Amicus Curiae Brief — Americans for Prosperity Foundation, Petitioner v. Rob Bonta, Attorney General of California
Supreme Court briefMar 30, 2021
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Nos. 19-251 & 19-255
IN THE
Supreme Court of the United States
____________________
AMERICANS FOR PROSPERITY FOUNDATION,
Petitioner,
v.
MATTHEW RODRIQUEZ,
Respondent.
____________________
THOMAS MORE LAW CENTER,
Petitioner,
v.
MATTHEW RODRIQUEZ,
Respondent.
____________________
On Writs of Certiorari to the United States Court
of Appeals for the Ninth Circuit
____________________
BRIEF OF THE CALIFORNIA ASSOCIATION OF
NONPROFITS AS AMICUS CURIAE
IN SUPPORT OF RESPONDENT
____________________
DANIEL HEMEL
UNIVERSITY OF CHICAGO
LAW SCHOOL
1111 East 60th Street
Chicago, IL 60637
(773) 834-3255
dhemel@uchicago.edu
ANNA-ROSE MATHIESON
Counsel of Record
CALIFORNIA APPELLATE
LAW GROUP LLP
96 Jessie Street
San Francisco, CA 94105
(415) 649-6700
annarose@calapplaw.com
Counsel for Amicus Curiae
i
TABLE OF CONTENTS
Page
BRIEF OF THE CALIFORNIA ASSOCIATION
OF NONPROFITS AS AMICUS CURIAE IN
SUPPORT OF RESPONDENT ............................ 1
INTEREST OF AMICUS CURIAE .......................... 1
INTRODUCTION AND SUMMARY OF
ARGUMENT ......................................................... 2
ARGUMENT ............................................................. 6
I.
The Attorney General Has a Vital
Interest in Protecting Public Trust in the
Nonprofit Sector ............................................ 6
A. State Attorneys General have
primary responsibility for
nonprofit-sector oversight within
the U.S. federalist system ................... 7
B. Protecting the public’s trust in the
nonprofit sector is an interest of
vital importance ................................. 11
II. California’s Schedule B Reporting
Requirement Is Substantially Related to
the State’s Important Interest in
Preventing Charitable Fraud and the
Misuse of Charitable Funds ....................... 16
A. Access to Schedule B substantially
aids the Attorney General in its
efforts to protect the public’s trust
in the nonprofit sector ....................... 17
B. Ex-post retrieval of Schedule B is
no substitute for ex-ante reporting ... 24
ii
TABLE OF CONTENTS
(continued)
Page
III. The Low Risk that the Identities of
Large-Dollar Donors Will Be Disclosed
Inadvertently Does Not Impose a
Substantial Burden on Petitioners’ First
Amendment Rights ..................................... 26
A. The fact that Petitioners’ expert
gained access to less than 1% of the
Registry’s confidential documents
ought to be understood ...................... 28
B. The Schedule B reporting
requirement affects only a small
number of large-dollar donors to
Petitioners .......................................... 33
CONCLUSION ........................................................ 35
iii
TABLE OF AUTHORITIES
CASES
Cal. Bankers Ass’n v. Shultz,
416 U.S. 21 (1974). ............................................... 6
Citizens United v. Schneiderman,
882 F.3d 374 (2d Cir. 2018) ............................... 26
Doe v. Reed,
561 U.S. 186 (2010) ...................................6, 17, 27
Educ. Assistance Found. for
Descendants of Hungarian
Immigrants in the Performing Arts,
Inc. v. United States,
111 F. Supp. 3d 34 (D.D.C. 2015) ...................... 10
Elrod v. Burns,
427 U.S. 347 (1976) .............................................. 6
Gospel Army v. City of Los Angeles,
163 P.2d 704 (Cal. 1945) ...................................... 9
Holt v. Coll. of Osteopathic Physicians
& Surgeons,
394 P.2d 932 (Cal. 1964) .................................. 8, 9
In re L.A. Cnty. Pioneer Soc’y,
257 P.2d 1 (Cal. 1953) .......................................... 8
In re Veterans Indus., Inc.,
8 Cal. App. 3d 902 (1970) .................................... 8
Korean-American Senior Mut. Ass’n,
Inc. v. Comm’r of Internal Revenue,
No. 21829-17X, T.C. Memo 2020129, 2020 WL 5414864 (T.C. Sept. 9,
2020) ................................................................... 10
NAACP v. Alabama ex rel. Patterson,
357 U.S. 449 (1958) ...................................5, 34, 35
New State Ice Co. v. Liebmann,
285 U.S. 262 (1932) .......................................25, 26
iv
TABLE OF AUTHORITIES
(continued)
Page
Vill. of Schaumburg v. Citizens for a
Better Env’t,
444 U.S. 620 (1980) .............................................. 9
Williams-Yulee v. Fla. Bar,
575 U.S. 433 (2015) .............................................. 7
CONSTITUTIONS
U.S. Const. amend. I ..................................6, 7, 27, 33
STATUTES
26 U.S.C. § 6033 ...................................................... 33
Cal. Gov’t Code § 12584 .......................................... 10
REGULATIONS
11 Cal. Code Reg. § 310(b) ........................................ 3
26 C.F.R. § 1.6033-2 ................................................ 33
OTHER AUTHORITIES
Paul Abowd, IRS ‘Outs’ Handful of
Donors to Republican Group, Ctr. for
Public Integrity (Apr. 4, 2013),
https://publicintegrity.org/politics/irs
-outs-handful-of-donors-torepublican-group ................................................ 30
AmeriCorps, Volunteering in America:
California,
https://www.nationalservice.gov/serv
e/via/states/california (last visited
Mar. 25, 2021) .................................................... 12
Woods Bowman, Confidence in
Charitable Institutions &
Volunteering, 33 Nonprofit &
Voluntary Sector Q. 247 (2004),
available at
https://journals.sagepub.com/doi/pdf/
10.1177/0899764004263420 .............................. 15
v
TABLE OF AUTHORITIES
(continued)
Page
Cal. Ass’n of Nonprofits & The
Nonprofit Inst., Causes Count: The
Economic Power of California’s
Nonprofit Sector (2019), available at
http://www.calnonprofits.org/images/
downloads/causes-count-719.pdf ....................... 12
Cal. Dep’t of Justice, Gifts-in-Kind
Donations: How They Can Be Used
To Deceive (n.d.), available at
https://oag.ca.gov/sites/all/files/agwe
b/pdfs/charities/publications/gikschemes.pdf ........................................................ 21
Cal. Dep’t of Justice, Registry
Verification Search,
https://rct.doj.ca.gov/Verification/We
b/Search.aspx (last visited Mar. 28,
2021) ..................................................................... 3
CalNonprofits, CalNonprofits Policy
Framework (Feb. 2017),
https://calnonprofits.org/publicpolicy/policy-framework ..................................... 27
CalNonprofits, Principles for
Responsible Crowdfunding,
https://calnonprofits.org/33advocacy/709-principles-forresponsible-online-crowdfunding
(last visited Mar. 25, 2021) ................................ 27
Carnegie Endowment for Int’l Peace,
Timeline of Cyber Incidents
Involving Financial Institutions,
https://carnegieendowment.org/speci
alprojects/protectingfinancialstabilit
y/timeline (last visited Mar. 25,
2021) ................................................................... 32
vi
TABLE OF AUTHORITIES
(continued)
Page
Eric Chabrow, Stolen Password Led to
South Carolina Tax Breach, Bank
Info Sec. (Nov. 20, 2012),
https://www.bankinfosecurity.com/st
olen-password-led-to-south-carolinatax-breach-a-5309 .............................................. 31
Paul Clolery, Some Donor Data
Accessed in Blackbaud Hack,
NonProfit Times (Sept. 29, 2020),
https://www.thenonprofittimes.com/
npt_articles/breaking-some-donordata-accessed-in-blackbaud-hack...................... 32
Complaint, Fed. Trade Comm’n v.
Cancer Fund of Am., Inc., No. 2:15cv-00884-NVW (D. Ariz., filed May
18, 2015) ............................................................. 22
Complaint, People v. L.B. Research &
Educ. Found., No. BC 421250 (Cal.
Superior Ct. L.A. Cnty., filed Sept. 8,
2009), available at
https://oag.ca.gov/system/files/attach
ments/press_releases/n1799_lbresea
rch.pdf ................................................................ 20
Alexis de Tocqueville, Democracy in
America (Harvey C. Mansfield &
Delba Winthrop eds./trans., Univ. of
Chicago Press 2000) (1835) ............................... 13
Final Statement of Reasons—Proposed
Amendment to Cal. Code Regs. tit.
11, §§ 310, 312, 999.1 (July 8, 2016),
available at
https://oag.ca.gov/sites/all/files/agwe
b/pdfs/charities/final-statementreasons-07082016.pdf ........................................ 22
vii
TABLE OF AUTHORITIES
(continued)
Page
James J. Fishman, The Development of
Nonprofit Corporation Law and an
Agenda for Reform, 34 Emory L.J.
