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COMPULSORY BURDEN SHIFTING IN
CALIFORNIA CHARITY LAW: WHEN
CONVENIENCE TRUMPS PROTECTED
SPEECH
In 2004, California enacted the Nonprofit Integrity Act.1 The Act
establishes the conditions under which charities may conduct fundraising
solicitations.2 It also regulates how charities may contract with commercial
fundraisers in their solicitation endeavors and dictates the conditions under
which the fundraisers may operate in the State.3
The legislation was enacted following a scandal involving a retired
deputy sheriff who,4 in cooperation with commercial fundraisers hired by
the local police association in previous solicitations, fraudulently canvassed
for charitable funds in the name of the local police association.5 The funds,
however, were almost exclusively used to enrich the deputy sheriff and the
fundraisers.6 The State Attorney General believed that this type of fraud
was not a unique occurrence in the State.7
The Nonprofit Integrity Act requires a written contract between a
charity and commercial fundraiser for each solicitation event.8 Every such
contract must contain a cancellation clause with the following provisions:9
1. CAL. GOV’T CODE § 12599 (West 2011); see also OFFICE OF THE ATTORNEY GEN. OF
CAL., CHARITIES: FREQUENTLY ASKED QUESTIONS, http://oag.ca.gov/charities/faq#nonprofit (last
visited Nov. 1, 2012).
2. GOV’T § 12599.
3. Id.
4. Charitable Organizations: Hearing on S. B. 1262 Before the S. Judiciary Comm., 200304 Regular Session (Cal. 2004) (statement of Martha M. Escutia, Chair of S. Judiciary Comm.).
5. Id.
6. Id.
7. Id.
8. GOV’T § 12599(i).
9. GOV’T § 12599(i)(10). The labels are designated by the author of this Comment for the
purpose of facilitating reference.
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(1) Cooling-Off Provision: The charity, and only the charity, is able to
cancel the contract within ten days of executing the contract. The
commercial fundraiser incurs no costs or liabilities.10
(2) Termination-for-Cause: Following the Cooling-Off period, the
charity, and only the charity, may cancel the contract effective immediately
upon written notice and without payment of any kind,11 if the commercial
fundraiser: 1) makes any material misrepresentations in the course of
solicitations or with respect to the charitable organization;12 2) is found by
the charity to have been convicted of a crime arising from the conduct of a
solicitation for a charity punishable as a misdemeanor or a felony; 13 3)
otherwise conducts fundraising activities in a manner that causes or could
cause public disparagement of the charity’s good name or good will.14
(3) Termination-for-Convenience: Following the Cooling-Off period
and notwithstanding its For-Cause termination rights, the charity, and only
the charity, may cancel the contract by providing thirty days written notice.
The charity “shall be liable for services provided by the commercial fundraiser up to 30 days after the effective service of the notice.”15
The United States Supreme Court has on multiple occasions addressed
the relationship between charities and commercial fundraisers.16 The Court
has consistently held in a line of cases that “[t]he solicitation of charitable contributions is protected speech.”17 These cases involved state regulations
that imposed financial restraints on the charity-fundraiser relationship.18
The statutes in question dictated various percentage-based economic
outcomes resulting from commercial fundraisers’ activities. Specifically, charities would be entitled to receive a statutorily enumerated percentage of
the proceeds collected by commercial fundraisers with which they had
contracted.19
Because such solicitation is enveloped by First Amendment
protections,20 the regulations were scrutinized as burdens on speech rather
10. Id.
11. GOV’T § 12599(i)(12).
12. GOV’T § 12599(i)(12)(A).
13. GOV’T § 12599(i)(12)(B).
14. GOV’T § 12599(i)(12)(C).
15. GOV’T § 12599(i)(11).
16. Riley v. Nat’l Fed’n of the Blind of N.C., 487 U.S. 781 (1988); Sec’y of Md. v. Joseph
H. Munson Co., 467 U.S. 947 (1984); Schaumberg v. Citizens for a Better Environment, 444 U.S.
620 (1980).
17. Riley, 487 U.S. at 789.
18. Id. at 787-88.
19. Id.
20. Id. at 789.
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than tested for rationality.21 The Court’s reasoning was that financial
regulations regarding charity fundraiser contracts are not incidental to
protected speech when “the desired and intended effect of the statute is to encourage some forms of solicitation and discourage others.”22
The Court’s test to determine the constitutionality of such regulations
requires a state’s interest in enacting the statute to be sufficiently substantial to justify a narrowly tailored regulation.23
The termination-for-convenience provision in California’s Nonprofit Integrity Act, which dictates when a commercial fundraiser must cease its
solicitation on behalf of a charitable organization, infringes First
Amendment speech protections of both parties. It is not narrowly tailored
enough to give effect to a valid underlying state interest so as to make it
constitutional. This Comment endeavors to look at each of the three
termination provisions in the Act, and examine whether there is a
discernible government interest that is capable of withstanding scrutiny in a
First Amendment challenge. Part I will provide a framework for analyzing
legislation concerning charitable organizations and commercial fundraisers.
It will touch on the Cooling-Off and For-Cause provisions in the Act in
order to provide a backdrop for the Convenience provision and to illuminate
any state interests that the Convenience provision may or may not serve.
Part II will discuss the judicial history concerning charitable regulations as
well as the evolution of Convenience provisions. Part III will argue that the
Convenience provision in the Act perpetuates its historical use, as outlined
in Part II, by regulating the financial aspects of charitable solicitations. In
looking at government interests behind the Act, this Comment concludes
that none suffice to justify the unilateral economic power afforded to
charities by the Convenience provision.
I.
