Pitfall Season for Cause Marketing

By: Zachary S. Kester, J.D., LL.M, CFRM Charitable Allies

After a hot, muggy summer, fall has come to Indiana.  In addition to bringing cooler temperatures, changing leaves and pumpkin spice flavored absolutely everything, the fall season is a popular one for charitable fundraising.  You have probably encountered an advertisement offering to donate a portion of proceeds from sales of small items to charity, or had a cashier ask you if you want to donate to a certain charity at checkout.

This type of fundraising—commonly called “cause marketing”—is known as a “commercial co-venture” arrangement in the legal field, and can present invisible pitfalls for the unwary.

Cause marketing is projected to be a $2 billion industry for 2016.  Among U.S. consumers, 56 percent say they have bought a charity-related product in the last 12 months; and those numbers are even higher among millennials (66 percent).  In 2010, consumers were about 5-10 percent more likely to purchase a product than they were to make an outright donation.

Given these numbers, any charity would logically conclude that partnering with a for-profit business in such an arrangement would be an excellent opportunity.  There is still some risk to the charity, though.

Use of its name, branding and/or logo without the proper permissions in place could cause the charity to lose its rights; worse, even with proper permissions, if the for-profit partner were to suffer a public embarrassment or setback, it could reflect poorly on charity too.

Further, since the for-profit will get a tax break for its “donation” to the charity through the sales arrangement, an unscrupulous business could seek to exploit a charity through an unfair distribution system or by trying to get free advertising out of the deal.  Therefore, a charity looking to enter into a cause marketing or commercial co-venture situation should seek competent accounting and legal advice first.

In 1999, Yoplait’s “Save Lids to Save Lives” campaign promised to make a donation to the Breast Cancer Research Foundation for each pink lid of its yogurt returned to it by consumers.  However, General Mills (Yoplait’s parent company) failed to disclose that they had capped the maximum donation at $100,000, or the equivalent of 200,000 lids.  Over 9 million lids were returned to the company, which could have entitled the Breast Cancer Research Foundation to $4.7 million in potential donations instead of $100,000.  The Georgia Attorney General took action against General Mills as a result.

Indiana does not regulate commercial co-ventures, although many other states do.  If your charity operates outside of Indiana state lines, commercial co-venture rules will be triggered as soon as there is any representation made that a purchase will benefit your charity or organization.  These rules will require tasks such as submitting a registration form, filing of contracts or reports, writing a detailed description of the campaign, and possibly even a bonding fee, depending on the state.

Furthermore, states are changing their requirements all the time, and fees for noncompliance can be steep.

No matter what the state requirements are, a charity should always be sure to have a written contract with their for-profit partner, which specifies a per-unit disclosure of donation amount and leaves control of the business relationship with the charity.  The commercial partner should also provide a full and comprehensive disclosure statement to shoppers/donors during the campaign.

The Better Business Bureau recommends that each disclosure statement include how the charity benefits from the sale, the actual/anticipated portion of the purchase price that goes to the charity, the duration of the sales campaign and any maximum or minimum contribution amount.  These BBB guidelines also satisfy the requirements of a majority of states, which regulate commercial co-ventures, making such an arrangement open to growth if a charity is looking to expand into other states in its future.

Charities must also keep in mind that a poorly-designed commercial co-venture arrangement can lead to unrelated business income and associated taxes called UBIT.  This sort of activity, if more than insubstantial, runs a risk of jeopardizing the charity’s 501(c)(3) status and must be dealt with cautiously.  Your legal and accounting professionals can help manage and reduce UBI through careful design of contracts, budgets and reporting.

While cause marketing has substantial benefits in both fundraising and publicity, charities should approach it as they would any other business partnership.  Without prudent consideration, the risks may outweigh the rewards.

Attorney Zac Kester provides generalist and strategic nonprofit legal and consulting services. He holds a Master of Laws, a post-law school advanced degree, in which he studied the unique needs of tax-exempt nonprofit organizations. His legal and consulting career has focused on nonprofit organizations.

With highly experienced legal and training personnel, Charitable Allies provides all manner of legal and educational services for boards, officers, management and staff of myriad charities throughout the sector. From basic one-time questions about a single matter to training for boards and officers to complex reorganization or merger of activities, Charitable Allies is your go-to cost-effective provider of legal services to nonprofit organizations