On February 12, 2003, a separation-of-church-and-state advocacy group and state prisoners sued the State of Iowa, Iowa Department of Corrections (DOC) officials, and certain vendors ("InnerChange" and "Prison Fellowship"), claiming violations of the First Amendment's Establishment Clause and the equivalent provision of the Iowa state constitution. The plaintiffs challenged a contract that provided for payments to vendor organizations for pre-release rehabilitation services at the DOC's Newton facility through the organizations' "values-based" program, based on Evangelical Christianity. The claimants, under 42 U.S.C. § 1983, sought declarative and injunctive relief, as well as nominal damages. The plaintiffs filed suit in the U.S. District Court for the Southern District of Iowa by retained and in-house counsel for the advocacy group, Americans United for Separation of Church and State.

The plaintiffs filed an amended complaint, making the same basic allegations, on August 8, 2003, with a second amended complaint filed on August 21, 2003, after two similar pending cases (Ashburn v. Mapes, Case No. 4:02-cv-90447, and Shukr v. Kautzky, , Case No. 4:03-cv-90101) in the same federal district court were consolidated with this one. The amendments added relatives of the prisoners as plaintiffs and stated that money deposits these relatives would otherwise make to the prisoners' telephone accounts had been used and would, without the requested relief, be used by the state to help fund the conduct allegedly violating the Establishment Clause. Additionally, these plaintiffs objected to the state's using funds from a tobacco litigation settlement to fund the objectionable conduct.

The amended complaints set out numerous specific practices in which Christian teachings and beliefs were explicitly a part of the rehabilitative services, asserted that participation in the program was pre-conditioned upon acceptance of Christian teachings, and noted that parole recommendations were made with input from the operators of the overtly Christian rehabilitative program. The plaintiffs sought a complete prohibition on state funding of this religious-based program or, alternatively, establishment of equivalently funded rehabilitation programs available to prisoners not participating in the InnerChange program. The plaintiffs also sought repayment to the state of taxpayer funds already paid to the vendors, as well as money taken from prisoner telephone accounts to help fund the program. The complaint also set out the desire to return some plaintiffs who had been transferred in order to make space for the program to prior housing assignments in the DOC system.

Discovery and depositions ensued. On April 29, 2005, District Judge Robert W. Pratt's unpublished order denied three pending cross-motions for summary judgment. The judge found that disputed factual issues existed, including what process the state used to select values-based pre-release rehabilitation programs, the voluntary nature or compulsive nature of this particular program, and whether the program was pervasively sectarian. Numerous individual defendants were dismissed from the case by stipulation between the parties on July 27, 2005, in light of the plaintiffs dismissing their claims for nominal damages. The case proceeded to a bench trial, but not without the court first denying pretrial motions the parties had filed seeking to limit introduction of certain evidence or to require certain statements made in prior pleadings to be viewed as admissions. 395 F. Supp. 2d 805 (S.D. Iowa 2005).

After the trial, the District Court's June 2, 2006, order by Judge Pratt held that: (1) the service providers were operating under color of state law, for purposes of amenability to suit under § 1983; (2) the program was pervasively sectarian; (3) the program did not involve payments made at direction of prisoners, which would not violate Establishment Clause; (4) the program fostered excessive entanglement of government with religion; (5) the contract violated the federal and state constitutions' Establishment Clauses; and (6) the service providers (InnerChange and Prison Fellowship) were enjoined from further contract performance, would not be paid amounts due under contract for services already rendered, and would be forced to return to the state all payments received since the inception of the contract in 1999. The defendants were not required to pay the expenses incurred by the state for its provision of in-kind support.

Judge Pratt's order required the DOC to make pro rata refunds to individual telephone accounts from which funds were taken, with the remainder of the recouped money to be returned to the tobacco settlement trust. 432 F. Supp. 2d 862 (S.D. Iowa 2006). The court did not require the state to establish alternative secular programs, as doing so would encourage the court to micro-manage a state correctional agency. Likewise, the court declined to order the state to return certain prisoners to their prior housing assignments, since they had no rights based on an expectation of certain living quarters. The court issued its formal judgment on June 5, 2006 based upon Judge Pratt’s order.

The defendants appealed to the U.S. Circuit Court of Appeals for the Eighth Circuit. That court's three-judge panel (including retired Supreme Court Associate Justice Sandra Day O'Connor, sitting by designation) issued an opinion on December 3, 2007. Written by Circuit Judge William Duane Benton, the opinion affirmed the district court's ruling in all but two respects: (1) the non-prisoner contributors to the prisoners' telephone fund lacked standing to sue, and (2) it had been an abuse of discretion for the lower court to grant recoupment for services rendered prior to its June 2, 2006 order.

Other aspects of Judge Benton's opinion rejected the claim that completed performance of the contract rendered the plaintiffs' claims moot. The Circuit court also rejected the vendors' objections to having been found to be state actors for § 1983 purposes. Similarly unpersuasive to the Court of Appeals was the state's claim that changes it had made in funding the multi-year program, resulting in a shift from cost-reimbursement to per diem payments (as an effort to make InnerChange an indirect aid program), limited the period during which state funding violated the Establishment Clause. 509 F.3d 406 (8th Cir. 2007). Requests for rehearing by the panel and rehearing en banc were denied by the Eighth Circuit on January 9, 2008, and the case was remanded to the district court.

On August 22, 2008, Judge Pratt granted a joint motion ordering the defendants to pay $20,000 in a settlement agreement plus attorney's fees. There has been no further substantial activity on the docket, and the case now appears closed.