MULTIPLE PROVISIONS REQUIRING INDEPENDENT JUSTIFICATION
A previous assessment of the Act24 considered whether the statutory
language regarding “a charity’s ability to supervise persons raising funds on
21. Id.
22. Id. at 789 n.5.
23. Id. at 792; see also John D. Inazu, Making Sense Of Schaumburg: Seeking Coherence In
First Amendment Charitable Solicitation Law, 92 MARQ. L. REV. 551 (2009) (providing a
thorough review of the somewhat inconsistent historical classifications and labels assigned to
charity law First Amendment scrutiny).
24. See David D. Johnson, Do California’s Laws On Commercial Fundraising Violate The
First Amendment?, 10 U.C. DAVIS BUS. L.J. 83, 100-02 (2009). Johnson focuses not just on the
contract termination provisions in and of themselves; but instead focuses on the entire act and its
constitutionality as a whole, in addition to the provisions. Id. Specifically, in regards to the
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its behalf”25 constituted a sufficient government interest that would justify
enactment of the three mandatory termination provisions.26 That analysis,
however, referred only to the State’s requirement within the Act that a
charity hold fundraisers accountable. This was not an express rationale of
the statute.27
In the context of judicial scrutiny of regulations that implicate free
speech protections, recasting this supervisory requirement as the underlying
rationale of the statute may not be enough. In the momentous trilogy of
charitable fundraising cases,28 the Court required justification for each
statutory provision that implicated free speech concerns.29 For example, in
Riley v. National Federation of the Blind, the broader goal of the statute in
question was to provide a framework for regulating charitable
organizations, so as to prevent any harm stemming from the questionable
practices of commercial fundraisers.30 However, the State in that case
nevertheless had to specifically justify each of the challenged contract
provisions separately.31 For instance, the State’s interest behind a requirement that a commercial fundraiser’s fees to a charity be “reasonable” was to ensure that a maximum amount of funds reach the charity.32 The
State’s interest behind a requirement that commercial fundraisers disclose (at the onset of a solicitation) the actual percentage of funds returned to a
charity, however, was that it was important to disclose such information to
potential donors about how their money was spent.33 The State also wished
to dispel negative misperceptions about the amount of funds commercial
fundraisers would keep before handing over the balance to charities.34
Here, each contract termination provision within the Act would
likewise require a foundation in a sufficiently substantial state interest.
Given the expectations set forth in the existing case law, it is unlikely that a
singular, overarching requirement in the Act could justify all three contract
contract termination provisions, a single state rationale is applied to all three termination
provisions alike rather than focusing on different justifications for each provision. Id.
25. Id. at 101 (referencing Charitable Organizations: Hearing on S. B. 1262 Before the S.
Judiciary Comm., 2003-04 Regular Session (Cal. 2004)).
26. Id.
27. Charitable Organizations: Hearing on S. B. 1262 Before the S. Judiciary Comm., 200304 Regular Session (Cal. 2004) (statement of Martha M. Escutia, Chair of S. Judiciary Comm.).
28. See cases cited supra note 16.
29. Riley v. Nat’l Fed’n of the Blind of N.C., 487 U.S. 781, 795, 799 (1988).
30. See id. at 784.
31. Id. at 795, 799.
32. Id. at 789.
33. Id. at 798.
34. Id.
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termination provisions in a judicial setting (and thus preclude the
requirement to proffer any specifically tailored state interests for each
provision).35 Additionally, merely looking at the State’s overarching requirement that a charity supervise a commercial fundraiser36 would
contradict the specific instances in the legislative record where an express
justification is put forth for at least one provision while none is mentioned
at all for the others.37
A. The “Cooling-Off” Termination Provision
The first termination provision mandated by the Act states, “The charitable organization has the right to cancel the contract without cost,
penalty, or liability for a period of 10 days following the date on which the
contract is executed.”38 This provision is commonly referred to as a
“cooling-off” period or “waiting period.”39 There is no reference in the Act
as to the purpose served by this waiting period provision,40 nor are there any
clues in the legislative history.41
Provisions of this type, however, are not uncommon and there are
many instances when a State requires inclusion of such provisions in
contracts between private parties or prior to obtaining certain services.42
For instance, California allows Cooling-Off periods in many different
contexts.43 Waiting periods also attach to more significant proceedings44 or
35. See, e.g., id. at 789-90 (describing the state’s additional justifications for the
regulations).
36. See Johnson, supra note 24, at 101.
37. Charitable Organizations: Hearing on S. B. 1262 Before the S. Judiciary Comm., 200304 Regular Session (Cal. 2004) (statement of Martha M. Escutia, Chair of S. Judiciary Comm.)
(providing express justification for the written termination provision, but no express justification
for any other termination provisions).
38. CAL. GOV’T CODE § 12599(i)(10) (West 2011).
39. See Eugene Volokh, Implementing the Right to Keep and Bear Arms for Self-Defense:
An Analytical Framework and a Research Agenda, 56 UCLA L. REV. 1443, 1538 (2009).
40. GOV’T § 12599.
41. See Charitable Organizations: Hearing on S. B. 1262 Before the S. Judiciary Comm.,
2003-04 Regular Session (Cal. 2004) (statement of Martha M. Escutia, Chair of S. Judiciary
Comm.).
42. See, e.g., Volokh, supra note 39 (discussing the various state laws requiring a coolingoff period for gun purchases).
43. See CAL. DEP’T OF CONSUMER AFFAIRS, CONSUMER TRANSACTIONS WITH STATUTORY
CONTRACT CANCELLATION RIGHTS (2010), available at http://www.dca.ca.gov/publications/
legal_guides/k-6.shtml.
