Charities Argue a California Requirement to Disclose Donor Information is Unconstitutional
|Argument||April 26, 2021|
|Decision||July 1, 2021|
|Opinion Below||Ninth Circuit Court of Appeals|
|Petitioner Briefs||Americans For Prosperity Foundation|
Thomas More Law Center
|Respondent Brief||Matthew Rodriquez, Acting Attorney General for the State of California|
On July 1, 2021, the Supreme Court ruled for the charities. The California donor disclosure requirement violates the First Amendment.
Scroll down for our Decision Analysis.
April 21, 2021
Democracy encourages people to have new ideas, to share ideas, and to advocate for their ideas. The First Amendment promotes free speech and free association to support these democratic goals.
This case concerns the First Amendment right to freely associate with others. The Constitution supports free association because associating with others encourages effective advocacy. A person who feels strongly about an idea should be able to pitch it to others and rally others in support.
In this case, two California charities brought suit against the California Attorney General challenging a state regulation that they claim violates their right to free association. The Ninth Circuit Court of Appeals ruled against the charities, which are now asking the Supreme Court to overrule the Ninth Circuit.
The California Regulation Requires Charities to Disclose Names of Substantial Donors
The state of California requires all charities to disclose the names of any donors who contributed $5,000 or more in a tax year. The donor information was first required by the federal government as an add-on to a nonprofit’s tax form (“Schedule B”).
Not all states require charities to submit Schedule B to the state regulatory agency. California started requiring it in 2019.
The Parties Dispute Whether California Keeps Disclosed Information Confidential
California maintains a policy of keeping confidential all donor information that charities disclose in Schedule B. According to the state, the information is kept “in a confidential database maintained by the Department’s in-house data center and used only by the Charitable Trusts Section.” California says even senior management does not have access; Schedule Bs are not included on the state website along with the charity’s other filings; further, state law authorizes discipline for employees who engage in negligence failing to safeguard charity information and even criminal sanctions for employees who wilfully expose official records.
However the plaintiffs-charities argue the state has several times failed to keep Schedule B information private. For example:
The [State] had known (but failed to disclose) for years that it had posted at least 25-30 Schedule B forms online. \During this litigation, AFPF discovered that the Registry had posted 1,778 additional Schedule B forms on its public website. Among those were Schedule Bs for many charities associated with controversial causes. For instance, in 2012 Planned Parenthood became aware that a complete Schedule B for Planned Parenthood Affiliates of California, Inc., for the 2009 fiscal year was publicly posted; the document included the names and addresses of hundreds of donors.Brief of Petitioner Americans For Prosperity Foundation (internal citations omitted).
Petitioner Thomas More Law Center alleges that the state relies on students, seasonal workers, and contractors to administer Schedule B disclosures and that the state cannot trust them to keep the information confidential.
California acknowledged that, “There have at times been shortcomings in the Department’s implementation of its confidentiality policies.” The state admits that, as part of this litigation, an expert found “Schedule B forms that had been inadvertently posted on the Registry’s public-facing website.” The state admits the expert also discovered a way that site visitors could alter URLs on the public-facing site and access documents meant to be housed confidentially.
The state claimed it fixed both issues, by removing the documents from public access. It issued further security protocols as well. In its brief to the Court, California says, “Although these shortcomings were unfortunate and contrary to Department policy, there was no evidence at trial that the broader public saw the confidential documents or that any harm resulted.”
Petitioners dispute that the state penalties on unauthorized disclosure are adequate; they are unsatisfied with state policy regarding what to do to remedy a data breach, and they find the state places the burden on the charity to figure out if its information is adequately protected.
Plaintiffs Claim the Disclosure Requirement Puts Donors in Danger
The plaintiff-charities (Petitioners) argue that California’s disclosure requirement puts donors in danger. The charities claim that donors face at least two types of harm when the public knows of their support for the charities. First, when other charities see that certain people are contributing large sums to nonprofits, the donors may be inundated with requests for donations from other charities. This can discourage donors from donating.
Next, because the plaintiff charities support politically controversial issues, public animosity towards the charities can lead to violence to its supporters. American For Prosperity Foundation says that its supporters face “economic reprisals and boycotts” and “they are also threatened with death and violence.”
At a Michigan [AFPF] event, for example, knifewielding protestors cut down a heavy tent, which collapsed on elderly supporters who could not escape on their own. At one of AFPF’s annual summits in Washington, D.C., for example, protestors physically blocked exits, “tried to push and shove and keep people in the building,” and knocked an attendee down the stairs.Brief of Petitioner Americans For Prosperity Foundation (internal citations omitted).
AFPF also says the government has used the information to target donors for audits and investigations.
