 7, 11, 12, and 13 on the grounds that they constitute legal issues disputed by the parties in their motions for summary judgment.
2. A genuine issue exists as to whether or not one of the purposes of the Charitable Solicitations Act (the “Act”), Utah Code Ann. §§ 13-22-1 et seq. (1953, as amended) is to prevent fraud. See Utah Code Ann. §§ 13-1-1; 13-22-1 et seq. (1953, as amended).
3. The Director disputes the allegations in paragraph 9 that the collateral in a bond or letter of credit must remain unencumbered during the period which Utah holds the bond or letter of credit as that issue was not fully explored in the deposition of Gary Christensen.
4. The Director disputes the “facts” in paragraph 10 because there is no evidence to support the claim that “[s]ome professional fundraising counsel may not qualify or be able to obtain a letter of credit in the amount of $25,000, and thus would be deprived of registering in Utah.”
In large measure, the issues raised in ATA’s Reply have already been fully addressed in the Director’s memorandum opposing ATA’s Motion for Summary Judgment (“Director’s Memorandum”). Initially, it should be noted that ATA has not submitted facts which would be necessary for a determination of the matter if the Court accepts ATA’s analysis. For example, discovery has not yet fully revealed the number of mailings into Utah, the exact efforts taken by ATA to obtain a bond or letter of credit, the industry requirements to obtain a bond, and the money actually generated through ATA’s fundraising efforts. On the other hand, the Director’s Memorandum demonstrates that given even the limited facts available at this time, the Director is entitled to judgment as a matter of law on all issues raised by ATA. This reply will be limited to discussion of those matters which may further assist the court in considering the issues in question.
I. The Test Set Forth in Brown-Forman and Healy Is Not the Appropriate Test for Assessing the Validity of the Act under the Commerce Clause.
ATA asserts that the applicable Commerce Clause test is set forth in the decisions of the Supreme Court in Brown-Forman Distillers v. New York Liquor Authority, 476 U.S. 573 (1986) and Healy v. The American Beer Institute, 491 U.S. 324 (1989). ATA argues that under the Brown- Forman and Healy decisions, “it is a violation of the Commerce Clause for a state to attempt to regulate commerce that occurs outside the state’s borders even though such commerce has effects within the regulating state.” However, a careful review of the decisions in Brown-Forman and Healy reveals that they do not stand for such a broad proposition. Indeed, the Court in each case ultimately determined that the subject laws were per se invalid under the Commerce Clause because they favored in-state economic interests over out-of-state interests. Consequently, the rationale in these cases is not applicable to the Charitable Solicitations Act which does not so discriminate.
In both Brown-Forman and Healy, the Supreme Court considered state liquor law provisions which required distillers to affirm that the price of liquor sold to in-state wholesalers would be no higher than the price of liquor sold to wholesalers in other states. The New York law in Brown- Forman required that the affirmation be included in its monthly schedule of prices, a procedure which effectively froze wholesale liquor prices in all other states for the ensuing month unless the New York Liquor Authority granted the distiller permission to lower its prices elsewhere. The Supreme Court recognized a two-tiered approach in Commerce Clause analysis:
This Court has adopted what amounts to a two-tiered approach to analyzing state economic regulation under the Commerce Clause. When a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, we have generally struck down the statute without further inquiry. When, however, a statute has only indirect effects on interstate commerce and regulates evenhandedly, we have examined whether the State's interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits. We have also recognized that there is no clear line separating the category of state regulation that is virtually per se invalid under the Commerce Clause, and the category subject to the Pike v. Bruce Church balancing approach. In either situation the critical consideration is the overall effect of the statute on both local and interstate activity.
476 U.S. at 578-79, 106 S.Ct. at 2084 (citations omitted). After analyzing the New York law under the two approaches, the Court agreed with the distiller’s argument that the affirmation law “disadvantages consumers in other States . . . and is therefore the sort of ‘simple economic protectionism’ that th[e] [Supreme] Court has routinely forbidden. See id. at 580, 582, 106 S.Ct. 2084, 2086. The Court, therefore, applied the first approach in Commerce Clause analysis, holding the affirmation law invalid without further inquiry. As noted by the Court, [w]hile New York may regulate the sale of liquor within its borders, and may seek low prices for its residents, it may not ‘project its legislation into [other States] by regulating the price to be paid’ for liquor in those States.” Id. at 582-83, 106 S.Ct. at 2086.
The Connecticut statute in Healy differed from the New York law in that it required shippers of beer to affirm that the price of beer sold to Connecticut wholesalers would be no higher than the price of beer sold in bordering states at the time of posting (rather than for the ensuing month as in New York). The Court observed that the contemporaneous nature of the law did not cure the constitutional defect. The Court concluded that “the interaction of the Connecticut affirmation statute with the Massachusetts beer-pricing statute (which does not link domestic prices with out-of- state prices) has the practical effect of controlling Massachusetts prices.” Healy, 491 U.S. at 337-38, 109 S.Ct. at 2500. Having thus concluded, the Court held the statute invalid without further inquiry, applying, therefore, the first approach identified in Brown-Forman.
