Since 1996, the federal Legal Services Corporation (LSC), which funds legal services for the poor, has placed severe restrictions how its funds can be used, and extended these restrictions to private funds raised by legal services programs. In December 2001 four legal service programs in New York City, a private charity and pro bono attorney filed suit against the Legal Services Corporation challenging the constitutionality of restrictions. On December 20, 2004 the United States District Court for the Eastern District of New York struck down application of the rule imposing the restrictions on private funding of legal aid groups. The judge denied the plaintiffs' challenge to the restrictions on direct LSC funding. The case, which has broad implications for the nonprofit sector, is under appeal.

The 1996 LSC Rule: More Restrictive Than Federal Grant Rules

In 1996 Congress mandated that as long as any Legal Services Corporation funds support a civil legal aid program, that program must not engage in certain prohibited activities even if it does so using private money. For example, if a law office serving the poor accepts any LSC funds, it cannot lobby, comment on proposed regulations, advertise its services, bring class action suits, represent many categories of immigrants or incarcerated people (regardless of whether they have been convicted) and it cannot recover attorney’s fee awards.

The restrictions were imposed after the Legal Services program had been threatened with elimination. They are renewed annually through the appropriations process. During this same time the nonprofit community successfully stopped Rep. Ernest Istook’s (R-OK) efforts to impose similar advocacy restrictions on all nonprofits that receive federal funding. Current law does not restrict nonprofit federal grantees from using non-federal funds for lobbying or other forms of advocacy.

The first legal challenge to these restrictions was brought by the Legal Aid Society of Hawaii (LASH v. LSC), and several other LSC funded programs. LSC then revised its regulations in May 1998, to set up conditions under which private funds could theoretically be used. Known as the "program integrity regulation", the rule requires physical separation between LSC-funded recipients and any organizations that engage in these restricted activities. (Se 45 C.F.R. 1610.) After this change the U.S. Court of Appeals for the Ninth Circuit found that the new rule is not a violation of the First Amendment protection of free speech. The plaintiffs filed asked the Supreme Court to review the case, but their petition for certiorari was denied.

Ever since 1998 a legal services program that wishes to engage in restricted advocacy must set up a separate program, with separate physical facilities, separate executive directors, staff, and budget. Only the boards of directors may overlap. In practice, this wasteful and duplicative alternative is has proved impossible to implement. Of the approximately 200 legal services programs nationwide, only a handful have even attempted to set up such facilities, and those few that have done so have struggled.

Successful Challenge to LSC Rule on Challenges to Welfare Law

The next challenge to the LSC restrictions addressed a rule barring the lawyers from using federal funding to challenge welfare reform laws in the course of representing clients seeking welfare benefits. Legal Services Corporation v. Velazquez was filed in the U.S. District Court for the Eastern District of New York in 1997 on behalf of legal aid lawyers, clients and funders. In February 2001, the U.S. Supreme Court struck this rule down as an unconstitutional restriction

The Dobbins Case: Challenging More Restrictions on LSC Funds and Application of the Regulations to Non-LSC Funds

The current challenge addresses the constitutionality of restrictions prohibiting LSC grantees from using LSC or other funds for class action litigation, legislative advocacy and community education and the “program integrity regulation”, which requires physical separation between LSC-funded recipients and any organizations that engage in these restricted activities.

Dobbins v. Legal Services Corporation was filed in December 2001 on behalf of several legal aid programs, some of their funders and David Dobbins, an attorney in private practice who wished to volunteer his services pro bono to a legal aid program in bringing a class action. He was prevented from doing so because the program’s receipt of Legal Services Corporation funds means it is barred from collaborating with him. The plaintiffs are represented by the Brennan Center for Justice at NYU School of Law and by Kaye Scholer LLP. The defendants are the Legal Services Corporation (LSC) and the United States.

The Plaintiffs, including South Brooklyn Legal Services and Mobilization for Youth, based in Manhattan, sought an injunction barring enforcement of the rules. The South Brooklyn group, which gets about one-third of its budget from federal funds, said compliance with the rules would force it to spend 8% of its $4.3 million budget on separate facilities, reducing services by 400 clients a year. As a result, they have decided to stop filing class action lawsuits.

