Legal Compliance for Cause Marketing Campaigns

Legal Compliance for
Cause Marketing
Campaigns
Instructors:
Terri J. Seligman
Frankfurt Kurnit Klein & Selz PC
212.826.5580
tseligman@fkks.com
www.ffks.com
H. Sujin Kim
Frankfurt Kurnit Klein & Selz PC
212.705.4828
skim@fkks.com
www.ffks.com
"We Will Donate a Dollar"
Legal Compliance for
“Cause Marketing” Campaigns
Terri J. Seligman
Partner
H. Sujin Kim
Counsel
What is Cause Marketing?
•
Arrangement in which a for-profit entity
advertises to the public that a consumer’s
actions, usually the purchase of a product, will
benefit a charity
–
•
Example: For every pink Yoplait yogurt lid sent in
by December 31, 2010, Yoplait will donate 10¢ to
Susan G. Komen for the Cure, up to $1.6 million
Also referred to as “cause-related marketing”
or entering into a “commercial co-venture”
Prevalence of Technique
•
•
Survey of leading Fortune 500 consumer
product manufacturers and national and
regional retailers engaged in causerelated marketing showed that 100% of
them intended to maintain or increase
their involvement in those programs
2010 Cone Cause Evolution Study
Purpose of the State Laws
• The purpose of these cause-related
marketing laws are two pronged:
– Prohibit for-profit entities from trading on the
name and trademarks of a charity without any
real benefit to the charity
– Protect consumers from for-profit entities who
would advertise that monies from the
purchase of its products or services are being
donated to a charity when in fact that is not
the case
What is a Commercial
Co
Co--Venturer?
• A majority of states define a “commercial
co-venturer” as a for-profit entity who
advertises to the public that the purchase
of its product or service will benefit a
charity
– Example: $1 for every DVD purchased will be
donated to the Susan G. Komen Foundation
“Good Will” States
• A handful of states include for-profit
companies who benefit in “good will” only
in their definitions of a “commercial coventurer”
– Example: For every email you forward to a
friend, we will donate 10¢ to Save the
Children
State Requirements:
Commercial CoCo-Venturer
• A contract with the charity
– Several states require specific provisions
(e.g., 15 day right of charity to cancel,
auditing, record-keeping)
• 6 states require registration and/or
bonding (“Registration States”)
• Disclosures in advertising
• 4 states require periodic and/or a final
accounting
State Requirements: Charity
involved with a Commercial CoCoVenturer
• Charity must be registered to solicit in the states in which
the campaign will be conducted
Note: If a charity isn’t registered to solicit in one the states in
which the CCV must register, the CCV’s registration will not be
accepted
• Charity is responsible for filing the contract in handful of
states:
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–
–
–
–
–
Arkansas
Connecticut
New Hampshire (notice of promotion)
New Jersey
New York
Utah (notice of promotion)
Registration & Bonding
• The Registration States are:
–
–
–
–
–
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Alabama
Hawaii (no bond)
Illinois
Massachusetts
Maine
South Carolina (no bond)
• Of these 6 states, 4 are “Good Will” States:
–
–
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Alabama
Massachusetts
Maine
South Carolina
What Types of Information
Do the States Require?
•
•
•
•
•
•
Name and address of CCV and of charity
Contact person for CCV and charity
List of CCVs involved in the promotion
CCV’s Articles of Incorporation
CCV’s Federal tax ID Number
Description of the campaign
Penalties: Failure to Register
•
Alabama: Knowing violation constitutes charitable fraud. Initial
conviction is a class A misdemeanor.
•
Hawaii: First intentional or knowing offense: a fine not less than $100
nor more than $500, or imprisoned not more than 6 months, or both.
•
Illinois: Person who failed to register is subject to “injunction, to removal,
to account, and to appropriate other relief before a court of competent
jurisdiction exercising chancery jurisdiction.” The court may impose a
civil penalty of not less that $500 nor more than $1,000.
•
Maine: A violation is considered an unfair trade practice. Intentional
violation of constitutes a Class D crime.
•
Massachusetts: A person who knowingly violates this law may be fined
not more than $1,000 or imprisoned for not more than 1 year, or both.