Unlike the affirmation laws in Brown-Forman and Healy, the Utah Act does not have the effect of regulating commerce in other states. ATA is subject to Utah regulation only to the extent consulting services are provided in connection with solicitations in Utah. The Act in no way regulates the services provided by consultants in connection with solicitations in other states. ATA’s services relating to solicitations in the other 49 states are not prohibited, restricted, or otherwise tied to or affected by the mandates of the Utah Act as was the case in Brown-Forman and Healy.1 Consequently, as discussed in the Director’s Memorandum, the applicable test by which the Act should be judged is set forth in Pike v. Bruce Church, Inc., 397 U.S. 137, 90 S.Ct. 844 (1970). As explained in the Director’s Memorandum, the Act is constitutional under the Pike analysis.
II. ATA’s Participation in Fundraising Satisfies Due Process.
ATA has attempted to downplay its role in fundraising efforts. However, ATA plays a significant and substantial role in these solicitations. Indeed, ATA’s vice-president, J.E.B. Carney, acknowledged that “Judicial Watch is looking to ATA for its expertise and its trade secrets or else Judicial Watch’s mailings probably would not be successful.” Carney Deposition, p. 154 (¶¶ 18-20). In other words, ATA is not a passive participant in fundraising. Instead, the charity relies on ATA to successfully orchestrate fundraising on its behalf. As also acknowledged by ATA’s vice- president, Judicial Watch has asked ATA “[s]pecifically to build a national base of supporters across the country.” Carney Deposition, p. 50 (¶¶ 11-14).
A reading of the contract reveals that ATA (1) prepares the creative copy and design of mailings, (2) plans and manages the production services relevant to direct mail solicitations, (3) selects lists of potential donors and identifies dates when mailings should occur, and (4) otherwise advises the client regarding its solicitations. See Director’s Memorandum, p. 15. Although the charity must also approve all direct mail packages, it is important to note that “approval may not be withheld unreasonably.” Contract, § 1.B. Such a condition is significant because it places ATA on equal ground with the charity in fundraising efforts–a standing that a mere third-party service provider would not normally have.
That ATA has a significant and substantial role in these fundraising activities is further evidenced by the amount of control it exercises over the disbursement of funds from charitable contributions. For example, the funds are required to be placed in an escrow account managed by an escrow agent mutually selected by ATA and the charity. Contract, § 3.A. Although the contract provides that the charity shall have “the exclusive rights to control, manage, and exercise dominion and control” of funds deposited therein, the restrictions placed on the escrow agent under the contract make that control largely illusory. For example, both the charity and ATA must agree to the terms and conditions of the escrow agreement. Contract, § 3.A. Moreover, disbursement of the funds is subject to a specified schedule in which funds are not released to the charity until expenses, advances, and fees have been paid. Contract, § 3.B. Additionally, the escrow agent must report donor responses and disbursements to not only the charity, but also to ATA. Contract, §§ 3.A. & 3.C. Finally, and contrary to ATA’s assertion, payment for ATA’s services is dependent on the success of the solicitations. As set forth in paragraph two of the Memorandum of Understanding attached to the contract, “[t]he contract provides no financial risk to JW [the charity]. JW pays only for bills incurred under its direct mail program but only to the extent that money comes in from mailings under the ATA contract or from contributors or other respondents developed under the ATA contract. Memorandum of Understanding incorporated in Contract, ¶ 2 (emphasis added).
All these factors, as well as those discussed in the Director’s memorandum, demonstrate ATA’s concerted effort to seek charitable contributions on behalf of the charity. ATA has argued that because the fundraising occurs nationwide, its efforts are not purposefully directed toward Utah residents. This argument, however, cannot survive scrutiny. Following that logic, the fundraising efforts of ATA cannot be said to be purposefully directed toward the residents of any state even though more than one million mailings have been made nationwide. See Director’s Memorandum, p. vii, ¶ 19. Whether or not ATA segments its solicitations by state or tracks its mailings by state is immaterial for purposes of due process analysis. Clearly, each Utah solicitation seeks the contribution of a Utah resident. Moreover, for each letter mailed into Utah, ATA is entitled to a fee, and, as discussed above, the ultimate receipt of that fee is dependent on the success of ATA’s fundraising efforts–whether they be nationwide or limited to Utah. Given these facts, ATA is “purposefully avail[ing] itself of the benefits of an economic market” in Utah. See Quill Corporation v. North Dakota, 504 U.S. 298, 307, 112 S.Ct. 1904, 1910 (1992).