617, 650 (1985) ..................................................... 8
James J. Fishman, Stealth Preemption:
The IRS’s Nonprofit Corporate
Governance Initiative, 29 Va. Tax.
Rev. 545 (2010) .................................................. 26
Joel L. Fleishman, Public Trust in Notfor-Profit Organizations and the
Need for Regulatory Reform, in
Philanthropy and the Nonprofit
Sector in a Changing America 172
(Charles T. Clotfelter & Thomas
Ehrlich eds., Ind. Univ. Press 1999) ................. 14
Beth Gazley & Jeffrey L. Brudney, The
Purpose (and Perils) of GovernmentNonprofit Partnership, 36 Nonprofit
& Voluntary Sector Q. 389 (2007) ..................... 16
Janet Greenlee et al., An Investigation
of Fraud in Nonprofit Organizations:
Occurrences and Deterrents, 36
Nonprofit & Voluntary Sector Q. 676
(2007), available at
https://www.researchgate.net/public
ation/249676796_An_Investigation_
of_Fraud_in_Nonprofit_Organizatio
ns_Occurrences_and_Deterrents ...................... 13
How Scripps Research Helped Map the
Course for Today’s COVID-19
Vaccines, Scripps Research (Dec. 23,
2020),
https://www.scripps.edu/news-andevents/press-room/2020/20201222ward-covid.html ................................................. 12
viii
TABLE OF AUTHORITIES
(continued)
Page
Internal Revenue Service, 2020
Instructions for Schedule A (Jan. 4,
2021), available at
https://www.irs.gov/pub/irspdf/i1040sca.pdf ................................................. 31
Internal Revenue Service, Form 990:
Return of Organization Exempt from
Income Tax: Am. for Prosperity
Found. (2018), available at
http://bit.ly/2018AFPF990 ................................. 34
Internal Revenue Service, Form 990:
Return of Organization Exempt from
Income Tax: Thomas More Law Ctr.
(2018), available at
http://bit.ly/2018TMLC990 ...........................33, 34
Kaiser Family Found., State Health
Facts: Hospitals by Ownership Type,
https://www.kff.org/other/stateindicator/hospitals-by-ownership
(last visited Mar. 25, 2021) ................................ 12
Mark S. LeClair, Reported Instances of
Nonprofit Corruption: Do Donors
Respond to Scandals in the
Charitable Sector?, 22 Corp.
Reputation Rev. 39 (2019) ................................. 15
Paul C. Light, How Americans View
Charities: A Report on Charitable
Confidence, 2008 (Brookings Inst.
Apr. 2008), available at
https://www.brookings.edu/wpcontent/uploads/2016/06/04_nonprofi
ts_light.pdf ......................................................... 15
ix
TABLE OF AUTHORITIES
(continued)
Page
Paul C. Light, To Give or Not to Give:
The Crisis of Confidence in Charities
(Brookings Inst. Dec. 2003),
available at
https://www.brookings.edu/wpcontent/uploads/2016/06/rw07.pdf ...............14, 15
Adam Looney, It Took 6 Years To
Uncover the College Admissions
Scandal, Here’s What the IRS and
Congress Can Do Better Next Time,
Brookings Inst. (Mar. 28, 2019),
https://www.brookings.edu/blog/upfront/2019/03/28/it-took-6-years-touncover-the-college-admissionsscandal-heres-what-the-irs-andcongress-can-do-better-next-time .................20, 21
Cindy M. Lott et al., State Regulation &
Enforcement in the Charitable Sector
(Urban Inst. Sept. 2016), available
at
https://www.urban.org/sites/default/f
iles/publication/84161/2000925State-Regulation-and-Enforcementin-the-Charitable-Sector.pdf ............................... 9
Lloyd Hitoshi Mayer, Could a More
Robust IRS Have Nipped the Varsity
Blues Scandal in the Bud?, Chron. of
Philanthropy (Mar. 15, 2019),
https://www.philanthropy.com/articl
e/could-a-more-robust-irs-havenipped-the-varsity-blues-scandal-inthe-bud ............................................................... 21
x
TABLE OF AUTHORITIES
(continued)
Page
Mike McDowall, How a Simple ‘Hello’
Became the First Message Sent via
the Internet, PBS News Hour (Feb.
9, 2015),
https://www.pbs.org/newshour/scienc
e/internet-got-started-simple-hello ................... 12
Brice McKeever, Nat’l Ctr. for
Charitable Statistics, Active &
Reporting Public Charities by State,
Urban Inst. (Aug. 27, 2018),
https://nccs.urban.org/publication/ac
tive-and-reporting-public-charitiesstate .................................................................... 26
Mutual Settlement Agreement &
Release Between the People ex rel.
Brown, Noah’s Wish, Inc., & Terry
Crisp (July 17, 2007), available at
https://oag.ca.gov/system/files/attach
ments/press_releases/2007-0817_Final_Signed_Settlement_Agree
ment.pdf ........................................................18, 25
Nat’l Ctr. for Charitable Statistics
Project Team, The Nonprofit Sector
in Brief 2019, Urban Inst. (June 4,
2020),
https://nccs.urban.org/publication/no
nprofit-sector-brief-2019 ...................11, 12, 15, 16
xi
TABLE OF AUTHORITIES
(continued)
Page
Press Release, Cal. Dep’t of Justice,
Attorney General Becerra
Announces $410,000 Settlement
with Giving Children Hope, After
the Charity Engaged in a
Misleading Reporting Scheme (Jan.
29, 2019),
https://oag.ca.gov/news/pressreleases/attorney-general-becerraannounces-410000-settlementgiving-children-hope-after ............................22, 23
Press Release, Cal. Dep’t of Justice,
Attorney General Becerra
Announces Settlement Against
Deceptive Veteran Charity for
Misleading Donors Through False
Solicitations (Jan. 12, 2021),
https://oag.ca.gov/news/pressreleases/attorney-general-becerraannounces-settlement-againstdeceptive-veteran-charity .............................13, 14
Press Release, Cal. Dep’t of Justice,
Attorney General Becerra Files
Lawsuit Against Charity for
Misleading Solicitations and
Reporting Scheme (May 30, 2019),
https://oag.ca.gov/news/pressreleases/attorney-general-becerrafiles-lawsuit-against-charitymisleading-solicitations ..................................... 23
xii
TABLE OF AUTHORITIES
(continued)
Page
Press Release, Cal. Dep’t of Justice,
Attorney General Becerra Secures
Judgment Against “National Cancer
Coalition” for False Financial
Reporting Scheme (Mar. 12, 2018),
https://oag.ca.gov/news/pressreleases/attorney-general-becerrasecures-judgment-against-nationalcancer-coalition .................................................. 22
Press Release, Cal. Dep’t of Justice,
Attorney General Brown Distributes
$4 Million for Animals of KatrinaRavaged Area (Aug. 17, 2007),
https://oag.ca.gov/system/files/attach
ments/press_releases/2007-0817_Attorney_General_Brown_Redist
ributes_Katrina_Animal_Shelter_Fu
nds_1__.pdf....................................................17, 18
Press Release, Cal. Dep’t of Justice,
Brown Halts UCLA Professor's Use
of Charitable Funds for Personal
Business Ventures (Dec. 4, 2009),
https://oag.ca.gov/news/pressreleases/brown-halts-uclaprofessors-use-charitable-fundspersonal-business-ventures ............................... 20
Press Release, Cal. Dep’t of Justice,
Brown Reaches Settlement with
Charity for Burn Victims Over
Deceptive Fundraising Tactics (Sept.
28, 2010),
https://oag.ca.gov/news/pressreleases/brown-reaches-settlementcharity-burn-victims-over-deceptivefundraising-tactics ............................................. 19
xiii
TABLE OF AUTHORITIES
(continued)
Page
Press Release, Fed. Trade Comm’n,
FTC Joins Four States in Action to
Shut Down Alleged Sham Charity
Funding Operation That Bilked
Millions From Consumers (Sept. 16,
2020), https://www.ftc.gov/newsevents/press-releases/2020/09/ftcjoins-four-states-to-shut-downalleged-sham-charity-operation ...................10, 11
Press Release, Fed. Trade Comm’n,
FTC, 38 States, and D.C. Act to Shut
Down Massive Charity Fraud
Telefunding Operation (Mar. 4,
2021), https://www.ftc.gov/newsevents/press-releases/2021/03/ftc-38states-dc-act-shut-down-massivecharity-fraud-telefunding .................................. 10
Press Release, Fed. Trade Comm’n,
FTC, States Continue Fight against
Sham Charities; Shut Down
Operations That Falsely Claimed to
Help Disabled Police Officers and
Veterans (Mar. 28, 2019),
https://www.ftc.gov/newsevents/press-releases/2019/03/ftcstates-continue-fight-against-shamcharities-shut-down ........................................... 11
Restatement of the Law, Charitable
Nonprofit Organizations § 5.01 (Am.