44. E.g., JUDICIAL COUNCIL OF CAL., OPTIONS TO END MARRIAGE OR DOMESTIC
PARTNERSHIP (2012), available at http://www.courts.ca.gov/1224.htm (six month waiting period
for divorce).
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purchases.45 Not all such provisions directly implicate constitutional rights,
as may be the case here. However, waiting periods on firearms exist in the
majority of States, notwithstanding the obvious implications on Second
Amendment constitutional rights.46 With respect to firearms, the prevailing
state interests are to prevent impulsive gun acquisitions and to allow
sufficient time for the government to conduct background checks.47
Despite the arguable merits of requiring such waiting periods,48 their
constitutional legitimacy is not easily challenged.49 Similarly, waiting
periods on other constitutional rights are also common.50 In many of these
instances, the method of challenging otherwise constitutionally permissible
waiting periods takes the route of focusing on the length of the waiting
period.51 There are substantial limits on lengths of waiting periods,
depending on the type of constitutional right that is in question.52 Although
analyses of the effects of waiting periods on different constitutional rights
cannot and should not be interchangeable, there are some common threads.
First, on the whole, the imposition of a waiting period on a constitutional
right does not automatically imply unconstitutionality.53 Second, there is a
certain degree of flexibility within the judicial system regarding the
permissibility of the length of such waiting periods.54
The Cooling-Off provision in question here may not encompass the
same public safety concerns that accompany gun control laws. The period
here may be likened more to the required cooling-off period when a
consumer signs up for a credit card or a similar transaction. The difference
here, of course, is the free speech implications of allowing a charity to
cancel contracts with commercial fundraisers within ten days of formation.
The Act requires contracts to contain many detailed provisions regarding
rights and responsibilities by each party, requiring performance and
45. E.g., OFFICE OF THE ATTORNEY GEN. OF CAL., FIREARMS: FREQUENTLY ASKED
QUESTIONS, http://oag.ca.gov/firearms/pubfaqs (last visited Nov. 1, 2012) (ten day waiting period
for firearm purchases).
46. Volokh, supra note 39, at 1538.
47. Id. at 1538-39.
48. See id. at 1538-40.
49. Id. That is not to say that there is a shortage of such challenges. Especially in the
context of gun control laws, state efforts come under frequent attack. See, e.g., Complaint,
Silvester v. Harris, No. 1:11-cv-02137 (E.D. Cal. Dec. 23, 2011) (recently filed lawsuit against the
California Attorney General challenging the constitutionality of waiting periods for guns).
50. Volokh, supra note 39, at 1539-40.
51. Id. at 1540.
52. Id.
53. Id. at 1541-42.
54. Id.
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payment.55 Additionally, such contracts must be signed prior to each and
every solicitation campaign or event and cannot be substituted by pro forma
contracts that cover a general period of time.56 The required specificity and
per-event nature of such contracts imply that a considerable amount of
negotiation, preparation, and forethought is required in order for each party
to agree to the final terms. This would seem to satisfy possible government
interests in preventing impulsive contracting or in protecting charities from
unscrupulous dealers, and minimizes the need for a cooling-off period.
Given the prevalence of cooling-off periods, however, its application here
does not seem to entail much harm to speech protections any more than it
would to protections for the right to bear arms.57
B. The For-Cause Termination Provision
The Act’s For-Cause termination provision that must be included in
every contract between charities and commercial fundraisers states:
Following the initial 10-day cancellation period, a charitable organization
may terminate at any time upon written notice a contract with a
commercial fundraiser for charitable purposes or a fundraising counsel for
charitable purposes, without payment or compensation of any kind to the
commercial fundraiser or fundraising counsel, if the commercial fundraiser
or the fundraising counsel, or their agents, employees, or representatives
(1) make any material misrepresentations in the course of solicitations or
with respect to the charitable organization, (2) are found by the charitable
organization to have been convicted of a crime arising from the conduct of
a solicitation for a charitable organization or purpose that is punishable as
a felony or misdemeanor, or (3) otherwise conduct fundraising activities in
a manner that causes or could cause public disparagement of the charitable
58
organization’s good name or good will.
It is apparent from the legislative text that some form of cause is
required before charities are able to terminate their contracts with
commercial fundraisers.
Although such “good cause” termination provisions are not uncommon between private parties, they are less so in the
55. CAL. GOV’T CODE § 12599(i) (West 2011).
56. Id.
57. Note, however, that the ten days afforded by the Cooling-Off provision also appear to be
arbitrary and unsupported by any findings in the legislative history.