Petitioner Thomas More Law Center echoes the concerns about losing confidentiality of donor information, that donors fear ideological opponents would hunt them down. The Law Center tells the story of a client who was the subject of assasination plots. Although the client was not a donor, the Law Center said the threats from the client’s ideological opponents included the Law Center and its donors. The Law Center also mentioned that Domino’s Pizza, owned by the Center’s co-founder and largest donor, faced boycotts because of the owner’s pro-life views.
In short, Petitioners claim that because of the threats of intimidation and harassment, donors are legitimately concerned about revealing their identities.
Petitioners Argue the Donor Disclosure Requirement Violates Their Right to Freedom of Association
Petitioners claim that California’s blanket disclosure requirement makes donors reticent to donate. Thus, the requirement to submit the information harms individuals’ First Amendment rights to associate.
According to Petitioners, the government may only affect individuals’ free association rights when the government proves “that a compelled-disclosure scheme is narrowly tailored to advance a compelling interest.” Petitioners argue that this is the standard advanced in a 1958 case, NAACP v. Alabama, in which Alabama sought NAACP’s membership lists after the state was enjoined from preventing the NAACP from conducting business in the state.
According to Petitioners, the narrow-tailoring requirement of the standard is essential. The lower court, the Ninth Circuit Court of Appeals, erred because it only required the government to show a “substantial relation between the requirement and a sufficiently important governmental interest.”
Narrow tailoring is required in a “strict scrutiny” analysis, whereas the Ninth Circuit applied “exacting scrutiny,” which is a lesser level of scrutiny that makes it easier on a government regulation to pass muster.
Petitioners argue that California’s blanket disclosure requirement fails strict scrutiny because the government almost never uses Schedule B information “for any reason” and if it needed the information, it could get it easily without having to store all Schedule Bs for all charities.
Petitioners argue the disclosure rule is not narrowly tailored at all. The Law Center says “California treats thousands of charities as suspected fraudsters rather than employing more precise standards to separate legitimate from illegitimate charities.” Both Petitioners point out that 47 other states don’t use Schedule B at all for their regulatory efforts on nonprofits.
If the Court decides to use “exacting scrutiny” instead of strict scrutiny, Petitioners argue the California disclosure requirement would still fail, particularly as applied to their particular cases. Both Petitioner-charities argue that they have shown a probability that compelled disclosure would cause threats, harassment, and reprisals. In their cases, then, the government’s interest in having the donor information (which Petitioners claim is for government efficiency, at best) is not nearly strong enough to intrude upon the associational rights of private associations and individuals.
California Defends the Donor Disclosure Requirement
California argues that it uses Schedule B information for a number of reasons, contrary to the Petitioners’ allegations that it “almost never” uses the information. California supports the Ninth Circuit’s use of “exacting scrutiny” which does not require that a state prove its regulation is the least restrictive means of achieving its regulatory goal.
California justifies its need for the the donor information as important to its regulation of state nonprofits. A state regulates charities because charities are public-serving entities. Unlike a for-profit corporation, where owners have equity interest, all the equity in a nonprofit is owned by the public. A nonprofit, thus, must use donated assets for public benefit suiting the organization’s mission; not for personal gain.
In exchange for a charity’s public-serving activities, the government gives nonprofits favorable tax treatment, like exemption from state and federal income tax and the ability to collect tax-deductible donations. These characteristics, the state notes, “give rise to distinct regulatory and enforcement concerns.”
In particular, beneficiaries typically lack a means to monitor the organization’s activities. Moreover, unlike corporate shareholders, those who donate to charities have little or no financial incentive to carefully monitor the organizations’ use of their gifts. And the tax-exempt status attached to charities, as well as the tax-deductibility of charitable contributions, offer opportunities for unscrupulous donors and managers to misuse charitable resources for personal advantage.Brief of Respondent (internal citations omitted).
As a means to protect the assets of nonprofit organizations, California law authorizes the state attorney general “to investigate mismanagement, deceptive solicitation practices, and breaches of charitable trust duties.”
For example, state investigators can use a Schedule B to cross-reference donor information with other parts of the Form 990 in order to see if a charity is paying a for-profit entity run by one of its largest donors for goods and services, or if it is making grants to benefit a donor’s family members, in violation of the organization’s legal obligations. Likewise, Schedule B information can help investigators detect circumstances in which a charity is unlawfully repaying a “loan” and misreporting it as a liability on its Form 990 when in fact it was a donation.Id. (internal citations omitted).
California argues the correct standard of scrutiny for evaluating a free association claim is “exacting scrutiny,” like the Ninth Circuit used. Even the case that Petitioners cite for supporting strict scrutiny, NAACP v. Alabama, did not include a narrow tailoring analysis.
In NAACP v. Alabama, the NAACP had “made an uncontroverted showing” that disclosing members’ identities caused “economic reprisals, physical threats, and other forms of public hostility, which jeopardized members’ collective ability to advocate their beliefs.” Yet, the state’s justification for needing the members’ identities had “no substantial bearing” on the interest Alabama advanced: “determining whether an organization was doing business within the State.” The “substantial bearing” requirement is less stringent than narrow tailoring Petitioners argue for.