L. Inst. 2021) .................................................... 8, 9
xiv
TABLE OF AUTHORITIES
(continued)
Page
Laura Saunders, IRS Says Cyberattacks
on Taxpayer Accounts More
Extensive Than Previously Reported,
Wall St. J. (Feb. 26, 2016),
https://www.wsj.com/articles/irssays-cyberattacks-on-taxpayeraccounts-more-extensive-thanpreviously-reported-1456514909 ....................... 31
Settlement Agreement & Order, People
v. Ass’n for Firefighters &
Paramedics, Inc., No. 30-2009 (Cal.
Superior Ct. Orange Cnty., filed
Sept. 21, 2010), available at
https://oag.ca.gov/system/files/attach
ments/press_releases/n1994_605595
93.pdf .................................................................. 19
Settlement Agreement, People v. L.B.
Research & Educ. Found., No. BC
421250 (Cal. Superior Ct. L.A. Cnty.,
filed Dec. 4, 2009), available at
https://oag.ca.gov/system/files/attach
ments/press_releases/n1840_docume
nt.pdf .................................................................. 20
Stipulation re Order for Permanent
Injunction and Monetary Judgment,
Fed. Trade Comm’n v. Cancer Fund
of Am., No. 2:15-cv-00884-NVW (D.
Ariz., filed Mar. 29, 2016) .................................. 22
xv
TABLE OF AUTHORITIES
(continued)
Page
U.S. Bureau of Labor Statistics,
Nonprofits Account for 12.3 Million
Jobs, 10.2 Percent of Private Sector
Employment, in 2016, TED: The
Economics Daily (Aug. 31, 2018),
https://www.bls.gov/opub/ted/2018/n
onprofits-account-for-12-3-millionjobs-10-2-percent-of-private-sectoremployment-in-2016.htm .................................. 11
Austin Wakeman Scott et al., Scott and
Ascher on Trusts § 37.3.10 (5th &
6th eds., 2020 Cum. Supp.) ................................. 7
Mackenzie Weinger, IRS Pays $50K in
Confidentiality Suit, Politico (June
24, 2014),
https://www.politico.com/story/2014/
06/irs-nom-lawsuit-108266 ................................ 30
Yale Book of Quotations (Fred Shapiro
ed., Yale Univ. Press 2006) ............................... 16
BRIEF OF THE CALIFORNIA ASSOCIATION
OF NONPROFITS AS AMICUS CURIAE
IN SUPPORT OF RESPONDENT
The undersigned respectfully submits this amicus
curiae brief in support of Respondent. 1
INTEREST OF AMICUS CURIAE
The California Association of Nonprofits (CalNonprofits) is a policy alliance of more than 10,000 member organizations that works to protect and enhance
the ability of California’s nonprofits to serve communities across the State. CalNonprofits submits this
brief in order to share its members’ unique perspective as both the subjects of the State’s Schedule B reporting requirement and the beneficiaries of the California Attorney General’s efforts to enhance public
confidence in the nonprofit sector.
1 All parties have consented to the filing of this brief.
No
counsel for any party authored this brief in whole or in part, no
party or party’s counsel made a monetary contribution intended
to fund the preparation or submission of this brief, and no person
or entity, other than the amicus curiae or its counsel, made a
monetary contribution to the preparation or submission of this
brief.
2
INTRODUCTION
AND SUMMARY OF ARGUMENT
Trust is the lifeblood of the nonprofit sector. Before members of the public will contribute their time
and money to charity, they must trust that nonprofit
organizations will apply those resources toward their
stated missions. Before government agencies will
partner with the nonprofit sector in the delivery of vital services, they must trust that nonprofit organizations will be faithful stewards of public funds. Until
quite recently, most nonprofit organizations were organized as charitable trusts—a name that underscored the importance of public confidence. Even as
organizational forms have evolved, the centrality of
trust to charity has remained a constant.
In California, as in every other State, the Attorney
General is the protector of the public’s trust in the
nonprofit sector. The Attorney General has a duty to
ensure that assets contributed to charity are used in
accordance with the purposes for which they were donated. The Attorney General also is charged with
safeguarding the public against fraudulent and deceptive charitable appeals. The Attorney General’s
charitable trust protection duties date back to sixteenth century England, when the Crown’s Attorney
General wielded the sovereign’s parens patriae power
to protect subjects who were unable to defend themselves. Five centuries later and an ocean away, State
Attorneys General across the United States still carry
primary oversight and enforcement responsibility
with respect to the nonprofit sector.
In order to execute these duties, the Attorney General needs to be able to identify donors who have made
3
substantial contributions to charities and the
amounts they have given. Attorneys General in California and New York—the two States with the largest
number of active charities—collect this information
by requiring organizations to submit copies of their
annual federal Form 990 series filings, including
Schedule B, to a state registry. Schedule B reports
the names, addresses, and total contributions of certain large-dollar donors, along with brief descriptions
of any non-cash property that these donors contributed. For charities such as Americans for Prosperity
Foundation and Thomas More Law Center that normally receive a substantial part of their support from
the general public, Schedule B requires the organization to list only donors whose contributions within the
taxable year equal or exceed the greater of $5,000 or
2% of the organization’s total support.
By law, the California Attorney General must hold
Schedule B information in confidence. 11 Cal. Code
Reg. § 310(b). And it does. Schedule B is not available
to the public through the Registry of Charitable
Trusts website. See Cal. Dep’t of Justice, Registry
Verification Search, https://rct.doj.ca.gov/Verification/Web/Search.aspx (last visited Mar. 28, 2021).
Visitors who search for an organization there will find
other Form 990 series filings, but not Schedule B.
Schedule B is also not available to the public for inperson inspection. Visitors to the Attorney General’s
Sacramento office can examine other nonconfidential
Registry documents, but not Schedule B. The only report of anyone gaining unauthorized access to Schedule B information through the Registry comes from
this litigation, when Petitioners hired a highly regarded data-acquisition expert and his information
4
technology company to circumvent the Registry’s privacy safeguards. Even then, the expert and his team
were able to access less than 1% of all confidential
documents in the database. When the expert reported
the breach to the California Department of Justice,
the Department fixed the problem within 24 hours.
There is, moreover, no evidence that anyone has been
harassed, threatened, or defamed—or has suffered
any other harm—as a result of any security breach
involving Schedule B or any other confidential document in the Registry’s history.
While protecting the confidential Schedule B from
public view, the Attorney General uses Schedule B information to fulfill its own responsibilities as the protector of the public’s trust in the nonprofit sector. The
trial record reveals a range of oversight and enforcement purposes for which the Attorney General uses
Schedule B information. For example:
•
Schedule B information allows the Attorney
General to identify and follow up with donors regarding the representations that
charities made when soliciting contributions. That, in turn, allows the Attorney
General to confirm that charities are using
assets in accordance with their promises to
donors. When the Attorney General determines that an organization is breaking its
promises to donors, the Attorney General
can intervene to ensure that gifts are applied to the charitable purposes for which
they were given.
•
Schedule B information aids the Attorney
General in identifying donors who are using
5
charitable organizations for noncharitable
ends (e.g., as passthroughs for gifts to family members and friends). When the Attorney General determines that donors are
abusing the nonprofit form, the Attorney
General can sue to recover diverted assets
and redirect those assets toward charitable
causes.
•
Schedule B information allows the Attorney
General to identify organizations that are
inflating values of in-kind gifts in order to
make their fundraising numbers look better
than they are. The Attorney General’s
string of successful enforcement actions
against “gift-in-kind” schemes since 2015 is
attributable in no small part to the Schedule B reporting requirement at issue here.
While the Schedule B reporting requirement has
played a key role in the Attorney General’s nonprofitsector enforcement efforts, the corresponding burden
on Petitioners’ associational interests is modest. To
appear on Thomas More Law Center’s Schedule B in
2018, a donor would need to have given more than
$31,000; for Americans for Prosperity Foundation, the
threshold was more than $341,000. This is very
clearly not a demand that Petitioners reveal the identities of their “ordinary rank-and-file members.” Cf.
NAACP v. Alabama ex rel. Patterson, 357 U.S. 449,
464 (1958).
The U.S. Constitution does not prohibit the Attorney General from collecting information about largedollar donations in order to fulfill its trust-protection
functions. There is no “per se rule” that forbids donor
6
disclosure “in a situation where the governmental interest would override the associational interest in
maintaining such confidentiality.” Cal. Bankers Ass’n
v. Shultz, 416 U.S. 21, 55-56 (1974). Here, the Attorney General has articulated an overriding interest in
disclosure: access to basic information about largedollar donations is essential to the Attorney General’s
efforts to protect charitable assets and to protect the
public from fraud and deception. Petitioners have not
articulated an associational interest of comparable
weight. The First Amendment protects the nonprofit
sector from unreasonable governmental intrusions,
but it does not give nonprofit organizations an invisibility shield.
ARGUMENT
I.