58. GOV’T § 12599(i)(12).
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context of state regulation of charitable activities.59 However, a comparable
approach by states does exist in the franchisor–franchisee field.60
Franchising as a form of retail distribution enjoyed a significant
amount of growth in the latter half of the twentieth century.61 One of the
consequences of this boom was a growing disparity in power between
franchisees and franchisors.62 Franchisors were frequently able to leverage
their superior bargaining positions to exact unfair contractual terms from
franchisees.63 Many States began enacting “good cause” requirements during the early 1970s in order to better protect franchisees.64 The
constitutionality of such legislation was subsequently challenged in the
contexts of due process rights as well as rights afforded by the Contracts
Clause.65
Although the success of these challenges varied,66 for the purposes of
this Comment and its focus on protected speech, the upshot may be that
challenges to the Act that are in the same vein as the franchising cases have
a limited but important implication. The courts have generally shown
deference to state legislative judgment when looking at “good cause” termination requirements in the franchising context.67 The For-Cause
provision in the Act in question here may be given similar deference. In
this regard, it is interesting how much importance that legislators attributed
to the “good-cause” requirement while the Act was being adopted.68 This
59. The IRS provides links to each state’s charity regulations on its website. See State Links
for Charity Registration and Regulations, INTERNAL REVENUE SERVICE, http://www.irs.gov/
Charities-&-Non-Profits/State-Links (last updated Aug. 8, 2012). Although most other states do
not have termination provisions comparable to California’s Nonprofit Integrity Act, Pennsylvania
has a similar ten day Cooling-Off provision. See Solicitation of Funds for Charitable Purposes
Act, 10 P.S. § 162.10(b) (2010). Similarly, New York allows for a fifteen day Cooling-Off
period. See N.Y. ATTORNEY GEN., HIRING A PROFESSIONAL FUNDRAISER: WHAT CHARITIES
NEED TO KNOW (2012), available at http://www.charitiesnys.com/pdfs/Hiring%20a%20
Professional%20Fundraiser.pdf. Also, Alabama prevents services from being performed until
fifteen days after the filing of a contract. See Charitable Fraud and Unlawful Charitable
Solicitation Act, 13A ALA. CODE § 9-71(i) (2008).
60. See , Gilbert R. Serota, Constitutional Restrictions to State “Good Cause” Restrictions
on Franchise Terminations, 74 COLUM. L. REV. 1487, 1487 (1974).
61. Id.
62. Id.
63. Id.
64. Id. at 1487, 1489.
65. Id. at 1494.
66. Id.
67. Id. at 1496.
68. Charitable Organizations: Hearing on S. B. 1262 Before the S. Judiciary Comm., 200304 Regular Session (Cal. 2004) (statement of Martha M. Escutia, Chair of S. Judiciary Comm.)
(“This is a very important safe harbor for charities that are victimized at some point in time by
unscrupulous professional fundraisers who are later found to have committed various
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provision was seen as a crucial “safe harbor” for charities.69 The State’s interest in protecting charities against “unscrupulous” commercial fundraisers is clear. The motivations by the State seem to revolve around
barring or preventing criminal elements from entering the fundraising
field.70 This could convincingly be argued as a sufficiently substantial state
interest. Additionally, the specific triggering events that would give rise to
a charity’s unilateral “good cause” termination seem to be narrowly tailored enough towards achieving the state objective.71 The greater significance of
the For-Cause provision here is its effect of siphoning off legitimacy from
the remaining termination provision.
II. JUDICIAL REVIEW OF CHARITY REGULATIONS & HISTORICAL USES OF
CONVENIENCE PROVISIONS
There are three United States Supreme Court cases that have had a
significant impact on State ability to regulate charities. These cases would
necessarily affect any analysis of the Convenience provision mandated by
the California Nonprofit Integrity Act.
The first significant case was Schaumburg v. Citizens for a Better
Environment.72 The regulation implicated in that case was an ordinance by
the Village of Schaumburg, Illinois. The ordinance in question was only
directed at charitable organizations and did not address commercial
fundraisers.73 Under this law, public solicitation by charities was only
allowed upon presenting proof that 75% of any proceeds would be used
directly for the charitable purpose of the organization.74
In deciding to classify the type of speech at issue, the Court rejected the
village’s argument that charitable solicitation should be classified as commercial speech because it fit the mold of typical business
misrepresentations or to have been convicted in other counties or states with crimes related to
charitable solicitations.”).
69. Id.
70. Id.
71. See CAL. GOV’T CODE § 12599(i)(12) (West 2011). The statute’s triggering events are
as follows: (1) making any material misrepresentations in the course of solicitations or with
respect to the charitable organization, (2) a finding by the charitable organization of a criminal
conviction arising from the conduct of a solicitation for a charitable organization or purpose that is
punishable as a felony or misdemeanor, or (3) otherwise conducting fundraising activities in a
manner that causes or could cause public disparagement of the charitable organization’s good
name or good will. Id.
72. 444 U.S. 620 (1980).
73. Schaumberg v. Citizens for a Better Environment, 444 U.S. 620, 622-24 (1980).
74. Id. at 622 (indicating that “charitable purpose” was defined in the law as excluding any
administrative costs or expenses associated with actually conducting the solicitation).
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propositions.75 Instead, the Court applied a stricter analysis; requiring the
ordinance to be narrowly tailored to achieve the government’s interest in the prevention of fraud.76 The ordinance failed to withstand this scrutiny
because the Court found that organizations might necessarily exceed the
25% cap on administrative and overhead expenses in order to effectively
conduct their solicitations.77 It would be untenable to assert that
organizations involved in research or advocacy, who may also hire paid
staff or contract with commercial solicitors, are aptly labeled ‘fraudulent’ merely because their expenses exceed the 25% cap.78 Finally, based on this
finding, the Court deemed that the government’s interest in preventing
fraud was only ‘peripherally promoted’ by the percentage requirement and could be sufficiently served by measures less harmful to First Amendment
interests.79
A subsequent case, Secretary of State of Maryland v. Joseph H.
Munson Co.,80 concerned a Maryland statute that directly regulated
contracts between charitable organizations and commercial fundraisers.
Specifically, the law forbade charitable organizations from paying or
agreeing to pay for expenses exceeding 25% of funds raised from a
fundraising activity.81 Although the government argued that the rule
amounted to mere ‘economic regulations,’ the Court expressly rejected this classification.82 It found that a direct restriction of fundraising activity was
75. Id. at 632 (“[S]olicitation is characteristically intertwined with informative and perhaps
persuasive speech seeking support for particular causes or for particular views on economic,
political, or social issues, and for the reality that without solicitation the flow of such information
and advocacy would likely cease. Canvassers in such contexts are necessarily more than solicitors
for money. Furthermore, because charitable solicitation does more than inform private economic
decisions and is not primarily concerned with providing information about the characteristics and
costs of goods and services, it has not been dealt with in our cases as a variety of purely
commercial speech.”).
