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Value Village claims First Amendment right in Washington lawsuit

The attorney general has surveyed 400 customers to bolster claims that the Bellevue-based thrift chain is misleading donors and consumers.

The storefront of Value Village in Seattle on Dec. 13, 2018. (Photo by Dorothy Edwards/Crosscut)

If you wanted to know how much Value Village is giving to charity from your donations, look no further than a graphic circulated on social media by the state Attorney General's Office. It reveals that the fancy piece of furniture you gave to the store's donation center could be worth as little as 2 cents to the charity.

That reality is far from the image the Bellevue-based chain has promoted, according to a lawsuit filed by Washington state Attorney General Bob Ferguson. He accuses the nation’s largest for-profit thrift-store chain of misrepresenting to the public the charitable benefits of customer donations and purchases.

In response to the attorney general’s lawsuit, Value Village has claimed that what it tells its donors and customers is covered under the free-speech protections of the First Amendment, citing U.S. Supreme Court rulings that charitable fundraising is a form of free speech.

The exception: fraud or deception. And that’s what Washington state prosecutors are out to prove.

“Through its widespread and persistent use of misleading advertisements, Value Village created the deceptive net impression among consumers that donations of housewares and other goods benefited charities,” attorneys for the state said in the lawsuit. “… (F)or years, well-intentioned donors in Washington and elsewhere believed that their donations provided a financial benefit to charities, when in reality, they did not.”

The case against Value Village is currently being argued in King County Superior Court, though part of it is now on its way to the state Court of Appeals. It is there that state prosecutors will try to beat back the company’s appeal of a partial ruling from a King County Superior Court judge. That judge allowed the attorney general to pursue the state’s claims that the company deceived customers by soliciting for donations of all types of goods, but paying charities only for some of them. Value Village and its corporate parent TVI Inc. are asking the Court of Appeals to review the judge’s ruling in part on First Amendment grounds. A hearing is scheduled Jan. 25.

“TVI’s arrangement of purchasing donated used goods on a wholesale basis has been the industry standard for decades, and TVI’s model enables its charity partners to receive reliable and unrestricted funding without having to operate retail stores themselves,” attorneys representing Value Village and TVI argue in court pleadings.

The state’s claims are supported in part by a state survey of hundreds of shoppers, which concluded that most were surprised to learn that the store isn’t a nonprofit, but rather a for-profit business reselling donated goods at a hefty markup. According to the state, despite many consumers’ impressions to the contrary, none of the stores’ revenues go to charities, which instead receive a far more modest “bulk rate” payment from the company.

“They are selling a used chest of drawers for $80 and they are going to give an organization 2 cents,” one shopper complained in the survey. “That’s awful!” 

Accusing the company of “widespread deception,” the suit claims Value Village is misleading customers about its true status as a for-profit business and commercial fundraiser. It states: “Value Village generates over $1 billion in annual revenue by hiding its for-profit status behind a veneer of charitable goodwill.” 

But Value Village, its corporate parent Savers LLC and their ultimate corporate parent TVI, Inc., are following a legal path that commercial fundraisers have previously used to ward off demands by regulators for more transparency.

The retailer, which operates more than 300 stores worldwide and 20 in Washington state, flatly denies the state’s allegations through its attorney, James Grant of the prominent Seattle law firm Davis Wright Tremaine.

The company, Grant said in court documents, “pioneered the model of a for-profit company partnering with charities to collect and resell used goods, paying the charities to purchase the goods and thereby providing a revenue source, to help fund their missions to support the less fortunate.” 

To bolster that claim, the company says in court documents that it paid $13 million in 2016 to Washington charities and more than $120 million between 2006 and 2016.

In negotiations with the state prior to the suit, Value Village rejected the state’s demand that it post signs in stores specifying the amounts paid to charity partners for each type of donated good, such as clothing, books or furniture, citing a 1988 U.S. Supreme Court decision in a North Carolina case. It’s one of several cases in which the Supreme Court has ruled in favor of paid solicitors who argued that charitable fundraising is a form of free speech.

State lawyers argue that constitutional protections simply don’t apply to deceptive marketing. “There is overwhelming evidence of deception,” they say in court documents.