The Attorney General Has a Vital Interest
in Protecting Public Trust in the Nonprofit Sector
This Court has subjected disclosure requirements
to a standard of “exacting scrutiny.” See Doe v. Reed,
561 U.S. 186, 196 (2010). To survive exacting scrutiny, the government’s interest must be “one of vital
importance.” Elrod v. Burns, 427 U.S. 347, 362 (1976)
(plurality opinion). The Attorney General’s interest
here in protecting the public’s trust in the nonprofit
sector certainly rises to that level. 2
2 While Americans for Prosperity Foundation acknowledges
that the “exacting scrutiny” standard applies, AFPF Br. 20,
Thomas More Law Center suggests that “exacting scrutiny” applies only to disclosure requirements in the campaign context
7
A.
State Attorneys General have primary responsibility for nonprofitsector oversight within the U.S. federalist system
State Attorneys General are responsible for protecting the public’s trust in the nonprofit sector. This
trust-protection responsibility consists of two principal components. First, Attorneys General are responsible for ensuring that assets entrusted to charities
are applied to their intended use. Second, Attorneys
General are responsible for protecting the citizens of
their States from fraudulent and deceptive charitable
appeals.
The Attorney General’s role in protecting charitable assets traces back at least as far as sixteenth century England. See Austin Wakeman Scott et al., Scott
and Ascher on Trusts § 37.3.10 (5th & 6th eds., 2020
Cum. Supp.). Under English common law, the charitable trust was the standard organizational form for
eleemosynary activities. A charitable trust is one that
benefits the general public or an indefinite number of
people. Typically, the widely dispersed or as-yet-unidentified beneficiaries of charitable trusts lacked the
ability to protect themselves. The burden of enforcing
charitable trusts thus fell upon the Attorney General
and a higher “strict scrutiny” standard applies to other disclosure mandates. TMLC Br. 31. Respectfully, this gets things upside-down. This Court has “long recognized” that “speech about
public issues and the qualifications of candidates for elected office commands the highest level of First Amendment protection.”
Williams-Yulee v. Fla. Bar, 575 U.S. 433, 443 (2015). Thomas
More Law Center inverts that hierarchy when it suggests a
lower standard for campaign finance-related disclosures than for
other donor disclosure requirements.
8
as the repository of the Crown’s parens patriae prerogative. See Restatement of the Law, Charitable
Nonprofit Organizations § 5.01 cmt. a (Am. L. Inst.
2021). When the charitable-trust form crossed the Atlantic, the Attorneys General of the colonies and then
the several States inherited this trust-protection responsibility from their Crown counterpart. See id.
In the twentieth century, the charitable corporation displaced the charitable trust as the dominant
form for nonprofit organizations in the United States,
but State Attorneys General have retained their central role as the protectors of charitable assets. See
James J. Fishman, The Development of Nonprofit Corporation Law and an Agenda for Reform, 34 Emory
L.J. 617, 650 (1985); see also In re L.A. Cnty. Pioneer
Soc’y, 257 P.2d 1, 6 (Cal. 1953) (noting that charitable
corporations and charitable trusts are “subject to the
same supervision by the Attorney General”). Under
California law, the Attorney General has a duty to ensure that assets contributed to charity are used in accordance with the promises made to donors. See In re
Veterans Indus., Inc., 8 Cal. App. 3d 902, 919 (1970).
This duty is all the more essential because in most
cases, if the Attorney General does not act to halt the
misuse of charitable assets, no one else will. See Holt
v. Coll. of Osteopathic Physicians & Surgeons, 394
P.2d 932, 935 (Cal. 1964) (“Since there is usually no
one willing to assume the burdens of a legal action, or
who could properly represent the interests of the trust
or the public, the Attorney General has been empowered to oversee charities as the representative of the
public, a practice having its origin in the early common law.”). A donor may have standing to sue a char-
9
itable corporation or trust for misuse of charitable assets in certain circumstances, but donor standing is of
limited use when the donors are dispersed or dead.
Dissenting directors or trustees also sometimes have
standing, though this accomplishes little if the charity’s fiduciaries are all in cahoots. Thus, while the Attorney General’s authority is not exclusive, the Attorney General still has “primary responsibility” for enforcing the promises made to donors and protecting
the interests of charitable beneficiaries. See id. at
936.
Over the course of the twentieth century, Attorneys General in most States took on a second responsibility with respect to the nonprofit sector: protecting
the public from fraudulent and deceptive charitable
appeals. See Restatement of the Law, Charitable Nonprofit Organizations § 5.01 cmt. b.4. Courts—including this one—have consistently recognized that reasonable regulation of charitable solicitations lies
squarely within the State’s police power. See, e.g.,
Vill. of Schaumburg v. Citizens for a Better Env’t, 444
U.S. 620, 632 (1980); Gospel Army v. City of Los Angeles, 163 P.2d 704, 713 (Cal. 1945). To facilitate oversight, most States require charities that solicit funds
in the State to register with the Attorney General,
Secretary of State, or other state-level consumer-protection authority or financial regulator. Cindy M.
Lott et al., State Regulation & Enforcement in the
Charitable Sector v, 41 app.B (Urban Inst. Sept.
2016), available at https://www.urban.org/sites/default/files/publication/84161/2000925-State-Regulation-and-Enforcement-in-the-Charitable-Sector.pdf.
In California, charities that solicit funds in the State
10
must file annual reports with the Registry of Charitable Trusts, which the Attorney General oversees. Cal.
Gov’t Code § 12584.
In addition to State Attorneys General, two federal
agencies—the Internal Revenue Service (IRS) and the
Federal Trade Commission (FTC)—hold important
responsibilities for nonprofit sector oversight. But
while the IRS polices some potential misuses of charitable assets, its ambit is much narrower than a State
Attorney General’s. The IRS intervenes, for example,
in cases of private inurement and private benefit, see,
e.g., Educ. Assistance Found. for Descendants of Hungarian Immigrants in the Performing Arts, Inc. v.
United States, 111 F. Supp. 3d 34, 38 (D.D.C. 2015);
Korean-American Senior Mut. Ass’n, Inc. v. Comm’r of
Internal Revenue, No. 21829-17X, T.C. Memo 2020129, 2020 WL 5414864 (T.C. Sept. 9, 2020), but it
would have no basis for intervening when an organization applies funds to a different charitable purpose
than the purpose for which a donor contributed. And
the FTC—although it is empowered to act on its own
to prevent unfair or deceptive acts or practices in or
affecting commerce—almost always moves in tandem
with State Attorneys General when it takes enforcement actions against nonprofit organizations. 3 Although the IRS and the FTC play valuable roles, State
See, e.g., Press Release, Fed. Trade Comm’n, FTC, 38
States, and D.C. Act to Shut Down Massive Charity Fraud Telefunding Operation (Mar. 4, 2021), https://www.ftc.gov/newsevents/press-releases/2021/03/ftc-38-states-dc-act-shut-downmassive-charity-fraud-telefunding; Press Release, Fed. Trade
Comm’n, FTC Joins Four States in Action to Shut Down Alleged
Sham Charity Funding Operation That Bilked Millions From
Consumers (Sept. 16, 2020), https://www.ftc.gov/news3
11
Attorneys General remain the chief custodians of the
public’s trust in the nonprofit sector.
B.
Protecting the public’s trust in the
nonprofit sector is an interest of vital importance
By protecting the public’s trust in the nonprofit
sector, State Attorneys General vindicate an interest
of the highest importance. Our economy, society, and
democracy depend upon nonprofit organizations for
their vitality. And nonprofit organizations rely ultimately on the public’s trust.
The nonprofit sector is an engine of economic activity. Nationally, nonprofit organizations employ
more than 12 million workers and account for nearly
6% of U.S. gross domestic product. 4 In California
alone, nonprofits employ more than 1.2 million people
events/press-releases/2020/09/ftc-joins-four-states-to-shutdown-alleged-sham-charity-operation; Press Release, Fed.
Trade Comm’n, FTC, States Continue Fight against Sham Charities; Shut Down Operations That Falsely Claimed to Help Disabled Police Officers and Veterans (Mar. 28, 2019),
https://www.ftc.gov/news-events/press-releases/2019/03/ftcstates-continue-fight-against-sham-charities-shut-down.
4 See U.S. Bureau of Labor Statistics, Nonprofits Account for
12.3 Million Jobs, 10.2 Percent of Private Sector Employment, in
2016, TED: The Economics Daily (Aug. 31, 2018),
https://www.bls.gov/opub/ted/2018/nonprofits-account-for-12-3million-jobs-10-2-percent-of-private-sector-employment-in2016.htm; Nat’l Ctr. for Charitable Statistics Project Team, The
Nonprofit Sector in Brief 2019, Urban Inst. (June 4, 2020),
https://nccs.urban.org/publication/nonprofit-sector-brief-2019.