76. Id. at 636-37.
77. Id.
78. Id. at 637 n.10 (“The costs incurred by charitable organizations conducting fundraising
campaigns can vary dramatically depending upon a wide range of variables, many of which are
beyond the control of the organization.”).
79. Id. at 637-38 (“Fraudulent misrepresentations can be prohibited and the penal laws used
to punish such conduct directly. Efforts to promote disclosure of the finances of charitable
organizations also may assist in preventing fraud by informing the public of the ways in which
their contributions will be employed.”) (citations omitted).
80. 467 U.S. 947 (1984).
81. Id. at 950. The Secretary of State could provide a waiver at his or her discretion. Id. at
962-63. This flexibility, however, was not sufficient to save the statute. Id.
82. Id. at 968-70.
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tantamount to “a direct restriction on protected First Amendment
activity.”83
Finally, in Riley, the Court held that a North Carolina statute was
unconstitutional and affirmed that, “[t]he solicitation of charitable contributions is protected speech.”84 The legislation in question required
that any fee retained by a commercial fundraiser be “reasonable.”85
Anything over 35% was automatically deemed unreasonable.86 Because
charitable solicitation is enveloped by First Amendment protections,87 the
regulations were scrutinized as burdens on speech rather than tested for
rationality.88 The Court’s reasoning was that financial regulations regarding charity fundraiser contracts are not incidental to protected speech when the
desired and intended effect of a statute is to encourage some forms of
solicitation while discouraging others.89 Of paramount significance was the
Court’s affirmation that speech by a commercial fundraiser enjoys the same protections as speech by a charitable organization.90 The receipt of
payment did not diminish this protection.91 In rejecting the state’s interests behind the legislation, the Court made clear that “the First Amendment does not permit the State to sacrifice speech for efficiency.”92
The Court’s constitutionality test requires the state interest in enacting the statute to be sufficiently substantial to justify a narrowly tailored
regulation.93
A. Termination-For-Convenience Provisions: Origins And Current Uses
The third mandatory contract termination provision in California’s Nonprofit Integrity Act provides that:
Following the initial 10-day cancellation period, the charitable
organization may terminate the contract by giving 30 days written
notice. . . . In the event of termination under this subdivision, the
charitable organization shall be liable for services provided by the
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
Id. at 967-68.
Riley v. Nat’l Fed’n of the Blind of N.C., 487 U.S. 781, 781 (1988).
Id. at 787.
Id. at 785.
Id. at 787-88.
Id. at 790.
Id. at 789 n.5.
Id. at 794 n.8.
Id.
Id. at 795.
Id. at 792-93.
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commercial fundraiser up to 30 days after the effective service of the
94
notice.
Although not specifically labeled as a termination-for-convenience
provision, the phrase is apt as applied to the Act’s grant of a unilateral ability to sever contracts with commercial fundraisers. As discussed below,
the evolution of termination-for-convenience provisions in private contract
mirrors, in both form and effect, the provision’s origins in federal military procurement contracts.95 The interpretation of private party terminationfor-convenience provisions by the courts has therefore looked to federal
case law for guidance, and in the process has been tailored to contract law
on the state level.96
The termination-for-convenience provision owes its origins to military
procurements that were no longer necessary upon the completion of the
Civil War.97 It was logical that the government should be able to terminate
contracts and settle with contractors, when discontinuing unnecessary
procurements was in the public interest.98 Early case law exhibits the
Supreme Court’s affirmation that the federal government should have the power to terminate and settle contracts when the “exigencies of war, or its termination, demanded.”99
This reading of the federal government’s power over its contracts,
referred to as the Corliss Doctrine, subsequently played a central role in
military procurements during World War I.100 A prime example of the
doctrine’s importance is the Urgent Deficiency Appropriation Act,101 which
Congress passed so that the President could modify and even cancel
contracts for the purchases of wartime materials for as long as six months
after a final peace treaty.102 Congress’ intent in passing this legislation was to allow the government to avoid unnecessary financial commitments on
stockpiles at war’s end as well as purchases of items that had become obsolete during wartime.103 It was also during this time of war that the
federal government began inserting termination-for-convenience provisions
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
CAL. GOV’T CODE § 12599(i)(11) (West 2011).
See Torncello v. United States, 681 F.2d 756, 764 (Cl. Ct. 1982).
See id. at 772.
Id. at 764.
Id.
Id.
Id.
Id.
Id. at 765.
Id. at 764-65.
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in its military procurement contracts.104 The provision, as it first appeared,
mirrored the legislation’s intent of shifting the financial burden onto contractors should wartime circumstances change.
The use of termination-for-convenience provisions resumed during
World War II.105 In contrast to the language of World War I provisions,
these newer ones dropped language referring to the type of wartime changes
that could necessitate a cancellation of a contract by the government.106 In
its stead, the new provisions provided that contracts could be cancelled “at any time.”107 This language, however, did not extend the force of the
cancellation power into peacetime or for reasons other than preventing
unnecessary financial burdens on the government.108
The use of termination-for-convenience provisions then took on a
much broader scope in the 1950s.109 No longer was their main purpose to
allow the government to accommodate changes in wartime circumstances,
but it began being applied to peacetime military procurements,110 with
civilian procurements following soon thereafter.111 Without the availability
of changes in wartime conditions as justification for inserting terminationfor-convenience provisions, courts have subsequently tussled over the types
of conditions that must be in place before the government is able to
unilaterally sever a procurement contract and shift the financial burden onto
the contractor.112 There is no question in the case law, however, regarding
the right of the government to make use of termination-for-convenience
104. Id. at 765 (“Termination—This contract being necessitated by a state of war now
existing, it is desirable and expedient that provision be made for its cancellation upon fair and
equitable terms in the event of the termination or limitation of the war, or if in anticipation thereof
or because of changes in methods of warfare the Chief of Ordnance should be of the opinion that
the completion of this contract has become unnecessary. It is therefore provided that any time,
and from time to time, during the currency of this contract, the Chief of Ordnance may for any of
the causes above stated notify the contractor that any part or parts of the articles then remaining
undelivered shall not be manufactured or delivered.”) (quoting Davis Sewing Machine Co. v.