In June 2002 one hundred nonprofits and foundations joined forces in a friend of the court brief filed in federal District Court in support of the Dobbins plaintiffs. The amicus brief argues that the legal services restrictions unconstitutionally infringe on the freedom of charitable donors and nonprofits by limiting their ability to spend private funds and target their resources as they see fit. It explains how the "third sector's ability to innovate and to enhance democracy hinges on its ability to act in partnership with government, while remaining free of unnecessary, onerous restrictions." To illustrate how unnecessary these restrictions are the brief explains how the government can (and does) ensure that its funds are not spent on prohibited activities without a requirement of physical separation, pointing out that:

• "For example, since 1984, federal grant rules have prohibited federal grantees from using federal funds, either directly or indirectly, for a variety of advocacy related activities and costs. Neither physical nor organizational separation is required. Instead, the Office of Management and Budget's Circular A-122 defines unallowable costs and establishes procedures for allocating expenses…..There is, consequently, no justification for LSC to require legal services offices to do so much more…" (p. 23-24)

Partial Success, Case Goes to Appeals Court

On December 20, 2004, the U.S. District Court, ruling, struck down application of the 1996 rule imposing restrictions on Legal Services Corporation (LSC) funds on private funding of legal aid groups. The court issued a preliminary injunction barring LSC from enforcing its physical separation requirement against the plaintiffs. The court agreed with the plaintiffs that, as applied to them, the requirement violates the First Amendment to the Constitution. At the same time, the court granted the government’s motion to dismiss plaintiffs’ claims that restrictions barring LSC grantees from using their LSC funding to represent clients in class action litigation, seek attorneys’ fee awards, and tell clients about their rights and then offer to represent them violate the Constitution.

The court ruled that LSC violated the plaintiffs First Amendment rights by requiring too great a degree of physical separation between federally funded approved activities and privately funded restricted activities. The government had argued that shared facilities and staff create public confusion about what is LSC funded activity and what is not. The court said the government's concerns can be met by having legally separate programs with strict accounting for shared facilities and staff to ensure LSC funds are not spent on restricted activities, and having separate public areas for LSC and privately funded activities.

In his ruling, the judge explained that the constitutional rights at stake are important (he pointed out that private speech is at stake and being suppressed), the burdens imposed by LSC on the plaintiffs are substantial (he pointed out that programs are being forced to waste money on duplicate expenses), and the reasons given by the government for requiring physical separation are insufficient to justify the burdens (he pointed out that government funds will go only to the intended purposes, and that the programs can use appropriate signage to address the government concern that the public might accidentally conclude that the government was paying for some of the restricted activities).

The government is now appealing the ruling declaring the physical separation requirement unconstitutional before the U.S. Court of Appeals for the Second Circuit. The plaintiffs have cross-appealed, continuing their challenge to the restrictions on use of LSC funds. David Udell, director of the Brennan Center, said, "Congress needs to apply the same rules to legal services that apply to other non-profits, including faith-based non-profits. More than 40 members of Congress have spoken out against the legal services private money restriction, and now a court has declared the rule unconstitutional. Instead of continuing to defend this unconstitutional restriction, Congress should simply get rid of it."

Implications for the Nonprofit Sector

If the federal court upholds the LSC restrictions on the use of private funds provided to nonprofit legal services programs, the Dobbins case could open the door for an attempt by Congress to limit the use of private funding made to a wide variety of federal grants. This would impact all organizations supported with both government and private funds, including, among others, museums, colleges, universities, social services organizations, and public broadcasting stations.

Imagine the Brooklyn Museum of Art being forced by the City of New York to show "controversial" art only in a separate off-premises exhibition space. Imagine a noncommercial television station being forced by the Corporation for Public Broadcasting to air privately funded editorial messages on a physically separate and distinct channel. Imagine researchers being required to conduct sensitive privately financed research in isolation from their former lab partners whose work is supported with government funds.

The lawsuit challenges the restrictions on the ground that they interfere with the right of larger philanthropic community to allocate money as they see fit. This is not just about legal services or access to the courts — the Dobbins case seeks to protect the broad array of public-private partnerships. Public-private partnerships work, at least in part, because of the many advantages of collaboration. The challenged rule and the possibility that it will be upheld by the courts pose a significant threat to the viability of these partnerships in a wide variety of settings and across the full political spectrum. When government helps finance free expression—here it happens to be legal representation for the poor, but as the examples above demonstrate, it easily could be art exhibits or PBS —government often claims control over the content of what it finances. Whether government can rely on governmental funding as a proxy to control how nonprofits spend their money in these public-private partnerships is at the heart of what the case will decide.