California points out two other Supreme Court cases to argue that “exacting scrutiny” is the proper standard. In Bates v. City of Little Rock (1960), the Supreme Court rejected state requirements that the NAACP publicly disclose its member roles because, as California paraphrases, the “cities’ interests in implementing their licensing-tax schemes lacked a ‘relevant correlation’ to compelled public identification of members.” California also noted the standard the Supreme Court used in Buckley v. Valeo (1976) required “there must be a “‘relevant correlation’ or ‘substantial relation’ between the governmental interest and the information required to be disclosed.”
California argues that, unlike any of the past cases in which the Court has struck a government required disclosure of membership or donor information, the strength of its interest in Schedule B information “reflect[s] the seriousness of the actual burden on First Amendment rights.” Thus the Supreme Court should uphold the regulation like the Ninth Circuit did.
The Supreme Court will hear arguments on April 26, 2021.
On July 1, 2021, the Supreme Court invalidated the State of California’s requirement that nonprofits disclose the names of their major donors as a condition of operating as a charity in the state. The case was brought by two California charities which argued that the disclosure requirements violated their First Amendment associational rights.
As a condition of registering and operating as a charity in California, the state Attorney General requires that charities file Schedule B to their IRS Forms 990, which lists the names and addresses of the charities’ major donors. The State seeks to police misconduct in nonprofit organizations, i.e. abuse of the benefits of being a nonprofit such as tax-exempt status.
Based on the CA disclosure requirement, two California charities brought suits in federal court. They declined to file unredacted Schedule Bs, stating the requirement violates their and their donors’ associational rights. They claimed that requiring charities like themselves to share donor information subjects the donors to risk of reprisals (for being associated with certain political ideals) and makes the donors less likely to donate.
The federal district courts in California agreed with the charities, both at the preliminary injunction stage and also after completing trials, enjoining the California AG from collecting Schedule Bs. However the Ninth Circuit Court of Appeals overturned the district courts, determining that the California law does not violate the First Amendment. The Ninth Circuit applied “exacting scrutiny” and refused to require that the California regulation be “narrowly tailored” to stated government interest. According to the Ninth Circuit, the CA regulation satisfied exacting scrutiny.
The charities appealed to the Supreme Court.
The Opinion of the Court
Chief Justice Roberts wrote for the Court with an opinion that was joined in full by Justices Kavanaugh and Barrett. The other conservative justices signed onto most of the Court’s opinion (Alito, Gorsuch and Thomas) and concurred in the judgment.
The Court determined that indeed “exacting scrutiny” is required in cases arguing a violation of the First Amendment right to free association. However, in contrast with the Ninth Circuit ruling, the Court held that exacting scrutiny requires narrow-tailoring. Before burdening the associational rights of individuals, the government must ensure that the law is narrowly tailored to the interest the government is attempting to advance with the regulation.
In this case, the Court ruled, the government has a legitimate interest — the interest in policing misconduct — but the regulation (requiring filing of Schedule B) is not narrowly tailored to the government’s interest. The Court said there’s not proof the Attorney General is ever using the Schedule Bs that it collects as a matter of course. Perhaps the AG uses the information on a Schedule B once an investigation of a nonprofit has started, but at the pre-investigation stage, it’s not clear it’s necessary to gather the information. Further, the Court determined it doesn’t even look like the AG had considered alternative means to getting the information it needs. Rather, it casts a “dragnet” for gathering information that becomes relevant in only a small number of cases once a complaint is filed. The government’s real purpose seems to be “ease of administration,” which does not justify the associational burdens that the regulation imposes.
Justice Thomas wrote a concurrence in the case, arguing that the Court should apply strict scrutiny in cases arguing a violation of associational rights.
Justice Alito wrote a concurrence (joined by Gorsuch) stating that he is not ready to state a standard by which to determine all Free Association claims.
The Dissent by the Liberal Wing
Justice Sotomayor wrote the dissenting opinion, joined by Justices Breyer and Kagan. The Dissent argued that the Court should have applied “exacting scrutiny” but without the “narrow tailoring” requirement. Sotomayor argued that the Court’s opinion validates free association claims but without requiring that the harm experienced is “objective.” In other words, the Court’s opinion assumes that all disclosure requirements impose associational burdens, like a subjective desire to privacy. However, the plaintiffs in the case must at least show that the harms resulting from the challenged law are objective. In this case, the plaintiffs have not shown that the donors actually face repercussions from the disclosure of donor information.
In the Dissent’s view, exacting scrutiny requires a “substantial relation” between the regulation and a “sufficiently important” government interest and that the strength of the government’s interest relates to the seriousness of the burden imposed on individuals’ associational rights.