United States, 60 Ct.Cl. 201, 203 (1925), aff’d 273 U.S. 324 (1927)).
105. Id. (“Termination for the convenience of the Government. (a) The Government may, at
any time, terminate this contract, in whole or in part by a notice in writing from the Contracting
Officer to the Contractor that the contract is terminated under this Article.”) (quoting 10 C.F.R. §
81.324).
106. Id.
107. Id.
108. Id.
109. Id.
110. Id.
111. Id.
112. Id. at 766. The issue remains largely unresolved, with approved justifications ranging
from a requirement of some sort of definable change in circumstances to allowing the government
to use the termination provision if it finds a better deal elsewhere.
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provisions.113 Government contracts continue to be unilaterally severable if
the government finds its continued performance of the contract clearly
inadvisable.114
Termination-for-convenience provisions later began being used in
contracts between private parties. In resolving disputes that turn on these
provisions, courts have generally upheld them when they were part of a
contract entered into by two sophisticated parties.115 Examination of
termination-for-convenience provisions by state courts, however, is less
frequent.116 Although the use of such provisions by private parties has
become prevalent, especially between contractors and subcontractors in the
construction field,117 there has been a struggle to reconcile the rationale
implicit in the federal government’s use of convenience provisions with
those used by private parties.118 In one instance, the Maryland Court of
Appeals refused to confer onto private parties the near “carte-blanche”119
right of contract termination held by the government.120 Private parties, the
court argued, do not have the same needs for employing convenience
provisions as do sovereign governments who must balance their
procurements with the public interest.121 Instead, the court in this case
applied common law requirements of good faith and fair dealing.122 More
importantly, it refused to read into the contract that the convenience
provision made it terminable on a whim.123 The fact that the contract in
question contained a specified duration excluded the possibility of making
113. Id.
114. Id.
115. See, e.g., Edo Corp. v. Beech Aircraft Corp., 911 F.2d 1447, 1453 (10th Cir. 1990)
(following method used in analyzing termination-for-convenience provisions in federal contracts
by requiring that two competent parties freely enter into a contract with mutual obligations, that
the terminating party give proper notice of its intent to terminate, and that it negotiates a damage
settlement). But see Harris Corp. v. Giesting & Associates, Inc., 297 F.3d 1270, 1273 (11th Cir.
2002) (finding error in a lower court’s determination that a termination-for-convenience provision
was ambiguous because it was followed by a separate section in the contract that provided a
termination for default, otherwise known as termination for cause).
116. See Thomas Marcey, Good Faith Termination: Where Does Questar Leave Us?,
Construction Briefings No. 2011-12, *4 (2011).
117. Id. at *3.
118. Id. at *1-2.
119. Questar Builders, Inc. v. CB Flooring, LLC, 978 A.2d 651, 669-70 (Md. 2009).
120. Id.
121. Id. at 669.
122. Id.
123. Id. at 671 (“To be sure, a right to terminate in the absence of the other party’s breach
does not equate necessarily with the right to terminate based on a whim. We shall not read into
the Subcontract such unfettered power, where the instrument itself provided that the agreement
was to ‘remain effective through [the] Duration OF THE PROJECT.’”).
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it severable at will.124 The court emphasized that the history of convenience
termination provisions as a risk-allocating tool also pointed against
exercising the termination right arbitrarily.125 Based on the foregoing
restrictions on exercising the provision, the court held that its use could
only be permitted upon a determination that continuing with the project,
“would subject [the severing party] potentially to a meaningful financial loss or some other difficulty in completing the project successfully.”126
The need for a potential ‘meaningful financial loss’ in exercising the convenience termination provisions in private party contracts mirrors the
original justification necessitating their inclusion in government military
procurement contracts. The fundamental understanding of termination-forconvenience provisions, where one party can unilaterally sever a contract,
has thus remained unaltered even as its scope has widened to include
private parties. Convenience provisions continue to function as risk
allocation tools when one party seeks to avoid financial loss by shifting that
potential loss onto the opposite party.
III. THE CONVENIENCE PROVISION IN THE NONPROFIT INTEGRITY ACT
This historical use of convenience provisions suggests a similar use of
the provision in the Act. The Convenience provision is a financial restraint
by the State on commercial fundraisers, intended to encourage the shifting
of financial risk by a charity.127 It allows a charity to bypass its contractual
obligations to a commercial fundraiser specifically because the State desires
it to do so in order to avoid financial loss.128
However, can the financial impact of this termination provision be
likened to the specific percentage-based financial regulations in the charity
cases decided by the Supreme Court? The specific percentage requirements
are incidental because the provision nonetheless is based on the State’s “desired and intended effect of . . . encourag[ing] some forms of solicitation
[while] discourag[ing] others.”129 Thus, by adding this provision, the State
124. Id. (“[I]f the Subcontract was terminable at will, the express term specifying the
agreement’s duration would be meaningless because the duration of an ‘at will’ arrangement is, by
definition, indefinite.”).