12
and generate nearly 15% of gross state product. 5
Nonprofits are also key service providers, operating—
for example—57% of all hospitals in the State and
across the country. 6 And the nonprofit sector is an
important driver of knowledge and innovation: research at nonprofit institutions in California has
played a key role in the development of everything
from email to the latest COVID-19 vaccines. 7
The nonprofit sector plays a central role in the formation and flourishing of communities. More than a
quarter of adults—in California and nationwide—donate their time to nonprofits each year as volunteers,
generating essential social capital. 8 In addition, nonprofit organizations play a vital democracy-enhancing
function. As Alexis de Tocqueville observed upon visiting the young United States nearly 190 years ago:
“In democratic countries the science of association is
5 See Cal. Ass’n of Nonprofits & The Nonprofit Inst., Causes
Count: The Economic Power of California’s Nonprofit Sector 6
(2019), available at https://calnp.memberclicks.net/assets/docs/
CausesCountDownloads/CausesCount-NewFindings-2019.pdf.
6 See Kaiser Family Found., State Health Facts: Hospitals by
Ownership Type, https://www.kff.org/other/state-indicator/hospitals-by-ownership (last visited Mar. 25, 2021).
7 See, e.g., Mike McDowall, How a Simple ‘Hello’ Became the
First Message Sent via the Internet, PBS News Hour (Feb. 9,
2015),
https://www.pbs.org/newshour/science/internet-gotstarted-simple-hello; How Scripps Research Helped Map the
Course for Today’s COVID-19 Vaccines, Scripps Research (Dec.
23, 2020), https://www.scripps.edu/news-and-events/press-room/
2020/20201222-ward-covid.html.
8 See Nat’l Ctr. for Charitable Statistics, supra note 4; Amer-
iCorps, Volunteering in America: California, https://www.nationalservice.gov/serve/via/states/california (last visited Mar. 25,
2021).
13
the mother science; the progress of all the others depends on the progress of that one.” Alexis de Tocqueville, Democracy in America 492 (Harvey C. Mansfield
& Delba Winthrop eds./trans., Univ. of Chicago Press
2000) (1835). Nonprofit associations inculcate the
civic virtues needed to sustain a free society, and they
serve as critical counterweights to governmental
power.
Yet the American approach to the nonprofit sector
has never been totally laissez faire. A completely
hands-off approach would be as devastating to the
sector as an overbearing one. This is so for two reasons.
First, charitable fraud and misuse of charitable
funds drain the nonprofit sector of resources. Every
dollar diverted from charitable purposes is one fewer
dollar available to meet community, national, and
global needs. See Janet Greenlee et al., An Investigation of Fraud in Nonprofit Organizations: Occurrences
and Deterrents, 36 Nonprofit & Voluntary Sector Q.
676, 677 (2007), available at https://www.researchgate.net/publication/249676796_An_Investigation_of_Fraud_in_Nonprofit_Organizations_Occurrences_and_Deterrents. The Attorney General’s enforcement efforts have the direct effect of boosting
nonprofit-sector resources when the Attorney General
recoups funds that a charity’s managers have siphoned off. See, e.g., Press Release, Cal. Dep’t of Justice, Attorney General Becerra Announces Settlement
Against Deceptive Veteran Charity for Misleading
Donors Through False Solicitations (Jan. 12, 2021),
https://oag.ca.gov/news/press-releases/attorney-general-becerra-announces-settlement-against-decep-
14
tive-veteran-charity (noting that the defendant organization and its former directors had agreed to “pay
$95,000 in restitution towards a legitimate tax-exempt charitable organization to ensure that veterans
receive the donations that they are entitled to”). The
Attorney General’s enforcement efforts also have a
deterrence effect on individuals who might otherwise
be tempted to engage in charitable fraud.
Second, and as importantly, charitable fraud and
the misuse of charitable funds at a single charity can
have sector-wide ripple effects. The nonprofit sector
appears to be subject to its own version of Gresham’s
law: the bad charities drive out the good. See Joel L.
Fleishman, Public Trust in Not-for-Profit Organizations and the Need for Regulatory Reform, in Philanthropy and the Nonprofit Sector in a Changing America 172, 177 (Charles T. Clotfelter & Thomas Ehrlich
eds., Ind. Univ. Press 1999). Oversight and enforcement by State Attorneys General serve not only to
remedy and deter the diversion of funds at particular
organizations but to protect trust in the sector as a
whole against the threat posed by fraud, deception,
and misallocation of charitable assets.
Experience confirms that scandal at individual
charities can have deleterious effects on sector-wide
trust. For example, reports in late 2001 that the
American Red Cross planned to use donations to its
September 11 relief fund for long-term projects unrelated to the terrorist attacks appear to have precipitated a stark drop in public confidence in charitable
organizations. See Paul C. Light, To Give or Not to
Give: The Crisis of Confidence in Charities 2 (Brookings Inst. Dec. 2003), available at https://www.brook-
15
ings.edu/wp-content/uploads/2016/06/rw07.pdf (noting that the percentage of Americans saying they had
“a lot” of confidence in charitable organizations fell
from 25% in July 2001 to 18% in May 2002, while the
percentage saying they had no confidence rose from
8% to 17%); Paul C. Light, How Americans View Charities: A Report on Charitable Confidence, 2008, at 1
(Brookings Inst. Apr. 2008), available at
https://www.brookings.edu/wp-content/uploads/2016/
06/04_nonprofits_light.pdf (noting that nearly seven
years after the American Red Cross controversy, confidence in the charitable sector “has yet to recover”).
Declines in public confidence in the nonprofit sector have immediate implications for charitable contributions. A recent study examining press reports of
malfeasance at nonprofit organizations and U.S.
charitable giving per capita over a 41-year span finds
that nonprofit scandals, as measured by media coverage, have a negative, statistically significant, and
substantively meaningful effect on giving. Mark S.
LeClair, Reported Instances of Nonprofit Corruption:
Do Donors Respond to Scandals in the Charitable Sector?, 22 Corp. Reputation Rev. 39, 44-47 (2019). And
the negative impacts go beyond dollars and cents:
lower public trust in the nonprofit sector is also associated with reduced rates of volunteering. See Woods
Bowman, Confidence in Charitable Institutions & Volunteering, 33 Nonprofit & Voluntary Sector Q. 247,
266 (2004), available at https://journals.sagepub.com/
doi/pdf/10.1177/0899764004263420.
Public confidence is particularly important for a sector that relies
upon 8.8 billion volunteer hours contributed by U.S.
adults each year. Nat’l Ctr. for Charitable Statistics
16
Project Team, The Nonprofit Sector in Brief 2019, Urban Inst. (June 4, 2020), https://nccs.urban.org/publication/nonprofit-sector-brief-2019#the-nonprofit-sector-in-brief-2019. Trust in the nonprofit sector also
potentially affects the willingness of federal, state,
and local governments to partner with nonprofit organizations in the delivery of services. See Beth
Gazley & Jeffrey L. Brudney, The Purpose (and Perils) of Government-Nonprofit Partnership, 36 Nonprofit & Voluntary Sector Q. 389, 404-07 (2007). 9
In sum, public trust serves to sustain the critically
important nonprofit sector. State Attorneys General
form the first and last line of defense against threats
to that public trust. The Attorney General’s vital interest in nonprofit-sector oversight and enforcement
ought to satisfy any standard of judicial scrutiny.
II.
California’s Schedule B Reporting Requirement Is Substantially Related to the
State’s Important Interest in Preventing
Charitable Fraud and the Misuse of Charitable Funds
The “exacting scrutiny” standard for disclosure requirements demands not only a “sufficiently im-
9 In the short term, exposure of charitable fraud and the mis-
use of charitable funds may challenge public confidence in the
nonprofit sector. But over the long term, rooting out misconduct
will no doubt strengthen the sector’s public trust. Cf. Yale Book
of Quotations 465-66 (Fred Shapiro ed., Yale Univ. Press 2006)
(“‘You can fool all of the people some of the time; you can fool
some of the people all the time, but you can’t fool all the people
all the time’” (noting and questioning attribution to Abraham
Lincoln)).
17
portant governmental interest” but also a “substantial relationship between the disclosure requirement
and . . . [the] governmental interest.” Reed, 561 U.S.
at 196 (quotation marks omitted). California’s Schedule B reporting requirement more than meets that
test.
A.
Access to Schedule B substantially
aids the Attorney General in its efforts to protect the public’s trust in
the nonprofit sector
In order to protect charitable assets and to protect
the public from fraudulent and deceptive charitable
appeals, the Attorney General needs to know the
identities of large-dollar donors and the amounts that
they gave. The Attorney General uses that information for a range of investigative purposes, including (a) following up with donors to determine whether
their contributions are being used in accordance with
representations made by the charity, (b) identifying
instances in which large-dollar donors are using charities as passthroughs for noncharitable purposes, and
(c) catching charities that seek to mislead the public
about their finances (e.g., by falsely claiming largevalue in-kind gifts).
