Are you looking for answers to legal questions that arise in cause marketing and corporate partnerships?  If so, look no further!

Last year, Selfishgiving.com founder and blogger  Joe Waters and I distributed a five-question survey to businesses and nonprofits regularly engaged in cause marketing and corporate partnerships, asking them to share their top legal compliance questions and challenges.  After reviewing the survey responses, we decided to create a series of blog posts to address the most common corporate partnership legal compliance questions covering four issue categories: (1) Advertising Disclosures; (2) Registration and Reporting Requirements; (3) Contracts; and (4) Unrelated Business Income Tax (UBIT).   I hope you will find these FAQs useful in helping to navigate the legal and regulatory issues that arise as your company or charity engages in corporate partnerships.

Click on the FAQ headers below to read the answers to each question, which are posted on SelfishGiving.com, and sign up for Joe’s informative and entertaining weekly email newsletter, which has all the latest trends and strategic advice about cause marketing and corporate partnerships!

Part 1: Advertising Disclosures

1. Are cause marketing advertising disclosure “best practices”  required by law? Some of our corporate partners think they are just “suggestions.”
2. What if a company insists on structuring a campaign where the donation is based on a percentage of its profits, rather than a percentage of the purchase price?
3. Have any companies gotten into trouble with regulators for failing to include certain information in their cause marketing advertisements?
4. Advertising disclosure problems only present a real legal risk to the corporate partner, not the charity, right?
5. Can the company simply state on the hang-tag or store signage, “10% of the purchase price will be donated to ABC Charity, see www.company.com/ABCCharity for details,” and then include the website URL where the minimum guarantee and/or donation cap can be found?

Part 2: Registration and Reporting Requirements

Company FAQ

1. Our company is conducting its first ever cause marketing campaign. I heard that we may need to file state registrations. How do I know if I need to register, what does it entail, and how long will it take?  Note: The answer to this includes a chart on the state registration and reporting requirements applicable to companies acting as commercial co-venturers.
2. I operate a small e-commerce business in Massachusetts that sells clothing online, and would like to run a promotion in which the company will donate $5 to a local, nonprofit homeless shelter for every special edition T-shirt sold through our website. Does my company need to register nationally? What, if anything, does the nonprofit need to do?  Note: The answer explains how to determine the parties’ fundraising compliance obligations specifically in the context of an online cause marketing promotion.
3. Our company’s cause marketing campaign launched last week and we just found out we are supposed to register in certain states as a commercial co-venturer! Are we going to face fines or other penalties?

Charity FAQ

1. Our charity was asked to be the beneficiary of a company’s charitable sales promotion, but we’ve never engaged in a cause marketing campaign before. What do we need to be aware of before we proceed with this opportunity?
2. Our nonprofit is already registered nationally, and discloses all of its CCV partners as part of our annual charitable solicitation registration renewals, so we should be set with our CCV-related compliance, right?  Note: The answer includes a chart on the state reporting requirements applicable to charities that have entered into a CCV agreement.
3. Our charity was approached by a start-up company that wants to conduct a cause marketing campaign to benefit our organization. When we told them they may need to register with certain states and obtain bonds, they were concerned about the cost and burden of compliance. We don’t want to lose the opportunity to build a partnership with this company. What can we do?

Part 3: Contracts

1. We are entering into a cause marketing promotion in which our charity will receive a portion of the proceeds from the sale of each Sellco product. SellCo sent us a draft contract to sign. It seems to describe the promotion the way we discussed it. Should we go ahead and sign it?
2. What provisions should be included in our cause marketing agreement? Note: The answer includes a 15-point cause marketing contract checklist!
3. Is there a way to streamline the preparation of cause marketing agreements so they are compliant with all 50 states’ laws as well as for online sales?
4. Our corporate partner wants to enter into a multi-year relationship that includes a significant financial commitment, and will involve numerous customer activations.  Only the details for the first activation have been solidified. How do we draft an agreement to cover this type of arrangement?

Part 4: Unrelated Business Income Tax (UBIT)

1.  My organization, Charity Corp., has a corporate partner, Cool Products Co., that is conducting a charitable sales promotion in which it will advertise that it is donating a portion of the purchase price from sales of a particular product to Charity Corp.  Cool Products has asked to promote their sales campaign to our members and donors through email and social media. I heard that charities aren’t allowed to promote these types of campaigns because it might subject the charity to a tax called UBIT.  What is UBIT, and why and when is it a potential problem? How do we avoid creating taxable income?
2. How can our organization appropriately communicate about a corporate partnership to our donors/members/social followers without crossing  the line into marketing for the corporate partner?
3. The UBIT rules make our corporate partnerships team feel constrained in our partner cultivation strategy. What options does our organization have to provide value to our corporate partners?