•
South Carolina: A person who knowingly and willfully violates this law
with the intent to deceive or defraud an individual or a charitable
organization is guilty of a misdemeanor and, upon conviction for a first
offense, must be fined not more than $5,000 or imprisoned not more
than one year, or both.
Disclosures in Advertising
• A majority of states require the following
disclosures in advertising:
– Name of CCV
– Name of charity
– Donation amount/percentage per purchased
product
– Any minimum and/or maximum donation
amounts
– Dates of campaign
The Charity’s Concerns
• Generally – maintaining tax-exempt status
is paramount
• Unrelated Business Income Tax (UBIT)
• Self-Dealing
• Registration
• Adequate contractual protection
Charity – TaxTax-Exempt Status
• Must be organized and operated
“exclusively” for a charitable, educational
or other purpose identified in section
501(c)(3) of the Code
• Only insubstantial and incidental private
benefit is permitted
– Arms-length agreement
– Economically fair to exempt organization
Charity – UBIT
• UBIT imposed upon income generated
from an exempt organization’s trade or
business activity that is:
– Not substantially related to exempt purposes
– Regularly carried on
• Such income, if excessive, can result in
loss of tax-exempt status
Charity – UBIT Exception:
Qualified Sponsorship Payment
• “Trade or business” does not include
solicitation and receipt of “qualified
sponsorship payment”
• Qualified sponsorship payment
– Payment made by person engaged in a trade
or business
– No arrangement or expectation that such
person will receive any substantial return
benefit other than use/acknowledgement of
name, logo, product lines
Charity – UBIT Exception: Qualified
Sponsorship Payment (cont’d)
• Acknowledgement versus advertising
– No endorsement
– No qualitative /comparative statements
– No price information
Charity – SelfSelf-Dealing
• Private foundation cannot engage in
certain transactions with “disqualified
persons”
– “Disqualified person” includes an entity that
contributes > 2% of total contributions
received by foundation
– Prohibited transactions include foundation
furnishing goods/services to disqualified
person
Charity – SelfSelf-Dealing
• Exceptions
– No more favorable basis than that available to public
• Foundation may furnish goods/services to a disqualified
person if on a basis no more favorable than made available
to general public
• E.g., Foundation licensing use of its name to CCV may be
providing a valuable “good” to CCV, but self-dealing may not
be triggered if terms are reasonable and fair
– Incidental or tenuous benefits
• Incidental or tenuous benefits received by disqualified person
from use by a private foundation of disqualified person’s
assets do not by themselves result in self-dealing
• E.g., public recognition that a substantial contributor may
receive as a result of the foundation’s charitable activities
Charity – Registration
• Is the charity currently registered to solicit
in all necessary states?
– Generally, “solicitation” is broadly defined
– Cost of registration
Charity – Disclosures
• BBB Wise Giving Alliance Standards for
Charity Accountability
• Standard #19 – cause related marketing
promotions should disclose:
• Actual or anticipated portion of purchase price that
will benefit charity (e.g., $1 will be contributed to
Charity X for every Company Y product sold)
• Duration of campaign (e.g., the month of October)
• Any maximum or minimum contribution amount
(e.g., up to a maximum of $200,000)
Charity – Contract
• Arms-length agreement; economically fair
• Adequate protection of intellectual
property – review and approval, breach
and termination
• No real ability to promote for-profit
• Cost of registration
Enforcement Actions
• 1995 – Eskimo Pie Corp. and FTC
• 1996 – McNeil Consumer Products Co. and Arthritis
Foundation
• 1996 – Benckiser Consumer Products and FTC
• 1997 – Sunbeam and American Medical Association
• 1998 – American Cancer Society and SmithKline
Beecham consumer Health Care
• 2010 – Challenge Nation and Big Brothers Big Sisters
Common Pitfalls
• Not allowing ample time to file the required documents
with the states
• Partnering with an unregistered charity
• Not stating the amount of the donation per product or
service purchased in the advertising
• Advertising that the purchase of a product will impact the
donation amount made to the charity when in fact the
for-profit has guaranteed a specific donation amount
• Making the promotional period too long/failing to pull the
advertising after reaching the maximum donation amount
• Voiding in Registration States but not actually having a
mechanism in place to check a consumer’s location
Questions?
Terri J. Seligman
tseligman@fkks.com
212.826.5580
H. Sujin Kim
skim@fkks.com
212.705.4828