As part of the state’s commissioned survey, 75 percent of Washingtonians in a focus group erroneously believed Value Village was a nonprofit, while nine out of 10 greatly overestimated the amount of money the company actually gave to charitable organizations. State lawyers allege that Value Village hides it for-profit status. 

“This may be because Value Village’s aggressive marketing campaign misled consumers to believe that both their purchases and donations would benefit local charities,” Ferguson wrote in a column on his office’s website.  “In reality, no money from in-store purchases ever went to charities.” 

A similar case filed by the Minnesota Attorney General’s Office was settled for $1.8 million in 2014.  While Savers admitted no wrongdoing, it agreed to better inform consumers about its financial dealings with charities.

In Minnesota, Savers now reveals through its website the bulk rates it pays for various store items, and it reports to the state the percentage of the value that goes to charity. The company also has detailed how much it gives to charity to state regulators in a number of states, including California, Colorado, and Ohio.

No such disclosures are made in Washington.

Here, Savers reported after the company registered as a commercial fundraiser in 2015 – 28 years after the state Charities Division first asked it to, according to state records obtained by InvestigateWest – that 100 percent of the “value of contributions” went to its charity clients. In December 2018 the company filed paperwork with the Washington Secretary of State’s Office amending that figure to 99 percent

The Washington attorney general’s suit followed publication of InvestigateWest’s 10-part “Profiting from Thrift” series in 2015 that used government records obtained under the Public Record Act to detail how state officials had for years tried but failed to force Savers and Value Village to register as a “commercial fundraiser.”  That designation was designed to require Savers and Value Village to disclose to regulators what the retailer pays local “partner” charities such as the Northwest Center and Big Brothers Big Sisters, as well as how much it retains as a commercial fundraiser.

The InvestigateWest stories in 2015 and 2016 established that the proportion of Savers’ revenue paid to charities is likely between 8 percent and 17 percent, based on the company’s own statements, an examination of some of the company’s contracts with charities obtained by InvestigateWest and estimates of revenues by private business research companies. The state’s survey revealed that most consumers thought the percentage that the charity would get was at least 30 percent of the sales price. About 90 percent of those responding overestimated the amount the charity would get.

Value Village told the state that in 2015 the entire chain "changed its business model to ensure transparency and clarity to consumers.” The company also claimed in documents sent to the attorney general and obtained by InvestigateWest that it took those steps “voluntarily and separate from the (Attorney General’s) Office’s investigation.”

Value Village argues that the suit should be dismissed because it “voluntarily changed practices and charity partner contracts in 2015,” before the attorney general filed suit.

The attorney general argues that the company changed its business practices only after the State of Minnesota filed a lawsuit against the company in May 2015 and the State of Washington began investigating in December 2014.

“While Defendant would like this Court to believe that it reformed its practices, on its own accord, such an assertion strains credulity,” attorneys for the state assert in court pleadings.

A key allegation in the attorney general’s suit is that consumers are led to believe, through the company’s in-store ads and social media messages, that sales rung up in the store benefit charities when they do not because the charities get paid a set amount, no matter how much the items sell for. 

Other types of donations, like those to Seattle-area charities founded by former Seattle Mariners pitcher Jamie Moyer and former Washington Redskins quarterback Mark Rypien, provided less benefit to the charities than was advertised, or did not go to the organizations specified, according to the suit.

As the case plays out, kind-hearted Washingtonians continue to make donations at local thrift stores, dropping off used items at each Value Village store’s on-site Community Donation Center or feeding handy collection bins positioned outside.

The chain pays charities a bulk rate of anywhere from 6 cents to 44 cents per pound of clothing and other cloth items, but pays a tiny fraction of the value of noncloth items, such as furniture, jewelry and miscellaneous housewares – just 2 to 19 cents per item for furniture and large items, and between 2 and 16 cents per pound for other items, according to contracts on file with the state. Those noncloth items are known in the business as “hard goods.”

According to the state lawsuit, Value Village received millions of dollars’ worth of  donations of noncloth donations, but failed to provide a benefit to charities – until the company began putting a price on them in its contracts in late 2015 and early 2016.  That change happened only after the company “came under pressure from multiple state regulators, including Washington,” according to the attorney general.

