United States: Do Good Deeds, Go Unpunished: Legal Pitfalls And Practice Tips For Cause Marketing

Last Updated: November 4 2014
Article by Lauren Emerson

"Join in the fight against breast cancer!"

Each October, store shelves are filled with pink products and pink packaging in honor of Breast Cancer Awareness Month. Businesses across a variety of industries solicit consumers to "join them" in supporting breast cancer awareness or research by purchasing "pink" products and designated services; typically, a portion of the proceeds from those sales will benefit a non-profit organization. In recent years, products and services as diverse as soup, kayaks, cosmetics, dolls and car rentals have all been "pinkwashed."

While some question the efficacy of such campaigns from a philanthropic standpoint, there is little doubt that so-called "cause marketing" or "embedded giving" can be highly effective for for-profit businesses. A 2013 study showed that 93% of American consumers have a more positive image of a company when it supports a cause.1 That same study showed that consumers are more likely to trust and be loyal to such companies, and that more than half of US consumers had purchased a product that supported a cause in the previous year.

In part because consumers are particularly likely to be influenced by an ad's claim that purchasing a particular item will benefit a charitable organization, and in part because of the risk of outright fraud, many states specifically regulate cause marketing. This article will discuss some of the relevant laws.

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When a for-profit business aligns itself with a charitable cause, it must be mindful of a myriad of laws, regulations and guidelines. In addition to general tenets of advertising law, cause marketers should be aware of:

  1. State commercial co-venture laws; and
  2. State professional fundraiser laws;

Commercial Co-Venture Laws

Approximately half of U.S. states have laws that pertain specifically to cause marketing. These "commercial co-venture" laws vary significantly from state to state. In fact, many states have their own unique requirements. Companies soliciting consumers across multiple states are advised to ensure that their campaigns comply with the laws of each of those states.2

In some states, the commercial co-venture ("CCV") laws apply only in a relatively narrow set of circumstances. For example, New York defines a commercial co-venturer as "[a]ny person who for profit is regularly and primarily engaged in trade or commerce other than in connection with the raising of funds or any other thing of value for a charitable organization and who advertises that the purchase or use of goods, services, entertainment, or any other thing of value will benefit a charitable organization." N.Y. EXEC. LAW § 171-a (McKinney 2014) (emphasis added). Thus, the New York CCV law applies only to businesses that offer products or services and advertise that that sale of those products or services will benefit a charity.

Massachusetts casts a somewhat wider net and defines a commercial co-venturer as "any person who for profit or other commercial consideration, conducts, produces, promotes, underwrites, arranges or sponsors a performance, event, or sale to the public of a good or service which is advertised in conjunction with the name of any charitable organization or as benefitting to any extent any charitable purpose. Any such person who will benefit in good will only shall not be deemed a commercial co-venturer if the collection and distribution of the proceeds of the performance, event or sale are supervised and controlled by the benefiting charitable organization." MASS GEN. LAWS ANN. ch. 68 § 18 (West 2014). Given the breadth of this definition, a business that merely mentions a charity in its advertising might be considered a CCV in Massachusetts.

Many states with CCV laws require that a CCV enter into a written agreement with the non-profit that will receive the donation. Certain states require that these agreements be executed by two officers of the non-profit. Some require that the CCV file those contracts with the state in advance of the solicitation; that burden may fall on the CCV or the non-profit depending on the state. Hawaii, for example, requires that the CCV file the written consent of the non-profit at least 10 days prior to the campaign. HAW. REV. STAT. § 467b-5.5(b) (West 2014). Even where the contract need not be filed, it should be retained as many states reserve the right to inspect such contracts.

Many of the states that require contracts specify what the contract must cover. For example, Massachusetts requires that each such contract "include (1) a statement of the charitable purposes to be described in the solicitation; and (2) a statement of the guaranteed minimum percentage of the gross receipts from fund-raising which will be utilized exclusively for the charitable purposes described in the solicitation." MASS GEN. LAWS ANN. ch. 68 § 22 (West 2014).

Certain states not only prescribe topics that must be covered, but also mandate the inclusion of specific terms. New York, for example, requires CCV agreements to spell out the charity's right to cancel the contract with no penalty for up to 15 days. N.Y. EXEC. LAW § 174-a (McKinney 2014). Similarly, Hawaii requires that CCV agreements include a provision indicating that the CCV will provide the non-profit with a final accounting on a per unit basis. HAW. REV. STAT. § 467b-5.5(b)(4) (West 2014).

There are specific rules governing what the CCV needs to include in advertisements touting the charitable endeavor as well. For example, some states require that the advertisements for the promotion disclose the amount of the donation on a per-unit basis. To comply, an ad might state that the company will donate 10 cents for every can of soda purchased, or it might state that it will donate 5% of the suggested retail price for each can of soda. In some jurisdictions, each advertisement or solicitation must disclose the name and address and telephone number of the charity, or how the money will be used.

A handful of states impose more stringent requirements. Alabama and Massachusetts, for example, require CCVs to register and obtain a license from the state and post a bond before running their promotion. Alabama's bond requirement is currently $10,000; Massachusetts' is $25,000. ALA. CODE § 13A-9-71(h)(1) (West, Westlaw through Act 2014-457 of the 2014 Regular Session); MASS GEN. LAWS ANN. ch. 68 § 24(b) (West 2014). Maine recently did away with similar obligations, including its $25,000 bond requirement.3

Several states require CCV's to file financial reports with the state.