III. The Act’s Registration Requirements Are Not Unduly Burdensome.
ATA has also argued that the registration requirements are unduly burdensome. ATA argues that the bond or letter of credit requirements are particularly burdensome, noting that a bank may require a business to post 100% collateral before issuing a bond. See ATA Reply, p. 12. It is important to note that collateral is not necessarily required. As stated by Gary Christensen, vice president and manager of the International Department of Zion’s First National Bank, the bank will issue a letter of credit if the applicant is well secured or the bank is satisfied with the credit worthiness of the applicant. Christensen Deposition, p. 4 (¶¶ 16–24). Moreover, collateral may be in the form of cash, real estate, accounts receivable, or stocks and bonds. Christensen Deposition, p. 7 (¶¶ 11–16). Consequently, as noted in the Director’s Memorandum, a letter of credit does not require that the assets of the consultant be tied up such that the consultant would not be free to utilize the same. Only cash collateral would have such an effect.
Bonds, on the other hand, may be even less burdensome. For example, in addition to periodic fees (which are comparable to those in a letter of credit), a surety company will typically require only an indemnity agreement from the principal, and, in certain unique situations, collateral. See Affidavit of Joseph A. Beykirch, pp. 2 (¶ 6)–3 (¶ 9), submitted herewith. The statements in the affidavit of Mr. Beykirch, vice president of the Leavitt Group, are not set forth in the Director’s Uncontested Facts, and therefore, they may or may not be subject to dispute. They are offered, however, to demonstrate the flexibility of the Act’s bonding requirement and that the same is not so burdensome as to unduly burden interstate commerce. The registration and bonding requirements are not, therefore, “clearly excessive in relation to the putative local benefits.” See Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 848 (1970).
IV. The Act Does Not Violate the First Amendment.
ATA also alleges that the Act grants the Director undue discretion in reviewing registration applications. ATA focuses primarily on that provision of the Act which authorizes the director to deny, suspend, or revoke a registration upon a finding that any one of a number of specified events has occurred and that the denial, revocation, or suspension would be in the public interest. ATA claims that the provision grants her undue discretion, yet cites to no authority supporting that contention. Faced with a similar challenge, the Minnesota law regulating professional fundraisers withstood constitutional scrutiny. As observed by the federal district court in Minnesota, “the Supreme Court has stated that its ‘. . . cases have consistently held that the use of the words 'public interest' in a regulatory statute is not a broad license to promote the general public welfare. Rather, the words take meaning from the purposes of the regulatory legislation." Heritage Publishing Company v. Fishman, 634 F.Supp. 1489, 1500 (D.Minn. 1986) (quoting National Association for the Advancement of Colored People v. Federal Power Commission, 425 U.S. 662, 669, 96 S.Ct. 1806, 1811, 48 L.Ed.2d 284 (1976)). After examining the law, the Minnesota court determined that the purposes thereof were “to protect the public from fraud and misrepresentation in charitable solicitations and to insure that prospective contributors are adequately informed about the nature of particular solicitations.” Id. at 1500-01. Having thus found, the court held that “[t]his approach to the "public interest" determination narrows the statute sufficiently to meet the requirements of the First Amendment.” Id. at 1501. So too is the public interest provision of the Utah Act sufficiently narrowed when read in light of the Act’s purposes as discussed in the Director’s Memorandum.
ATA also appears to challenge the Act on the grounds that the Director dictates the duties of the Division’s enforcement counsel, maintains discretion to open cases for investigation, and enforces the Act in accordance with her interpretation thereof. These provisions and all others, however, cannot be viewed as unconstitutional grants of discretionary authority, but rather necessary and appropriate powers of the Director. See Heritage Publishing, 634 F.Supp. at 1501.
Finally, ATA argues that the Act constitutes a prior restraint on speech. However, the Act is not a prior restraint on speech because it does not require the registration or licensing of speech, but of a business or profession. As held by the federal district court in Heritage Publishing, “a state may regulate a profession to insure that individuals working within it maintain high standards.” Id. at 1499. Therefore, as was the case with the Minnesota licensing scheme of professional fundraisers, “the Freedman test is inapplicable because the purveyors of the speech [are] being licensed, not the speech itself. Id. at 1501.
NOW, THEREFORE, based on the applicable law as explained above and in the Director’s Memorandum, the Director requests that the Court grant the Director’s Motion for Summary Judgment and deny ATA’s Motion for Summary Judgment.
Dated this 8th day of December, 1997.
Utah Attorney General
Jeffrey S. Gray
Counsel for Defendant
CERTIFICATE OF SERVICE
I hereby certify that I caused to be served a true and correct copy of the attached Reply Memorandum to Plaintiff’s Memorandum in Opposition to 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 8th day of December, 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