In its answer to the attorney general's complaint, Value Village denies that it paid nothing for the noncloth items. Value Village says that its contracts with charities were written in such a way that the payments for clothing and other cloth items were meant to compensate the charities for the other items, the so-called “hard goods.” In fact, the charities that brought in more “hard goods” got a higher rate, the company claims, although the judge raised questions about whether that was uniformly true.

Another way Value Village is deceptive, the state alleges, is its claim in Washington secretary of state filings that it gives “100 percent” of the value of donated goods to charity.

The company says it reports disbursing 100 percent of the value because it “does not retain any portion of the agreed value of the goods purchased [in] bulk.” Unlike other fundraisers, it doesn’t disclose the portion it retains, charity officials point out. (By contrast, for example, a similar company, Thrift City Stores Inc., reports giving 20 percent to charity.)

The case is set to be heard in May by King County Superior Court Judge Samuel Chung, who initially sided with Value Village on the issue of whether the company was falsely advertising that all donated merchandise benefited charities. He concluded that “the cloth rate was intended to provide compensation for the hard goods the charity partners provided as well.”

That view was supported by four of Value Village’s participating charities in Washington. One was Sight Connection, which helps people with vision loss. Sight Connection director Shannon Grady Martsolf said her organization “never had any misunderstanding” that Value Village included hard goods in its per-pound payments for bulk donated merchandise.

Nevertheless, weeks later, in an Oct. 10 ruling, Judge Chung reversed his earlier finding, ruling in favor of the state to reassert its claim that the company had failed to pay charities for virtually all merchandise that wasn’t cloth, or “soft goods.”

Judge Chung's reversal came after Assistant Attorney General John Nelson provided evidence of internal billing ledgers and internal emails revealing that charities were not paid for the noncloth portion of donated goods. Nelson produced ledgers that clearly showed $00.00 being paid for “hard goods,” the judge concluded. As a result, the judge allowed the state to continue pressing its claim that Value Village has been misleading shoppers.

Customers dismayed by profit-taking

The state’s case against Value Village hinges to a large degree on public perception based on what the state calls the overall "net impression" created by the retailer’s marketing, such as advertising, social media, charity appeals, logos and tax receipts designed to make it appear like a nonprofit instead of a for-profit company.

Nelson, the assistant attorney general, said in a hearing in September that the state isn’t challenging the company’s business model but rather its “depiction of its business model, and its depiction of its relationship with its charity partners to the public.” 

Grant, Value Village’s lawyer, countered in the same September hearing that there’s not “one bit of evidence of consumers complaining” about the store’s arrangements with charities.

TVI denies the state’s allegation that it misrepresents itself as a charity. The company also says that its charities state that they have not received complaints from people about their relationships with Value Village.  It also says the company has not represented that charities are paid part of the proceeds of its sales.

“The State’s claims are that for a decade ….TVI was making misrepresentations … and for a decade [involving] …. what must be millions of different customers and donors, the state has not shown one [consumer] who was deceived by that practice or filed any kind of complaint,” Grant argued at the hearing. 

Nelson strongly disagreed. He told the judge that many of the 400 “ordinary consumers” who responded to the survey commissioned by the state were “outraged when they were told the true amounts … that the charities received.”

When asked, as part of the survey, how they felt about the actual rates paid to charities, many consumers expressed shock and disgust. Some said they would no longer shop at Value Village.

“Wow! No! I can't believe this,” said one shopper. “I will never be there again.”

In the past, some states either required registered charities to spend a certain amount of the money they raise on programs or imposed limits on how much goes to paid fundraisers. But during the past two decades, such demands have been struck down as unconstitutional by the U.S. Supreme Court, with several cases citing fundraising as part of charities’ First Amendment free-speech protections.

There are limits to that right, however, the high court has decided.

In 2003, in an Illinois case, justices unanimously upheld a fraud suit filed by the Illinois attorney general against two telemarketing firms that raised more than $7 million for Vietnam veterans while keeping $6 million for expenses, despite claims that 90 percent of the money raised would go to veteran’s organizations. Writing for the court, Justice Ruth Bader Ginsburg said “states may maintain fraud actions when fundraisers make false or misleading representations designed to deceive donors about how their donations will be used.”

Today, about a dozen states require fundraisers to disclose certain aspects, including ratios of fundraising.