125. Id. at 672.
126. Id.
127. Charitable Organizations: Hearing on S. B. 1262 Before the S. Judiciary Comm., 200304 Regular Session (Cal. 2004) (statement of Martha M. Escutia, Chair of S. Judiciary Comm.).
128. Id. (“SB 1262 hopes to ensure that charities get a larger share of the funds that are
collected on their behalf by commercial fundraisers . . . .”).
129. Riley v. Nat’l Fed’n of the Blind of N.C., 487 U.S. 781, 790 n.5 (1988) (“The dissent
suggests that the state’s regulation is merely economic, having only an indirect effect on protected
speech. However, as we demonstrate, the burden here is hardly incidental to speech. Far from the
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has given the charity the power to do what the State admittedly knows it
cannot do on its own.130
By looking at the State’s express rationales for enacting this regulation, this Comment contends that legitimate rationales, if any, are nevertheless
not furthered by the Convenience provision in such a way that would
comport with the narrow tailoring requirement.
The four rationales of this legislation are: preventing fraud, protecting
charitable organizations, protecting donors, and ensuring that charities get a
larger share of funds.131
The desire to prevent fraudulent activity by commercial fundraisers
does not implicate any illegitimate government interests. The Supreme
Court has found that a state’s interest in preventing fraud is a sufficiently substantial interest that would justify a narrowly tailored regulation.132
However, the use of the financial risk-allocation tool inherent in the
convenience provision is not narrowly tailored enough to withstand judicial
scrutiny. There are two reasons for this conclusion.
First, government officials often equate low solicitation returns with
fraudulent activity.133 The Court has explained that this is a misplaced
belief because there are charities whose primary purpose in contracting with
commercial fundraisers is to “advocate, collect, or disseminate information.”134 When this is the case, there is a necessity to expend more
on fundraising costs than if maximum capital-raising were the primary
motivation.135
Thus, financial restraints imposed on charities and
fundraisers only “peripherally promote” fraud prevention.136
Second, a financial restraint is inadequate as a fraud prevention
measure when other means exist that are “less destructive of First Amendment interests.”137 For instance, in Schaumburg, this could be
accomplished by enforcing existing fraud laws and requiring charities to
file financial disclosure requirements.138 Both of these methods are already
completely incidental impact of, for example, a minimum wage law, a statute regulating how a
speaker may speak directly affects that speech.”).
130. Charitable Organizations: Hearing on S. B. 1262 Before the S. Judiciary Comm., 200304 Regular Session (Cal. 2004) (statement of Martha M. Escutia, Chair of S. Judiciary Comm.)
(discussing potential conflict with the holding from Riley).
131. Id.
132. Riley, 487 U.S. at 792.
133. Id. at 788.
134. Id.
135. Id.
136. Id.
137. Id.
138. Schaumberg v. Citizens for a Better Environment, 444 U.S. 620, 637-38 (1980).
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available to the State here.139 In addition, there is the added safeguard
provided by the For-Cause provision, which the State expressly views as “a very important safe harbor for charities that are victimized at some point in
time by unscrupulous commercial fundraisers.”140
The convenience provision in the Act is not a narrowly tailored
regulation owing to its misplaced justification that ensuring maximum
solicitation revenue is tantamount to fraud prevention and because there are
existing alternatives available that are equally effective, if not more so.
Turning to the remaining three rationales other than fraud prevention,
attempts at justifying the Convenience provision again come up short.
Whereas preventing fraud has been deemed a legitimate state interest,
protecting the charitable organization has been found to be just the
opposite. In Riley, the State framed the regulation on charities as one that
was required in order to protect those charities.141 The Court framed this
interest as a paternalistic protection that does not justify abridgment of First
Amendment speech protections.142 It rejected this paternalism because the
First Amendment, by its very purpose, “foreclose[s] public authority from
assuming a guardianship of the public mind through regulating . . .
speech.”143 This is a broad swipe at professed government wishes to protect
charities from themselves or others, especially given the bold statement that
it is “mandate[d]” by the First Amendment to presume that speakers are in the best position to know what they want to say and how to say it, rather
than the government.144 In relation to charities in particular, the Court ruled
out substitution of speaker and listener judgment by the government,
notwithstanding even the purest of motives.145
The desire by the State here to protect charitable organizations is thus
not a sufficiently substantial state interest upon which the convenience
provision could rest. This is especially so in light of the Court’s rebuke of misplaced assumptions equating low fundraising returns with fraudulent
behavior.146
The foregoing reasoning would similarly result in disqualifying the
state’s interest in protecting donors as a sufficiently substantial government
139. See Charitable Organizations: Hearing on S. B. 1262 Before the S. Judiciary Comm.,
2003-04 Regular Session (Cal. 2004) (statement of Martha M. Escutia, Chair of S. Judiciary
Comm.).
