Update on California Mandatory Donor Disclosure Litigation

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Another blow to charitable organizations’ First Amendment rights took place when the federal Ninth Circuit Court of Appeals ruled on December 29, 2015, that the California Attorney General’s mandatory donor disclosure requirements are constitutional “as applied” within the context of state charitable solicitation filing requirements.

The APF litigation follows on the heels of a similar loss by the Center for Competitive Politics (CCP).  In the CCP case, the Ninth Circuit ruled that compelled disclosure of donor information by itself is insufficient to constitute a First Amendment injury compelling enough to foreclose such governmental intrusion.  The U.S. Supreme Court denied certiorari in November 2015.  APF (along with its companion plaintiff Thomas More Law Center) asserted a similar First Amendment claim based on evidence showing that such mandatory disclosures actually chill speech and result in donor harassment.   This increased level of harm is apparently constitutionally insufficient as well, at least according to the Ninth Circuit. 

Background

Both cases began when the organizations challenged the California Attorney General (AG)’s demand to submit their IRS Form 990 Schedule B as part of their annual AG reports, in connection with their charitable solicitation activity in California.  The AG’s demand resulted from a 2013 change in its policy; consistent with most other states, the California AG’s office had never before required such disclosures.  Form 990’s Schedule B requires nonprofits to list major donors’ names, addresses, and amounts given.  The IRS collects this information but is legally required to keep it confidential.  Both civil and criminal sanctions are available for improper disclosure of such information, and nonprofits may legally redact such information in their publicly available Form 990s. 

In contrast, California law provides no such protections against donor disclosure.  Instead, under California law, nonprofits that fail to comply with such disclosure requirements face serious consequences:  their state income tax exemption is invalidated; late fees are imposed, for which directors and officers are personally liable; and the noncompliant organizations may not engage in fundraising within California.  The incentive for nonprofits to disclose otherwise confidential donor information is thus quite compelling.

APF’s Losing Appeal

APF initially won injunctive court relief against the California AG at the trial court level, based on specific evidence of donors actually being intimidated and seriously harassed, thereby resulting in “chilled speech” in violation of the First Amendment. 

On appeal, the Ninth Circuit rejected such conclusion.  The court decided instead that APF had not shown anything more than “broad allegations,” “subjective fears,” and “worries” about such problems.  The court further focused its attention on the California AG’s willingness to keep such sensitive donor information confidential, as required by law.  Such conclusion, however, ignores the possibility of confidentiality breaches, as has already reported happened and likely could happen again, with no legal relief available to donors, as well as the evidence provided that donors’ behavior has already in fact been adversely affected by such legal requirement.  The court found such information, however, “too speculative” to warrant injunctive relief.

No plausible reason exists for the California AG’s collection of such donor information.  As in the CCP case, the court relied only on a generalized AG interest in “enforcing charitable organization laws and ensuring that charities . . . are not engaging in unfair business practices.”  Apparently, such interest trumps otherwise highly valued First Amendment values of free speech and freedom of association. 

The only bright spot in the court’s opinion was its recognition that donor disclosures should not be available for public inspection.  The court noted that such public inspection currently may be required under California law, “notwithstanding the Attorney General’s good faith policy to the contrary.”  The court further noted that the AG is “in the process of promulgating a regulation prohibiting such public disclosure.”  Consequently, the court upheld the injunctive relief to this very limited extent. 

Up Next

Anecdotally speaking, some of this author’s nonprofit clients have already expressed concerns about reduced donations in California, in light of such mandatory donor disclosures and the potential chilling effect on donors who wish to keep their identities confidential.  One drastic option is to leave California out entirely from fundraising efforts there.  A more pragmatic solution is for donors to make their contributions through a donor-advised fund (DAF) intermediary, which is itself a 501(c)(3) organization.  The DAF can both:  (a) provide confidential donor receipts (at least DAFs operating outside of California) and (b) pass along donations to California nonprofit organizations, while serving as the reporting donor for disclosure purposes.    

On the litigation front, APF may seek further relief from the U.S. Supreme Court, although the chances for judicial review are questionable given the Court’s refusal to grant CCP’s petition.