Value Village has shed no light on its overall revenues and profit margins. The company instead refers interested consumers to copies of individual contracts with charities it has posted on the Washington Secretary of State’s Office website. (see box below).

However, those contracts reveal only the per pound rate paid to each charity, rather than what percentage those donations represent in relation to Value Village's total revenues. There is no way for consumers to know how much their donations benefit the charities from the disclosures made available to them. 

The state's lawsuit makes this point several times, stating that "Washington donors have expressed frustration when they ask for this information at Value Village stores, but can't get an answer." The complaint quotes several consumers, including one upset that "not a single store or shift manager ... could tell me the actual percentage of income or profit or anything about what they actually give to charity." The lawsuit quotes another donor: "the deception apparent in Value Village’s misrepresentation that it donates 100 percent of the value of donated items to its charity partners." That must be a lie, the donor is quoted saying, "because Value Village owners must pay themselves something."

Under court rulings, donors are entitled to know how much of their donation is going to charity – but the donor has to ask.

“TVI is in full compliance with the disclosure requirements of (state law),” said a written statement released by TVI spokeswoman Sara Gaugl in response to an InvestigateWest question on this point.  “TVI’s contracts with charities are publicly available from the Washington Secretary of State’s Office.”

Regulatory filings in Minnesota offer clues as to the size of the chain’s cut. Savers’ latest filings there, for instance, reveal that the company took 97 percent of the value of donations received on behalf of that state’s Big Brothers Big Sisters organization.

Company brochures and ads falsely gave the impression that every store purchase helps local nonprofits, the Washington attorney general charges. The chain consistently said “Value Village pays local nonprofits every time you donate,” which was not true, the state argues in its pleadings.

Value Village recently started paying charities a small amount – “several cents per piece of furniture or household item” – on donated hard goods. That’s far less value than what donors and consumers would expect for such items, the state says.

In court pleadings, the state claims that Value Village continues to be deceptive on social media. The suit cites the company’s response on Facebook to a person asking about Value Village’s relationship with charities: “We’re proud to partner with local nonprofits across the US, Canada and Australia and help support them through the donations and sales that we get from our stores.” 

Company attorneys object to the survey, calling it misleading and inaccurate. The lawyers, for instance, say people were asked if they “donate to Value Village” when it would have been more accurate to ask if they “donate to a charity at Value Village.” They objected to the survey’s selection of a donated dresser with a price tag of $79.99 when most of the store's items are "priced at $10 or lower."

 Value Village denies that it ever claimed that a portion of what customers pay for goods sold in its stores would be contributed to charities. Nevertheless, Value Village’s attorney Grant has asserted that it’s “entirely true and not misleading” to say that shopping in the stores helps the charities. 

By supporting Value Village, the attorney said, consumers are allowing the chain to continue collecting and reselling donated goods, keeping funds flowing to organizations serving the blind, disabled and needy.

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The attorney general accuses Value Village of deceptive advertising in its use of signage, as well as social media. (Photo by Dorothy Edwards/Crosscut)

Calls for greater transparency

The company gets its goods in a number of ways.

Some items come via on-site, manned donation centers and bins at stores, with donors usually getting a coupon toward a future purchase and a tax receipt.

Other items are collected and delivered to the company by charities. Value Village also appeals directly to potential donors with phone calls and mailers, Federal Trade Commission documents obtained by InvestigateWest show.

Tony Shumpert, the company’s vice president for recycling, says in a sworn statement in the lawsuit that Value Village does not pay charities a portion of the sale price. Instead it helps the charities acquire the goods and pays them a bulk rate, “akin to buying products at wholesale and then selling a portion of the goods at retail.”

The result, he said, is to give the charities an unrestricted revenue source without having to operate brick-and-mortar stores on their own. 

One charity that receives funding from Value Village is ARC of Washington State, which provides help for people with developmental and intellectual disabilities and their families. ARC director Sue Elliot said in a statement submitted In the lawsuit that her organization had considered the possibility of operating its own thrift stores but decided against that he idea. 

 "We could not match the revenues provided by TVI, given its efficiencies and scale of operations, and setting up an operation would burden the organization with administrative and operational demands, financial risk, and costs,” she said, adding that the group’s alliance with Value Village had enabled it “to grow several times over.”