140. Id.
141. Riley v. Nat’l Fed’n of the Blind of N.C., 487 U.S. 781, 790 (1988).
142. Id.
143. Id. at 791.
144. Id. at 790-91.
145. Id. at 791.
146. See discussion supra notes 136-37 and accompanying text.
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interest. Even if this government interest were to withstand judicial
scrutiny, however, the Court in Riley described in an unrelated matter how
protecting donors could be equally if not more effectively accomplished by
enforcing disclosure laws.147 Here too, this option already exists for the
State.148
Turning finally to the last express rationale by the State in passing the
Act–ensuring that charities get a larger share of funds–the Court’s analysis of a state interest in ensuring that a fundraiser’s fee be “reasonable”149 is
illuminating. Following its admonition of the state’s interest in protecting charities, the Court went on to discuss why a charitable organization would
object to a financial restraint by the State on its dealings with a commercial
fundraiser.150 For instance, a charity may value long-term gain, including
non-cash benefits, more than short-term financial rewards in its quest to
disseminate information or advocate for a certain issue.151 In addition, such
financial restraints overlook the reality that in many cases small or
unpopular charities must expend more than the State would like, owing to
the difficulty in attracting donors.152
Illustrative of this reality are the agreements between the Irvine Police
Association and a commercial fundraiser to produce two events in 2010.153
The fundraiser returned 11% and 22% of total revenues to the
Association.154 The Association, however, was less concerned with these
percentages in light of its belief that the events were community
celebrations in addition to fundraisers.155 The events that were staged by
the fundraisers enabled the Association to promote its mission of
“support[ing] the great Irvine community.”156 This is the type of speech
that the court in Riley wanted to protect from the “impermissibly insensitive”157 breadth of financial restraints in charity regulations.
147. Riley, 487 U.S. at 799.
148. Charitable Organizations: Hearing on S. B. 1262 Before the S. Judiciary Comm., 200304 Regular Session (Cal. 2004) (statement of Martha M. Escutia, Chair of S. Judiciary Comm.).
149. Riley, 487 U.S. at 790.
150. Id. at 791-92.
151. Id. at 792.
152. Id. at 793.
153. Teri Sforza, Commercial Fundraisers Pocket Millions Meant for Charity, ORANGE
COUNTY REGISTER, Dec. 29, 2010, http://taxdollars.ocregister.com/2010/12/29/commercialfundraisers-pocket-millions-meant-for-charity-2/71280/.
154. Id.
155. Id.
156. Id.
157. Riley, 487 U.S. at 793.
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Further confirmation can be found in the annual commercial fundraiser
reports released by the California Office of the Attorney General.158 With
regard to the Irvine Police Association, the reports reveal that the
Association used the same commercial fundraiser during the prior two years
as well, with similar rates of return in each of those years.159 In fact, the
reports show that many organizations continued to contract with the same
commercial fundraisers year after year notwithstanding low returns. 160
These trends show a disconnect between the State’s goal of ensuring greater funds for charities and the actual solicitations that are used by many
charities in order to advocate for their causes.161
The Court in Riley also looked at how the State’s misplaced goal potentially impacted commercial fundraisers.162 The percentage-based
requirements in Riley burdened commercial fundraisers because of the
possibility that failure to achieve those results could lead to litigation,
should the fundraiser’s fee be deemed unreasonable.163 Here, commercial
fundraisers are likewise burdened with the possibility that a charity could
deem post-contractual financial circumstances unreasonable, such that a
charity would choose to terminate the contract for convenience.
In Riley, the Court stated that such burdens “necessarily chill speech in direct contravention of the First Amendment’s dictates.”164 The court
surmised that this uncertainty would encourage commercial fundraisers
from engaging in certain types of fundraising165 or from representing certain
charities who might need the most help.166 It could even drive fundraisers
out of the market.167 All of these possibilities would have a cumulative
158. OFFICE OF ATTORNEY GEN. OF CAL., SERVICES AND INFORMATION, http://oag.ca.gov/
charities/publications#cfrReports (last visited Nov. 10, 2011).
159. CAL. REGISTRY OF CHARITABLE TRUSTS, COMMERCIAL FUNDRAISERS REPORT 47
(Nov. 2011), available at ag.ca.gov/charities/publications/2010cfr/tables/table1.pdf; CAL.
REGISTRY OF CHARITABLE TRUSTS, COMMERCIAL FUNDRAISERS REPORT 54 (Dec. 2010),
available at ag.ca.gov/charities/publications/2009cfr/tables/table1.pdf; CAL. REGISTRY OF
CHARITABLE TRUSTS, COMMERCIAL FUNDRAISERS REPORT 50 (Nov. 2009), available at
ag.ca.gov/charities/publications/2008cfr/tables/table1.pdf.
160. See sources cited supra notes 157-58.
161. See Marisa Lagos, State Tracks Commercial Fundraising for Charities, S.F. CHRON.,
Dec. 25, 2011, http://www.sfgate.com/news/article/State-tracks-commercial-fundraising-forcharities-2424383.php#page-1 (“[T]here can be good reasons for a charity not to see every penny,
something fundraising officials at some charities stressed as well.”).
162. Riley, 487 U.S. at 794.
163. Id.
164. Id.
165. Id.
166. Id.
167. Id.
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negative effect of reducing the quantity of expression.168 The Court found
that this effect was a restriction on speech, with equal implications for the
speech of charitable organizations and commercial fundraisers alike.169
These eventualities are no less likely here given the difficulty in quantifying
the discouraging, or chilling, effects on speech.
In light of the effect of Riley on the rationales underpinning the
Nonprofit Integrity Act’s termination-for-convenience provision, the State
should do away with it and thus enable a fair and justifiable framework to
govern contracts between charitable organizations and commercial
fundraisers. The state’s legitimate interest in fraud prevention is adequately
served by other means. The remaining rationales of the Act, however, are
not sufficient to allow sacrificing the speech of either party in the name of
efficiency.
Avedis Koutoujian*
168. Id.
169. Id.
* I would like to thank Brent, Mom, Shant, Garen and my dear friends and mentors for
their wholehearted love and support. They felt my joys, trials, and successes the same as their
own. Additional thanks to Professor Fagundes and Professor Miller for providing their time and
insight regarding this topic. And my sincerest gratitude to my Notes & Comments Editors and
Southwestern Law Review for their camaraderie and teamwork.