One example of the Attorney General’s use of
Schedule B that emerged at trial involved a nonprofit
organization that raised funds after Hurricane
Katrina to assist animal victims of the storm. AFPF
JA 312. The Sacramento-based Noah’s Wish took in
more than $8 million after telling potential donors
that contributions would go toward Katrina-related
efforts, but it spent only $1.5 million of that amount
on Katrina-related relief. Press Release, Cal. Dep’t of
18
Justice, Attorney General Brown Distributes $4 Million for Animals of Katrina-Ravaged Area (Aug. 17,
2007),
https://oag.ca.gov/system/files/attachments/
press_releases/2007-08-17_Attorney_General_
Brown_Redistributes_Katrina_Animal_Shelter_
Funds_1__.pdf. Tipped off by a complaint, the Attorney General launched an investigation. Comparing
Schedule B (which showed an inflow of funds around
the Katrina campaign) to the organization’s public financial statements (which claimed that the vast majority of the organization’s assets remained unrestricted), the Attorney General’s office “realized there
was a really serious problem.” AFPF JA 312 (testimony of Belinda Johns, former Senior Assistant Attorney General for the Charitable Trusts Section).
In the Noah’s Wish case, the organization quickly
settled on terms that ensured that remaining funds
would be used for Katrina-related efforts, including
(among other projects) rebuilding a storm-ravaged
animal shelter in Slidell, Louisiana. See id.; Mutual
Settlement Agreement & Release Between the People
ex rel. Brown, Noah’s Wish, Inc., & Terry Crisp (July
17, 2007), available at https://oag.ca.gov/system/files/
attachments/press_releases/2007-08-17_Final_
Signed_Settlement_Agreement.pdf.
In other cases, the Attorney General uses contributor lists to contact individual donors and determine
whether a charity made specific promises when soliciting funds. For example, the Orange County-based
Association for Firefighters and Paramedics solicited
contributions from donors across the State and across
the country under the pretense that it would direct
their dollars to burn victims, fire departments, and
paramedics “within a reasonable radius of your area
19
so that the impact of your donation can be felt close to
home.” Press Release, Cal. Dep’t of Justice, Brown
Reaches Settlement with Charity for Burn Victims
Over Deceptive Fundraising Tactics (Sept. 28, 2010),
https://oag.ca.gov/news/press-releases/brownreaches-settlement-charity-burn-victims-over-deceptive-fundraising-tactics. Instead, the organization
used 80% to 90% of the donations to cover fundraising
expenses, assisted burn victims only in one part of the
State, and gave nothing to fire departments or paramedics. Id.
Starting from the organization’s contributor list,
the Attorney General sent out questionnaires to donors in order to determine what exactly the organization’s telemarketers had promised in individual conversations. Id. The investigation culminated in a
$100,000 settlement with the organization and its officers; that money was then used to assist burn victims across the State and to reimburse the Attorney
General’s investigative costs. See Settlement Agreement & Order, People v. Ass’n for Firefighters & Paramedics, Inc., No. 30-2009 (Cal. Superior Ct. Orange
Cnty., filed Sept. 21, 2010), available at
https://oag.ca.gov/system/files/attachments/press_releases/n1994_60559593.pdf.
The Attorney General also uses Schedule B in order to identify instances in which a donor is using a
charity as a passthrough for noncharitable ends. For
example, the Attorney General sued L.B. Research
and Education Foundation as well as several of its officers and substantial contributors in 2009 for breach
of fiduciary duty, among other counts; one of the allegations in the complaint was that organization had
paid a $25,000 grant to a California artist as a quid
20
pro quo for a $25,000 contribution from the artist’s
friend (the trial record refers to the grantee as the donor’s “girlfriend”). Complaint at 8-9, 13, People v. L.B.
Research & Educ. Found., No. BC 421250 (Cal. Superior Ct. L.A. Cnty., filed Sept. 8, 2009), available at
https://oag.ca.gov/system/files/attachments/press_releases/n1799_lbresearch.pdf; AFPF JA 415. The
Schedule B showed the $25,000 contribution from the
donor to the organization; the list of grants on the organization’s Form 990 showed the corresponding
grant to the donor’s friend/girlfriend. AFPF JA 415.
Ultimately, the Attorney General reached a settlement agreement under which it recovered the funds
that had been diverted from the organization’s charitable purpose as well as the Attorney General’s own
investigative costs. Settlement Agreement, People v.
L.B. Research & Educ. Found., No. BC 421250 (Cal.
Superior Ct. L.A. Cnty., filed Dec. 4, 2009), available
at https://oag.ca.gov/system/files/attachments/press_
releases/n1840_document.pdf; Press Release, Cal.
Dep’t of Justice, Brown Halts UCLA Professor’s Use
of Charitable Funds for Personal Business Ventures
(Dec. 4, 2009), https://oag.ca.gov/news/press-releases/brown-halts-ucla-professors-use-charitablefunds-personal-business-ventures. 10
10 As a number of commentators have noted, Schedule B fil-
ings also contained evidence relevant to the “Varsity Blues”
scandal, in which donors used a sham charity called Key Worldwide Foundation to effectively purchase spots for their children
at selective colleges and universities. Key Worldwide Foundation’s Schedule B would have revealed the identities of the parents who made large payments to the organization. See Adam
Looney, It Took 6 Years To Uncover the College Admissions Scandal, Here’s What the IRS and Congress Can Do Better Next Time,
21
Schedule B has played a particularly important
role in the Attorney General’s efforts against so-called
“gift-in-kind” schemes. AFPF JA 433-34. In a gift-inkind scheme, an organization seeks to inflate its revenue and minimize its reported overhead and fundraising-expense ratios by claiming that it has received
large noncash gifts, which must be reported and described on Schedule B. In many of these cases, charities claim these large gifts even though they never
take ownership of the property in question (acting instead as a mere conduit for goods shipped by other donors to other donees). See Cal. Dep’t of Justice, Giftsin-Kind Donations: How They Can Be Used To Deceive
(n.d.), available at https://oag.ca.gov/sites/all/files/agweb/pdfs/charities/publications/gik-schemes.pdf.
Starting from Schedule B and then following up with
Brookings Inst. (Mar. 28, 2019), https://www.brookings.edu/
blog/up-front/2019/03/28/it-took-6-years-to-uncover-the-collegeadmissions-scandal-heres-what-the-irs-and-congress-can-dobetter-next-time (“In Schedule B enforcement authorities have a
list of all the parents who funneled bribes through the charity . . . .”). Moreover, Key Worldwide Foundation claimed that it
had made grants to a number of other nonprofit organizations;
those organizations’ Schedule B filings would have revealed that
Key Worldwide did not in fact make the grants in question. See
Lloyd Hitoshi Mayer, Could a More Robust IRS Have Nipped the
Varsity Blues Scandal in the Bud?, Chron. of Philanthropy (Mar.
15, 2019), https://www.philanthropy.com/article/could-a-morerobust-irs-have-nipped-the-varsity-blues-scandal-in-the-bud
(noting that a cross-check of the Schedule Bs of the ostensible
grantees could “have revealed that KWF’s returns were inaccurate”).
22
the ostensible donor, the Attorney General can determine whether the purported gift ever actually happened.
Gift-in-kind schemes have been a top enforcement
priority for the Attorney General in recent years. In
2015, the California Attorney General, along with the
FTC and counterparts in the other forty-nine States
and the District of Columbia, entered into a $75 million settlement agreement with the perpetrators of a
gift-in-kind scheme involving supposed cancer charities. See Complaint, Fed. Trade Comm’n v. Cancer
Fund of Am., Inc., No. 2:15-cv-00884-NVW (D. Ariz.,
filed May 18, 2015); Stipulation re Order for Permanent Injunction and Monetary Judgment, Fed. Trade
Comm’n v. Cancer Fund of Am., No. 2:15-cv-00884NVW (D. Ariz., filed Mar. 29, 2016). A year later, the
Attorney General announced that it “currently has
open investigations wherein Schedule B has provided
significant information related to inflated noncash donations.” Final Statement of Reasons—Proposed
Amendment to Cal. Code Regs. tit. 11, §§ 310, 312,
999.1 (July 8, 2016), available at https://oag.ca.gov/
sites/all/files/agweb/pdfs/charities/final-statementreasons-07082016.pdf. Since then, the Attorney General has announced actions against at least five organizations over gift-in-kind fraud. 11
11 See Press Release, Cal. Dep’t of Justice, Attorney General
Becerra Secures Judgment Against “National Cancer Coalition”
for False Financial Reporting Scheme (Mar. 12, 2018),
https://oag.ca.gov/news/press-releases/attorney-general-becerrasecures-judgment-against-national-cancer-coalition; Press Release, Cal. Dep’t of Justice, Attorney General Becerra Announces
23
In evaluating the evidence in the trial record, it
bears emphasis that for most of the period covered by
the trial record, the Attorney General did not have access to a complete set of Schedule Bs for organizations
in the Registry. Prior to 2010, thousands of charities
active in California renewed their annual registrations without submitting their Schedule B. AFPF
Pet. App. 10a. From August 2010 until June 2015,
the Attorney General sent approximately 8,000 deficiency letters informing organizations of their incomplete filings. AFPF Pet. 7; AFPF JA 277-79. 12 At the
time of the Americans for Prosperity Foundation trial
in February and March 2016, the Attorney General
had been working with a substantially complete set of
Schedule B filings for—at most—a matter of months.