Shumpert pointed out that Value Village also benefits Washington by employing 1,600 people and generating about $9 million per year in state and local taxes.

Unlike Value Village’s corporate parent, a private equity company, nonprofit thrift stores such as those run by the Salvation Army and St. Vincent de Paul are required to disclose their financial arrangements. Under federal rules, such charities must register as tax-exempt organizations and file a federal income tax 990 form publicly detailing much about their finances

Washington’s suit against Value Village and Savers came two years after the company’s settlement of Minnesota Attorney General Lori Swanson’s suit on grounds similar to those Ferguson has staked out. “Savers has seriously misled the public about the extent to which donated clothes and merchandise benefit the for-profit retailer vs. the charity,” Swanson said in a news release.

A month after the Minnesota suit was filed, Savers settled. The company agreed to pay $1.8 million to its six Minnesota charity partners and better inform Minnesotans about its financial relationship with the charities. 

Ferguson is seeking the same kind of transparency in Washington. He originally wanted Value Village to pay a $5 million fine, then demanded $3.2 million when the lawsuit was filed. That number was based on 30,130 violations of the state’s consumer-protection law at each of the company’s Washington stores.

Value Village balked, ultimately offering $700,000 -- $200,000 to pay the attorney general’s costs and a $500,000 donation to a Washington State University research program on recycling waste from clothing, sheets and other cotton consumer items made from cotton.

If Value Village offered information in Washington similar to its disclosures in Minnesota, the state says, donors would be able to make smarter decisions on where to give -- and help level the fundraising playing field. Under such a system, nonprofits that give a higher percentage of sales proceeds to charity may be viewed as a more attractive option, the state says.

Value Village argued to the state Court of Appeals court late last month that the King County judge allowed “inadmissible evidence” – internal company documents intended by the state to show that nothing was being paid to charities for “hard goods.”  Value Village also argued that the trial court ignored the “heightened burden" under the First Amendment that requires the state to prove that consumers were harmed by their business practices.  The appeals court has yet to rule.

Value Village tried to stave off the state suit by suing the state in federal court in December 2017. The company alleged that the state’s efforts to regulate its marketing was infringing on its free-speech rights. Value Village lost when U.S. District Judge Ricardo S. Martinez ruled in April 2018, that “an important state interest is implicated here, given the large consumer public that interacts with [Value Village] stores.”

There are no indications that any settlement talks have taken place since before the suit was filed, when the state rejected a $200,000 offer from Value Village and was seeking $5 million in fines. Both sides have declined to discuss their legal strategy with InvestigateWest.

Would-be donors growing wary

Charity watchdogs are keeping a close eye on the case.

The Better Business Bureau is currently flagging Value Village for “government actions against the business.” A red “ALERT” describes the court case and provides the company’s response.

Bennett Weiner, CEO of the bureau’s Wise Giving Alliance, urges prospective donors to ask this question when giving to thrift stores: “How much will the charity receive from my donation?”

“If you don’t get a straight answer,” he advises, “move on.”

Some apparently have.

In the wake of the lawsuit and news reports, several nonprofit thrift stores in the Seattle area report having more customers requesting information on how their donations are used.

“People value their stuff and don’t want it not going to a good cause,” said Daicia Mestas, manager of Lifelong Thrift on Capitol Hill, which raises funds for a community health organization.

At a Kenmore thrift benefiting St. Vincent de Paul, donation attendant Micki McGuire says contributions have surged in recent months. So has the number of unusually detailed questions.

“People want to know what we do with the money,” she said. “I tell them 90 cents on the dollar goes to our mission.”

Dominic Campese and Joy Payton-Stevens contributed to this report, which was edited by Robert McClure and William Miller.

Correction: This story has been corrected since its initial publication to clarify that Judge Samuel Chung’s ruling in favor of the state was procedural rather than substantive and to eliminate any reference to the First Amendment in Judge Ricardo Martinez’s ruling.

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Value Village claims First Amendment right in Washington lawsuit

About the Authors & Contributors

Francesca Lyman

Francesca Lyman is a Seattle-based journalist and author of The Greenhouse Trap: What We're Doing to the Atmosphere and How We Can Slow Global Warming.