The post Key Legal Issues in Corporate Partnerships first appeared on Perlman Sandbox.

• failing to properly oversee its commercial co-venturer, Harris Originals of New York and related entities collectively doing business as “Harris Jewelry,” which advertised on its website and retail stores that for each teddy bear purchased in the promotion, a specific amount of money would be donated for the express purpose of sending care packages to service members;
• failing to maintain the donated funds as restricted funds as they were designated for a particular purpose;
• using donated funds for purposes other than those expressly represented as the charitable purpose of OTA;
• spending funds on non-charitable purposes; and
• engaging in unfair, false, misleading, or deceptive solicitation and business practices.

According to the settlement, OTA acknowledged that it failed to oversee Harris Jewelry’s “Operation Teddy Bear” by failing to request an accounting of the numbers of bears sold or any other information in order to determine that the per-bear dollar figure sent to OTA was accurate.  The settlement further notes that OTA failed to provide Harris Jewelry with information on how the funds donated by the company were used, or how many care packages were sent to service members.

The settlement further notes that the funds donated were improperly expended on non-charitable purposes and states that OTA spent funds and took other actions without any discussion, approval, or oversight by its Board of Directors, in violation of the Boards’ statutory fiduciary duties.

As part of the settlement, OTA will cease operating and wind down its operation and OTA’s chief executive Mark Woods is barred from serving as a fiduciary or soliciting for any nonprofit. The agreement will assess civil penalties and requires OTA to continue to provide assistance, as needed, in the states’ continued investigation of Harris Jewelry.

The investigation was by led by New York and Tennessee, joined by executive committee states Nevada, North Carolina, and Washington and participating states California, Delaware, Georgia, Hawaii, Idaho, Illinois, Kansas, Louisiana, Maryland, Pennsylvania, and Virginia.

The multi-state enforcement action is a wake-up call for charities to make certain that they are actively overseeing charitable sales promotions conducted to benefit them. The following steps should be taken to meet these requirements:

• Ensure that each cause marketing relationship is subject to a written agreement;

• require the co-venturer to provide a written accounting with each payment made to the charity to certify that the correct donation amounts are being transferred based on the terms of the promotion;

• review the co-venturer’s advertisements to ensure that the language accurately reflects the terms of the promotion, including how donated funds will be used; and

• guarantee that donations are actually used for the purposes as specified in the advertising of the promotion.

Given a trend towards communicating specific consumer impact in cause marketing campaigns (often structured as 1-for-1 campaigns, in which the purchase of each item triggers a specific charitable impact), charitable sales promotions are increasingly generating restricted donations.  Thus it’s critical for charities to undertake the proper procedures to account for and expend these donations in accordance with the stated restrictions, and to ensure that company advertisements are correctly stating how funds will be used by the organization.  In our Nonprofit Times article, 5 Things That Are Making Regulators Buzz, my colleague Tracy Boak and I highlighted the solicitation and use of restricted gifts as a leading area of regulatory scrutiny.

Nonprofit boards must also provide proper oversight over their organizational activities and expenditures.  While the settlement agreement does not provide much detail on OTA’s governance problems, nonprofit governance is also a key area of regulatory scrutiny, with states increasingly seeking to hold nonprofit boards accountable for the organizations’ violation of state charitable solicitation laws.

This enforcement action is significant in that it apparently is the first multi-state regulatory activity involving cause marketing in almost two decades. The last such collective activity undertaken by the states was issued in 1999 in a report issued by the Federal Trade Commission (FTC), and sixteen State Attorneys General and the District of Columbia Corporation Counsel. It discussed regulatory concerns regarding false advertising, unfair and/or deceptive trade practices and consumer fraud arising from commercial-nonprofit product advertisements, with a particular focus on implied endorsements and exclusive relationships.

In 2012, the New York Attorney General’s Charities Bureau issued “Five Best Practices for Transparent Cause Marketing,” providing guidance to companies and charities on ways to ensure consumer transparency in their cause marketing campaign disclosures.

Does the OTA settlement represent the first of many more regulatory enforcement actions focused on cause marketing activities that may be coming down the pike?  Or does it simply highlight the first of several multi-state enforcement actions arising out of the new federal and state enforcement initiative named Operation Donate With Honor, which focuses on fraudulent solicitation activities purporting to benefit veterans and military service members?  We shall see.  In the meantime, we will continue to monitor state and federal regulatory enforcement efforts affecting charities and companies engaged in cause marketing and other fundraising activities, so please stay tuned.

The post Sixteen States Enter into Settlement Agreement with Charity Involved in Unlawful Cause Marketing Campaign first appeared on Perlman Sandbox.