Consequences for violating states CCV laws vary, but can include fines, penalties and bad publicity. In 2012, Appeals Court of Massachusetts upheld a permanent injunction against a woman and two defunct corporations who violated that state's requirements by not making the necessary filings prior to soliciting, not registering with the attorney general and paying the fee, not posting a bond and not having authorization to use the non-profit's name and logos to solicit. See Attorney General v. Bach, 964 N.E.2d 370 (Mass. App. Ct. 2012).

State professional fundraiser laws

Unlike CCV laws, most state professional fundraiser laws apply only to those who raise funds on behalf of others for compensation. They are noteworthy for two reasons.

First, in most states, professional fundraiser laws tend to be more onerous than CCV laws in terms of registration, bonding, disclosure requirements, and so forth. Businesses running cause marketing campaigns may wish to avoid falling under their purview. One way to do this is to avoid soliciting donations apart from the purchase of products or services. If the business does solicit donations, it should not require the donating party to also make a purchase, as one could argue that the required purchase constitutes compensation. The business must also deliver the entirety of any donated amounts to the charity; anything retained could also be considered compensation.

Second, it is not inconceivable that states – particularly those without dedicated CCV laws – could attempt to enforce broadly worded professional fundraiser laws against businesses engaged in cause marketing.

Practice Tips

To avoid running afoul of the myriad rules and regulations governing CCVs, plan ahead and work with counsel to address the requirements of all of the states where the promotion will run. Some states require advanced registration, licensing and the posting of a significant bond; others require that a signed written contract be executed and possibly filed with the state in advance of the solicitation.

Regardless of where the promotion will run, enter into a written agreement with the non-profit that sets forth:

  • The nature of the planned solicitations, including the good or services that will be offered as part of the promotion;
  • The anticipated number of sales;
  • The charitable purpose for which the funds will be raised;
  • The start and end dates for the promotion;
  • The time(s) at which the money raised will be transferred to the non-profit and the manner of transfer;
  • The charity's representation and warranty that it is a non-profit and that it is in compliance with all applicable state registration requirements;
  • Any obligations of the charity in connection with the promotion;4
  • Any guaranteed minimum donation amount or maximum donation amount that the CCV will provide to the non-profit regardless of how many sales are made;
  • The CCV's right to use the charity's name, logo or other trademarks in its promotional materials; and
  • Any other provisions as required by the states in which consumers will be solicited.

The contract should be signed by the CCV and by two officers of the charity. Record the agreement where necessary.

Each solicitation should clearly disclose either the dollar amount per unit or the percentage of the retail price per unit that will be donated to the non-profit. Clearly disclose any guaranteed minimums or maximum donations so that the consumer understands how his purchase is likely to impact the amount donated. Solicitations should also set forth the duration of the campaign, as well as the name and address of the charity. All disclosures should be visible and easy to read. Keep in mind that social media posts may also be considered solicitations.

Do not inflate the price of the products immediately prior to the promotion.

Do not fundraise for the organization apart from the promotion. If the decision is made to fundraise, do not require consumers to make a purchase in order to be eligible to contribute.

Turn over the donations to the nonprofit promptly, and in accordance with any agreed upon terms and applicable state laws.

Following the promotion, file financial reports with the states that require them.

Maintain all paperwork relevant to the promotion for a minimum of three years.

Conclusion

Businesses with the best of intentions can encounter a host of legal issues when they engage in cause marketing. The matters discussed above reflect only some of the concerns that ought to be considered when launching a campaign to benefit a charity. The safest course of action is for the business to involve counsel early on in the planning process so that there is ample time and budget set aside to comply with applicable state regulations.

Footnotes

1. Cone Communications: Public Relations & Marketing, 2013 Cone Communications Social Impact Study: The Next Cause Evolution 12 (2013) available at http://www.conecomm.com/stuff/contentmgr/files/0/e3d2eec1e15e858867a5c2b1a22c4cfb/files/2013_cone_comm_social_impact_study.pdf.

2. While they lack the force of law, the Better Business Bureau has issued Standards for Charity Accountability bear mention as they echo some of the more common provisions of state CCV laws. These guidelines "seek to encourage fair and honest solicitation practices, to promote ethical conduct by charitable organizations and to advance support of philanthropy." Standard 19, in particular, provides that cause marketing solicitation should "clearly disclose how the charity benefits from the sale of products or services", including "the actual or anticipated portion of the purchase price that will benefit the charity... the duration of the campaign... [and] any maximum or minimum contribution amount." Better Business Bureau, Standards for Charity Accountability (2003), available at http://www.bbb.org/us/standards-for-charity-accountability/.

3. In other states, different laws will trigger similar requirements. For example, under Illinois law, a company that holds over $4,000 for a charity in a 12 month period must register with the state; such entities must also file an annual report under the state's Charitable Trusts Act. See ILL. ADM. CODE tit. 14, §§ 480.30, 480.50 (West, Westlaw through rules published in the Illinois Register dated September 12, 2014).

4. A non-profit may be unwilling to co-promote such endeavors as doing so might jeopardizing the entity's tax-exempt status.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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