Federal Court Strikes Down Indiana Telemarketing Disclosure Requirement

On June 30, 1999, two nonprofit organizations filed suit in federal court in Indianapolis alleging that a new Indiana law affecting how nonprofits raise money by telephone in the state was unconstitutional. On March 21, the court agreed and struck down what had been the most invasive telemarketing disclosure requirement found in any state.

Although the law did not affect telemarketers selling goods or services, several important lessons can be learned from the litigation.

The law required professional solicitors, working on behalf of nonprofit organizations, to make several statements at the beginning of each telephone solicitation, including the name of the nonprofit organization for which the call was placed, the name of the professional solicitor as on file with the state, the phone number and address of the solicitor and the percentage of the charitable contribution which would be expended for charitable purposes after expenses.

The law, however, did not apply to nonprofits that solicited contributions using in-house phone rooms and solicitors. Thus, the law discriminated against nonprofits which used professional solicitors by forcing their pitch to begin with what the state thought was important but allowing other nonprofits to speak in any manner they chose. This type of discrimination is forbidden by the Constitution.

This is the first important lesson applicable to commercial telemarketing in general: Any time a law affecting speech, including commercial telemarketing, exempts certain types of organizations, it can be vulnerable to challenge. As anybody who has studied commercial telemarketing laws knows, they are almost always riddled with exemptions. A court will look at those exemptions and ask: Did the legislature pass this law to help consumers, or in light of these exemptions, did it pass this law to punish one type of business versus another?

For example, Arkansas' new “do-not-call” list law exempts sellers of real estate, auto dealers, insurance agents, newspaper sellers, banks, funeral homes, securities dealers and nonprofits. Yet the stated purpose of the law is to protect “individuals' privacy rights” from intrusive telemarketing calls. Do calls from any of the exempt types of businesses intrude any less on privacy than calls from long-distance companies, for example? Or are these exemptions present simply because the legislature was protecting some types of businesses?

This statute and others like it are vulnerable to constitutional challenge because discrimination against some speakers versus others is forbidden.

The court's opinion also set forth the next important lesson: This law differed from other types of disclosure requirements in that the mandated speech was required at the beginning of the call, before the speaker has any chance to deliver his or her own message. It was very possible that a recipient of a call would hang up before the speaker could deliver any part of the message simply because of this requirement. The court held, however, that the state's interest in letting its citizens know this information — the identity of the charity and fundraiser and their location — was equally well served by a disclosure before requesting a donation.

The timing requirement was more burdensome than necessary and therefore unconstitutional.

As an aside, the percentage disclosure requirement was held unconstitutional, regardless of the timing requirement, based on the Supreme Court's unambiguous ruling in Riley vs. National Federation of the Blind, the 1988 case which still controls most aspects of how states can permissibly regulate charitable fundraising.

Many laws affecting commercial telemarketing impose similar timing rules for the disclosure requirements. For example, some laws require that disclosures be made during the first 30 seconds of a call. The Telemarketing Sales Rule requires disclosures be made promptly and conspicuously.

These laws, however, are not glaringly vulnerable like the one in Arkansas. Still, when a law requires speakers to deliver someone else's message before and perhaps to the exclusion of their own, it potentially infringes upon free-speech rights protected by the First Amendment.

Finally, the case shows that affecting legislation by a constitutional challenge is by no means an instant fix. This case took close to a year to resolve, and the plaintiffs still will need to move for attorneys' fees to be paid by the state before it is finally resolved. The third lesson to be learned from the case in Indiana is that lobbying at the state legislative level is a much quicker way to change a law than a constitutional challenge. However, do not consider the battle lost if a law is passed over lobbying objections; if it has problems like the ones described above, it can be vulnerable to constitutional challenge. The state is usually liable for the plaintiff's attorneys' fees, moreover, after a successful constitutional challenge, which can make an impression upon the state more than a lobbying victory.

New Registration Law in Delaware

The Delaware legislature passed a law which creates a registration requirement for commercial telemarketers.

The law is very similar to those found in several other states. The registration requires telemarketers to post a $50,000 bond and disclose several types of corporate information to the state's Consumer Protection Unit. The law contains many of the standard exemptions found in other states' laws, including exemptions for publicly traded companies, utilities, sellers of magazines and supervised financial institutions.

Nonexempt businesses planning to call into the state should contact the Consumer Protection Unit as soon as possible.

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