Internet has driven extraordinary growth in organizational advocacy and fundraising during the past decade. The most recent industry statistics show that Internet donations increased by more than 40 percent during the last quarter of 2005, when factoring out gifts made for disaster relief during 2004.

Although online gifts still account for only a small percentage of most charities' overall revenue, fundraising experts predict that the Internet will eventually become the primary vehicle for small gift donations.

The explosive growth in Internet transactions has also increased government scrutiny hunting for Internet crimes. According to the Feb. 10, 2006 edition of The Wall Street Journal, the Federal Bureau of Investigation (FBI) has made Internet fraud the agency's third-highest priority, after counter-terrorism and counter-intelligence.

Charity regulators have focused on Internet fundraising and revenue generation, thus it has become imperative that all those participating in these online activities take note of how the potential regulatory environment may affect their efforts to effectively use this "first of its kind" global medium.

Although existing laws are, to a large extent, sufficient to regulate Internet activities, a key question that continues to challenge regulators is how federal and state courts and regulatory agencies can obtain jurisdiction over those entities participating in online activities.

There are two key jurisdictional questions that affect the work of nonprofits online. The first issue is whether a court has the power to adjudicate claims against an organization for its conduct on the Web. For example, can a homeless shelter in Atlanta, with no ties to Illinois other than maintaining a Web site that is accessible by Illinois residents, be brought before a state court in Illinois for allegedly posting fraudulent information on the charity's Web site?

The second jurisdictional issue involves the extent of statutory authority given to state or federal regulatory agencies. Can the Illinois attorney general require the homeless shelter in Atlanta to register in Illinois simply because its Web site is accessible to Illinois residents?

The question of personal jurisdiction is as critical to nonprofits that engage in Internet fundraising and revenue-generating activities as it is to for-profits. If merely setting up a Web site that is available nationwide triggers registration and reporting requirements in every jurisdiction in the United States that imposes them, this would create an insurmountable burden for the vast majority of charities that are small community-based organizations.

Although the philanthropic community recognizes the need for a reasonable level of regulatory oversight, any regulatory plan should take a balanced approach that will not discourage the development and use of this medium to expand the charitable activities of nonprofits large and small.

For a state to obtain jurisdiction to impose its regulations upon online solicitors, it must comply with the constitutional standards set forth in the seminal U.S., Supreme Court case, International Shoe v. Washington. The constitutional standard of "minimum contacts" sets forth the minimum amount of contacts necessary for a state to exercise jurisdiction over a person or entity. To meet the constitutional minimum contact standard: (1) the defendant must purposefully avail himself of the privilege of doing business in the state; (2) the cause of action or regulation must relate to the defendant's activities with the state; and (3) the exercise of jurisdiction must be reasonable in light of the various interests at stake.

The "minimum contacts" standard established by the U.S. Supreme Court provides the outer reaches of jurisdiction over a person or entity. However. each state is further limited by its own law. known as a "long-arm statute," to determine whether it can obtain jurisdiction of the Internet conduct of out-of-state persons or entities. A state statute may define its jurisdiction more narrowly, thereby limiting the court's ability to reach certain entities whose actions may have satisfied the constitutional minimum established by the U.S. Supreme Court.

For example, New York's long-arm statute provides for narrower jurisdiction than the constitutional limit. In Bensusan Restaurant Corporation vs. Richard B. King, individually and d/b/a The Blue Note, the so-called Blue Note case, the U.S. Court of Appeals for the Second Circuit declined to exercise jurisdiction over a jazz club in Missouri when the only contact with New York was that its Web site was accessible in the state. The Appeals

Court held that the Missouri Blue Note's maintenance of a Web site accessible to New York residents did not create the level of contacts required to exercise jurisdiction under New York's long-arm statute.

The exact opposite result was found that same year in Connecticut under almost identical facts. In Inset Systems, Inc. v. Instruction Set, Inc., the U.S. District Court for the District of Connecticut found that the state could constitutionally assert jurisdiction over the Massachusetts Web site host because "advertising via the Internet" both satisfied the Connecticut long-arm statute covering solicitation of business in-state and the Supreme Court's constitutional minimum contacts standard.

The Inset court's ruling represents the outer limits of jurisdiction over Internet activities and allows a passive Web site to create sufficient contacts for the state to obtain jurisdiction over the Web site owner. Several states have taken a similar expansive view of personal jurisdiction, including Virginia, Missouri and Minnesota.

In 1997, the federal district court in Pennsylvania developed a sliding scale approach for determining whether the court has jurisdiction over Internet activities. In the Zippo Mfg. Co. v. Zippo Dot Com, Inc., (the Zippo case) the U.S. District Court for the Western District of Pennsylvania ruled that "the likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet." It then posited a scale that places Web sites on a continuum, from those that actively solicit and do business to those that passively convey information. Between these two ends of the spectrum lie Web sites where "a user can exchange information with the host computer ... [and] the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the Web site."

The vast majority of states have adopted Pennsylvania's sliding scale approach including California, Indiana, Maryland, Illinois and Texas.

What does this mean for charities using the Internet? During the late 1990s, as charities increasingly began conducting charitable solicitations over the Internet, state regulators sought to regulate this method just as they did other forms of solicitation. However, they faced jurisdictional obstacles in applying their charitable solicitation schemes to entities whose only in-state presence was through the Internet. Discussions among state regulators culminated in the creation of the Charleston Principles, a set of non-binding guidelines that seek to provide an analytical framework for determining whether a state can impose its regulations on an entity engaged in Internet charitable solicitations.