Nonetheless, when Americans for Prosperity
Foundation asked the Attorney General to identify
ten investigations in which it had relied on Schedule
B, the Attorney General came back with ten (five of
which were not yet public). AFPF JA 398-99; Resp.
Br. 33. And when the Attorney General, during the
Americans for Prosperity Foundation trial, sought to
$410,000 Settlement with Giving Children Hope, After the Charity Engaged in a Misleading Reporting Scheme (Jan. 29, 2019),
https://oag.ca.gov/news/press-releases/attorney-general-becerraannounces-410000-settlement-giving-children-hope-after; Press
Release, Cal. Dep’t of Justice, Attorney General Becerra Files
Lawsuit Against Charity for Misleading Solicitations and Reporting Scheme (May 30, 2019), https://oag.ca.gov/news/pressreleases/attorney-general-becerra-files-lawsuit-against-charitymisleading-solicitations.
12 The Attorney General submitted its first deficiency notice
to Thomas More Law Center in March 2012 and to Americans
for Prosperity Foundation in March 2013. TMLC Pet. App. 163a;
AFPF Pet. App. 11a, 42a.
24
introduce additional examples of investigations in
which it had used Schedule B, the Foundation’s counsel objected. The following exchange ensued:
THE COURT: Sustained. We’re not talking
about everybody else, we’re talking about the
person here who is the plaintiff . . . . Schedule
B is a Schedule B, or whatever it is. We’re talking here about the Schedule B to this plaintiff.
[ATTORNEY GENERAL’S COUNSEL]: I’m
sorry, Your Honor. Just to be clear: If these examples don’t involve plaintiff, you would -- I
should not ask about them?
THE COURT: That’s right.
TMLC ER 510-11. Petitioners highlight the small
number of examples in the trial record of investigations in which the Attorney General used Schedule B.
See AFPF Br. 19; TMLC Br. 13. But that small number reflects the fact that Petitioners—and the district
court—prevented the Attorney General from introducing further examples.
B.
Ex-post retrieval of Schedule B is no
substitute for ex-ante reporting
Petitioners cannot seriously dispute the fact that
access to information about large-dollar donations is
substantially related to the Attorney General’s important interest in protecting the public’s trust in the
nonprofit sector. Petitioners suggest, though, that
the Attorney General could obtain the same information through less intrusive means by requesting or
subpoenaing an organization’s Schedule Bs after the
launch of an investigation. AFPF Br. 34-39; TMLC
25
Br. 42-43. In support of this suggestion, Americans
for Prosperity Foundation asserts that “requesting
Schedule B through audit letters and subpoenas has
never tipped anyone off in a way that frustrated or undermined the ensuing audit or investigation.” AFPF
Br. 35-36.
In fact, the Senior Assistant Attorney General for
the Charitable Trusts section testified at trial that an
organization had fabricated board minutes after receiving an audit letter. TMLC ER 1111. The district
court, however, disallowed further discussion of that
episode. See TMLC ER 1111 (“THE COURT: Counsel,
it is very interesting, but it’s not anything with this.
Let’s find out about donors and their privacy. That’s
what this case is about.”). Moreover, the risk of evidence tampering is not the only reason for ex-ante collection of Schedule B information. Nonprofit-sector
enforcement is a race against the clock. Obtaining
Schedule B through audit letter or subpoena allows
more time for organization managers to spend down
charitable assets or transfer funds beyond law enforcement’s reach. Cf. Mutual Settlement Agreement
& Release Between the People ex rel. Brown, Noah’s
Wish, Inc., & Terry Crisp 1-2 (noting that more than
$2.5 million of funds raised for Katrina-related relief
had been spent on other purposes by the time the Attorney General intervened).
It is true that many other Attorneys General do
not require charities active in their State to file
Schedule Bs with a state registry. But this Court has
never held that state regulatory requirements are
subject to a least-common-denominator criterion.
Such a standard would be inconsistent with core federalism values. See New State Ice Co. v. Liebmann,
26
285 U.S. 262, 311 (1932) (Brandeis, J., dissenting)
(“Denial of the right to experiment may be fraught
with serious consequences to the nation. It is one of
the happy incidents of the federal system that a single
courageous State may, if its citizens choose, serve as
a laboratory . . . .”).
Notably, the two States with the largest number of
nonprofit organizations active within their borders—
California and New York—are also two of the States
that impose a Schedule B reporting requirement. See
Brice McKeever, Nat’l Ctr. for Charitable Statistics,
Active & Reporting Public Charities by State, Urban
Inst. (Aug. 27, 2018), https://nccs.urban.org/publication/active-and-reporting-public-charities-state; Citizens United v. Schneiderman, 882 F.3d 374, 382-83
(2d Cir. 2018). These are also, not coincidentally, two
of the States whose nonprofit-sector enforcement efforts are widely recognized as most robust. See, e.g.,
James J. Fishman, Stealth Preemption: The IRS’s
Nonprofit Corporate Governance Initiative, 29 Va.
Tax. Rev. 545, 556 (2010) (identifying California and
New York as two of three States—along with Massachusetts—which have displayed “vigor” in “correcting
abuses involving fraudulent charitable solicitation
and charitable trusts”).
III.
The Low Risk that the Identities of LargeDollar Donors Will Be Disclosed Inadvertently Does Not Impose a Substantial Burden on Petitioners’ First Amendment
Rights
The exacting scrutiny standard requires the Court
to consider not only the strength of the governmental
interest but also the “actual burden” on Petitioners’
27
freedom of association. See Reed, 561 U.S. at 196 (“To
withstand [exacting] scrutiny, ‘the strength of the
governmental interest must reflect the seriousness of
the actual burden on First Amendment rights.’”). In
this case, the burden on Petitioners’ rights is a very
low risk that members of the public might gain unauthorized access to information about the identities of
a subset of large-dollar donors. The State’s strong
need for access to Schedule B overwhelmingly outbalances that low risk.
To be clear, Amicus is strongly committed to protecting the legitimate privacy interests of nonprofit
donors. See CalNonprofits, CalNonprofits Policy
Framework (Feb. 2017), https://calnonprofits.org/public-policy/policy-framework (recognizing “the importance of the right to privacy for donors and other
constituencies”). Donors trust that nonprofit organizations will not reveal donors’ identities to the general
public without donor permission; that trust would be
undermined if donors’ names leaked out. See, e.g.,
CalNonprofits, Principles for Responsible Crowdfunding, https://calnonprofits.org/33-advocacy/709-principles-for-responsible-online-crowdfunding (last visited
Mar. 25, 2021) (“All parties must protect the integrity
of the relationship between donors and nonprofits. . . . Anything that jeopardizes that trust threatens the generosity of giving and the work nonprofits
do for the common good.”). But a larger threat to the
nonprofit sector—both immediately and in the long
run—comes from charitable fraud and the misuse of
charitable funds. The Attorney General’s oversight
and enforcement efforts—facilitated by access to
Schedule B—play an important role in mitigating
that larger threat.
28
A.
The fact that Petitioners’ expert
gained access to less than 1% of the
Registry’s confidential documents
ought to be understood
While the security breach at the Registry of Charitable Trusts ought not be excused, it also ought not
be exaggerated. Contra AFPF Br. 40 (“Schedule B information is effectively available for the taking”);
TMLC Br. 14 (“California leaks confidential information like a sieve”). To put the breach in fuller context:
•
The Schedule Bs in question were not viewable
to visitors clicking through the Registry website or running Google searches. Petitioners retained an expert—Dr. James T. McClave, the
chief executive officer of Info Tech, Inc.—to circumvent the Registry’s privacy safeguards.
McClave is a PhD statistician with decades of
experience in computerized detection techniques, and Info Tech is a company that “focuses on the development of computerized tools
to assist in the acquisition and analysis of
data,” working—in particular—with “large,
complex, databases.” Expert Report of Dr.
James T. McClave at 2 (TMLC D. Ct. Doc. #59).
Dr. McClave and his associates did gain unauthorized access to a subset of Schedule Bs in
the Registry, but there is no suggestion in the
record that anyone else did.
•
Dr. McClave testified that he and his associates
gained access to approximately 2,200 confidential documents in the Registry’s database (not
all of which were Schedule Bs). TMLC JA 423.
29
At the time, the Registry housed approximately
370,000 confidential documents. TMLC JA
284. Thus, the confidential filings accessed by
Dr. McClave and his team represent less than
1% of the total.
•
A California Department of Justice employee
discovered in October 2015 that a hacker could
theoretically harvest nonpublic documents
from the Registry by creating an algorithm to
generate document ID numbers that match a
certain pattern and sequence. TMLC JA 40506. The Department promptly fixed the problem. TMLC JA 433. Contrary to the dissent
below, Dr. McClave did not testify that “[h]e
was readily able to access every confidential
document in the registry.” AFPF Pet. App. 92a.