State regulation of Internet fundraising

Of all the legal issues facing nonprofits that engage in Internet communications, charitable solicitation regulation is the area most significantly affected. Charitable solicitation is primarily regulated at the state level. There are approximately 45 states that have statutory systems dealing with solicitation activity within their state. These statutory systems typically include registration, filing and disclosure requirements. They are imposed on nonprofits, professional solicitors, professional fundraising counsel and commercial co-venturers. While a certain level of regulation can be beneficial to increase donor confidence and fight fraudulent solicitations, the inconsistency in reporting and disclosure requirements among the states creates a significant burden for nonprofits, in particular for smaller charities.

The First Amendment

The government's interests in regulating charitable solicitation are to ensure that the funds raised are in fact used for charitable purposes, to protect citizens from fraudulent solicitations, and to protect the privacy interests of prospective donors. Charities, on the other hand, typically engage in solicitation to both disseminate information about, and seek funding for, their charitable causes. The U.S. Supreme Court has noted that charitable solicitations are inextricably intertwined with informative and persuasive speech, which is protected by the First Amendment.

During the 1980s, when the interests of the government and charities clashed, the U.S. Supreme Court resolved the conflicts in a trilogy of cases, striking down state regulations that limited the percentage of fees that charities could pay fundraisers and which required fundraisers to make pre-solicitation disclosures regarding prior fundraising costs. Although these First Amendment issues are central to the development of reasonable fundraising regulation, they have not yet played a prominent role in the development of Internet fundraising regulation.

The Charleston Principles (and its progeny?)

In October, 1999, members of the National Association of State Charities Officials (NASCO) and the National Association of Attorneys General (NAAG) met in Charleston, S.C., and agreed to adopt a set of principles to clarify the applicability of states' charitable solicitation regulations to Internet fundraising. In March 2001, the "Charleston Principles" were pubfished as advisory guidelines for state charity officials.

The Charleston Principles assert that existing registration statutes, of their own terms, encompass and apply to Internet solicitation. The Charleston Principles help bridge the application of existing laws to this new frontier by defining and limiting the circumstances in which a nonprofit solicitor must register with a given state based on their Internet contacts with the state.

According to the Principles, state registration and reporting regimes apply only to: (1) entities domiciled within the state; (2) out-of-state entities whose non-Internet activities would require registration in the state (e.g., direct mail or telephone solicitation into the state); and (3) out-of-state entities that solicit through an interactive or non-interactive Web site and either specifically target persons physically located in the state, or receive contributions from the state on a repeated and ongoing, or substantial basis through or in response to the Web site solicitation.

The jurisdictional analysis offered by the principles is similar to the Zippo sliding scale approach, but adds a marker to the scale that would explicitly require registration for passive Web sites that request only offline donations when certain additional ties exist (i.e., targeting the state's residents or receiving contributions from the state on a repeated and ongoing, or substantial basis).

The requirement that an out-of-state entity specifically target persons physically located in the state raises questions when applied to emails. A person will be "specifically targeted" if the sender knows or reasonably should know the recipient is physically located in the state. The "knows or reasonably should know" standard is difficult to apply to an email sent to a state resident because email addresses do not generally include geographic identifiers. The Principles suggest that there are ways an entity reasonably should know where an email is being directed, including email addresses linked to a prior credit card donation; other prior forms of communication; Web site information tracking, and cross-references to external databases.

One of the problematic standards contained in the Principles that would allow the states to acquire jurisdiction involves an organization that receives contributions from a state on a "repeated and ongoing" or "substantial" basis. The terms "repeated and ongoing" (referring to the number of separate contributions) and "substantial" (referring to the total dollar amount of contributions) lack any definite numbers that nonprofits can use to determine whether they need to register and comply with a state's regulations. The Annotations to the Principles recognize that for the Principles to be useful, "states must draw a bright line, even if that line is somewhat arbitrary and even if it is not the same in all states." Concrete guidance in this regard is especially important for out-of-state charities using non-interactive Web sites whose contacts with the state may be minimal at best.

The Principles would generally not require registration of service providers that solely provide administrative, supportive or technical services. However, if their services include the kinds of activities that characterize a fundraising counsel, commercial co-venturer or professional solicitor, they would be required to register. In contrast, mere technical services in processing online transactions, similar to a bank processing checks or credit card transactions received in response to a fundraising campaign, would not trigger registration.

To date, no state has explicitly adopted the Charleston Principles as its framework for determining whether a nonprofit whose only contact with the state is via the Internet must register. The only state that has provided any public, written guidance on Internet solicitation is Arkansas. In a written opinion published in August, 2005, Attorney General Mike Beebe cited the Zippo sliding scale approach as the standard that would be applied to determine whether a nonprofit must register when conducting Internet solicitations in the state.

Despite the lack of specific state policies for regulating Internet solicitations, state regulatory agencies have nevertheless been attempting to impose their existing registration requirements on charities and their vendors for Internet solicitation activities, sometimes under circumstances where the entity in question has little, if any, involvement with the actual online solicitation.

Registration issues often arise when a charity files its vendor's contract with the state. Technical or ambiguous contractual language may cause state regulators to presume that the vendor's involvement with solicitation activities requires registration. Further complicating matters is the fact that states do not cite the Charleston Principles when seeking to enforce their regulations.

Instead, states cite their existing solicitation laws, which use broad language that does not provide clear guidance as to whether the services provided by these vendors trigger the registration requirements. Even when states do cite the Charleston Principles, they are not strictly applied as controlling law, but rather as suggestions for determining whether an entity must comply with their state regulations. Because of this lack of certainty in guidance, charities and their vendors arc left to figure out how to fit their square pegs into round holes.

Seth Perlman is a senior partner at Perlman and Perlman. He is author of Fund-Raising Regulation. His email is seth@perlmanandperlmancom Karen I. Chang is an associate with the firm. Her email is karen@perlmanandperman.com

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