Dr. McClave repeated the fact that a California
Department of Justice employee had identified
and addressed a vulnerability affecting confidential documents. TMLC JA 432-33. Dr.
McClave also testified that when he and his
team tested the Registry to see if those confidential documents could be accessed via the
vulnerability that the Department employee
identified, “they were all gone.” TMLC JA 433.
•
The particular vulnerability exploited by Dr.
McClave and his associates was not unique to
the Registry. According to Dr. McClave, CitiBank and Delta Airlines—as well as other
large and sophisticated companies—have suffered similar problems. TMLC JA 431-32.
•
Every time the Attorney General was alerted of
a breach, the relevant filings were removed
30
from public view within 24 hours. TMLC JA
426.
•
There is no evidence that anyone has been harassed, threatened, or defamed, or has suffered
any other harm as a result of any security
breach at the Registry. TMLC JA 296.
The fact that Petitioners’ expert gained unauthorized access to less than 1% of confidential documents
in the Registry’s database also ought to be considered
in the context of other potential vulnerabilities affecting Petitioners and their donors:
•
Petitioners must file their Schedule Bs with the
IRS, and they do not challenge this requirement. The IRS, in 2012, inadvertently sent the
Schedule B filed by the National Organization
for Marriage to a member of the media, who
then forwarded it to a prominent pro-LGBTQ
rights group. (The National Organization for
Marriage advocates for laws defining marriage
as between a man and a woman.) See Mackenzie Weinger, IRS Pays $50K in Confidentiality
Suit, Politico (June 24, 2014), https://www.politico.com/story/2014/06/irs-nom-lawsuit108266. The IRS also has accidently posted the
Schedule B of the Republican Governors Association Public Policy Committee on a public
website. See Paul Abowd, IRS ‘Outs’ Handful
of Donors to Republican Group, Ctr. for Public
Integrity (Apr. 4, 2013), https://publicintegrity.org/politics/irs-outs-handful-of-donors-torepublican-group. Petitioners are correct that
“‘[t]he IRS takes seriously its duty to protect
31
confidential information.’” AFPF Br. 46. But
even the IRS is not perfect.
•
Petitioners’ donors also must disclose noncash
contributions of more than $500 in order to
claim income tax deductions for their gifts. See
Internal Revenue Service, 2020 Instructions for
Schedule A A-12 (Jan. 4, 2021), available at
https://www.irs.gov/pub/irs-pdf/i1040sca.pdf.
The IRS revealed in 2015 and 2016 that cybercriminals gained access to return information
for as many as 700,000 individual income taxpayers.
See Laura Saunders, IRS Says
Cyberattacks on Taxpayer Accounts More Extensive Than Previously Reported, Wall St. J.
(Feb. 26, 2016), https://www.wsj.com/articles/irs-says-cyberattacks-on-taxpayer-accounts-more-extensive-than-previously-reported-1456514909.
•
In a number of states, donors must disclose
noncash gifts over $500 in order to claim state
charitable contribution deductions. Like the
IRS and the California Attorney General, State
tax administrators take data privacy seriously.
But state tax databases have been subject to
hacks as well. See, e.g., Eric Chabrow, Stolen
Password Led to South Carolina Tax Breach,
Bank Info Sec. (Nov. 20, 2012), https://
www.bankinfosecurity.com/stolen-passwordled-to-south-carolina-tax-breach-a-5309.
•
Charitable contributions almost always will
generate records at the donor’s and donee’s financial institutions, whether the donation is by
32
check, credit card, or brokerage account transfer. Numerous U.S. and multinational financial institutions—including Bank of America,
Capital One, Citigroup, Equifax, HSBC,
JPMorgan Chase, Morgan Stanley, and TD
Ameritrade—have been the subjects of major
data breaches in recent years. Carnegie Endowment for Int’l Peace, Timeline of Cyber Incidents Involving Financial Institutions,
https://carnegieendowment.org/specialprojects/protectingfinancialstability/timeline (last
visited Mar. 25, 2021).
•
Charitable organizations’ own donor databases
are not 100% secure. In 2020, Blackbaud—
which provides cloud computing services to
more than 45,000 nonprofit organizations and
government institutions—revealed that cybercriminals had gained access to donor information at nonprofits that it serves. See Paul
Clolery, Some Donor Data Accessed in Blackbaud Hack, NonProfit Times (Sept. 29, 2020),
https://www.thenonprofittimes.com/npt_articles/breaking-some-donor-data-accessed-inblackbaud-hack.
Petitioners make much of the fact that California
officials will not guarantee that a security breach will
never happen again. See, e.g., TMLC Br. 3, 14. But
of course California officials will not guarantee that:
No database is 100% secure. California officials
simply recognize the reality of our computerized age.
33
B.
The Schedule B reporting requirement affects only a small number of
large-dollar donors to Petitioners
California requires nonprofit organizations that
solicit funds in the State to file their full federal tax
returns with the Registry, but it does not require organizations to share donor information beyond what
federal law demands. To evaluate the burden on Petitioners’ First Amendment rights, the Court therefore must consider the scope and limits of the federal
mandate.
Federal law requires section 501(c)(3) charitable
organizations to report the names and addresses of
donors who give at least $5,000 within the taxable
year on the confidential Schedule B. 26 U.S.C.
§ 6033(a)(3), (b)(5); 26 C.F.R. § 1.6033-2(a)(2)(ii)(F).
But if an organization normally receives at least a
third of its total support from government grants plus
contributions from the general public, the Schedule B
requirement applies only to donors who contribute at
least $5,000 or more than 2% of the organization’s total support, whichever is greater. 26 C.F.R. § 1.60332(a)(2)(iii)(A). Americans for Prosperity Foundation
and Thomas More Law Center both normally receive
at least a third of their total support from the general
public. Both organizations therefore need to disclose
only contributors who account for more than 2% of total contributions. For a donor to cross that 2% threshold, she would need to have given more than $31,000
in 2018 to Thomas More Law Center or more than
$341,000 to Americans for Prosperity Foundation.
See Internal Revenue Service, Form 990: Return of
Organization Exempt from Income Tax: Thomas More
Law Ctr. 1 (2018), available at http://bit.ly/
34
2018TMLC990; Internal Revenue Service, Form 990:
Return of Organization Exempt from Income Tax: Am.
for Prosperity Found. 1 (2018), available at http://
bit.ly/2018AFPF990.
The Schedule B reporting requirement is thus
readily distinguishable from other donor disclosure
mandates that this Court has struck down as unconstitutional. The contrast with NAACP v. Ala. ex rel.
Patterson, 357 U.S. 449, a case repeatedly invoked by
Petitioners, is particularly stark:
•
While Alabama sought to compel the NAACP
to disclose the names and addresses of all of its
members in the State, California seeks only the
identities of large-dollar donors whose gifts account for more than 2% of Petitioners’ total
(necessarily, no more than 49 per organization). See NAACP, 357 U.S. at 464 (noting that
NAACP “has urged the rights solely of its ordinary rank-and-file members”). For Petitioners,
this means donors who have given tens or hundreds of thousands of dollars within a year.
•
While Alabama specifically targeted the
NAACP, 357 U.S. at 452, the California Attorney General is enforcing a generally applicable
requirement, and there is no evidence that the
Attorney General picked out Petitioners for selective enforcement. Indeed, Petitioners did
not receive deficiency letters until (at the earliest) the third year of the Attorney General’s initiative to enforce the Schedule B reporting requirement.
35
•
Most importantly, while the membership rolls
at issue in NAACP had no “substantial bearing” on Alabama’s ability to enforce its laws,
NAACP, 357 U.S. at 464, access to Schedule B
is vital to the Attorney General’s efforts to protect the public’s trust in the California nonprofit sector.
Petitioners describe this case and NAACP v. Alabama ex rel. Patterson as “indistinguishable.” TMLC
Br. 3; see also AFPF Br. 30 (suggesting that a ruling
for California “would be tantamount to abdicating
NAACP v. Alabama”). Little could be further from the
truth. California’s Attorney General seeks Schedule
B information in order to protect the public’s trust in
the nonprofit sector. To liken that effort to Alabama’s
harassment of the NAACP is to misunderstand the vital role that public trust in the nonprofit sector plays
in California and across our society.
CONCLUSION
To ensure that the nonprofit sector in and beyond
California can continue to thrive, Amicus urges this
Court to affirm the decision below.
36
Respectfully submitted,
DANIEL HEMEL
UNIVERSITY OF CHICAGO
LAW SCHOOL
1111 East 60th Street
Chicago, IL 60637
(773) 834-3255
dhemel@uchicago.edu
March 2021
ANNA-ROSE MATHIESON
Counsel of Record
CALIFORNIA APPELLATE
LAW GROUP LLP
96 Jessie Street
San Francisco, CA 94105
(415) 649-6700
annarose@calapplaw.com
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.