Overview
Cheer and goodwill are two pillars of the holiday season. This year, in the midst of a global pandemic, the significance of holiday giving is even more pronounced. But as retailers nationwide are stepping up to do their part by sponsoring charitable organizations and launching charity-centered advertising campaigns, it is important to know that even holiday cheer and generosity are subject to federal and state regulation. Understanding the legal implications of charitable giving is vital to ensure that your corporate generosity does not land your company or your non-profit beneficiary in legal trouble.
Type of Charitable Giving Triggers Different Risks, Regulations
Corporate charitable giving generally falls into two main categories: corporate sponsorship or cause-related marketing. A corporate sponsorship relationship is typically where a for-profit corporation donates money to a cause, charity, or non-profit. In this relationship, the corporation primarily receives recognition for its support of a particular event, therefore bolstering the corporation's public profile.
Cause-related marketing is similar, albeit with one key difference—whether the charitable act directly impacts the sale of the corporation's goods. In this relationship, the corporation uses the name or logo of the charity to encourage consumers to purchase the corporation's product. The most obvious example of this type of marketing includes campaigns advertising that a certain percent of the sale of a product is given to charity.
While corporate sponsorship can trigger tax complications for non-profits who stray too far from their charitable purpose, cause-related marketing carries greater risks for retailers. Companies must navigate a complex regulatory framework that includes: Better Business Bureau (BBB) Standards, state commercial co-venture (CCV) laws, federal and state laws on misleading or false advertising, federal tax laws, and non-controlling guidelines, including the Proposed Multistate Consumer Law Guidance Principals, and Charleston Principles. We discuss some of the more complicated rules in more detail below.
Commercial Co-Venture Laws
The CCV laws passed in at least 22 states govern cause-related marketing and similar activities. In a majority of states, a commercial co-venturer is defined 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 "advertises that the purchase or use of goods, services, entertainment, or any other thing of value will benefit a charitable organization."
This definition targets for-profit entities advertising that the purchase of their products will benefit a cause or charity. This is to not only protect consumers from being misled that purchasing a product will benefit a charity, but it is also in place to ensure that charities receive the donations as promised.
Though a named charity is typically needed to trigger CCV laws, some states, like Connecticut, have broadened their statutes to apply when only a general cause is mentioned. Similarly, while most CCV laws are only in force when a product is sold, as reflected in the definition above, Massachusetts CCV laws apply even without a sale as long as a company uses the name of a charity in connection with advertising. This can be an issue if retailers wish to merely mention a charity they support on their site, without any requirement that the consumer spend a certain dollar amount or purchase a product.
There are currently CCV laws in many states, though the rigidity and requirements vary greatly. Below are the general requirements that make up CCV laws nationwide.
Contract
At least 20 states require that there be a contract between the co-venturer corporation and charitable organization before the organization's name and marks can be used in the campaign. While required provisions may vary from state to state, common provisions include: termination rights for the charity, reference to the state's laws, an accurate description of the offer available to the public, an estimate of the total donations to be given, and the charity’s right to review program accounting.
Filing and Registration
The corporation's duties vary by state. The states known for their registration requirements for CCV's are: Massachusetts, Alabama, Illinois, South Carolina, and Hawaii. In Massachusetts and Alabama, a CCV is responsible for registering, posting a bond, and filing an annual report. In Hawaii and South Carolina, only a notice of the campaign is required. In Illinois, CCVs must register a report as a "charitable trust."
Many states also require co-venturers to file a copy of the contract with the charitable organization within a certain time period before the charitable solicitation campaign launches, and some within a certain time period after the campaign has concluded. In New York, for example, charities must be given an accounting within 90 days after the campaign ends.
In states with Charitable Solicitation Registration laws, the charity has an independent duty to be registered for general fundraising purposes. In some states, the charity also has an independent duty to file a copy of the contract.
It is worth noting that while some states have decided to accommodate reasonable filing delays caused by the COVID-19 pandemic, filing requirements are still in effect.
Required Disclosures
For venturers benefitting a named charity, many states require disclosure of the name of the benefitted charity, contact information, and use of the donated funds. At least 11 states require that advertising campaigns inform customers about the per-unit amount of their donations either "as a dollar amount or percentage of the value of the goods or services purchased or used."
The Better Business Bureau also establishes disclosure guidelines, though they are substantially similar to those listed in CCV laws. These include disclosure of the time period the campaign is in effect, any maximum or minimum contribution limits, and the per-unit amount of the donation.
Misleading Advertising
Retailers must also be mindful of the Federal Trade Commission Act and state consumer protection acts in advertising their charitable giving campaigns. These regulations prohibit unfair and deceptive trade practices and include omissions or misrepresentations of material fact in advertising when a consumer would rely on that information in deciding to purchase a product or service.
Tips to Consider when Advertising a Charitable Campaign
To avoid running afoul of these laws, retailers should consider the following tips:
- Disclose any maximum or minimum donation amounts and monitor inventory to ensure that consumers are not misled to purchase a product after a maximum has been met or the minimum is unreasonably out of reach.
- Avoid giving a charity a fixed amount when advertising represents that each purchase results in a donation. A fixed amount suggests a sponsorship and should be treated accordingly.
- Ensure disclosures are not unreasonably vague. Phrases like "a portion of proceeds" or "percentage of profits" are likely not informative enough. Similarly, disclosures mentioning a high percentage of net profits that actually represent a very small percentage of the purchase price may be considered misleading. Offering a minimum per-unit donation may help to resolve these concerns.
Professional Fundraising
By definition, most retailers are not in the business of professional fundraising and should avoid being classified as such. Many states have laws regulating professional fundraisers and define them as "any person who directly or indirectly . . . for compensation or other consideration plans, manages, conducts, carries on, or assists in connection with a charitable solicitation or individually solicits or who employs or otherwise engages on any basis another person to solicit in this state for or on behalf of any charitable organization."
Professional fundraisers typically solicit donations separately from the regular retail price of a good for compensation. While most cause-marketing retailers are classified as a non-regulated volunteer, the legal line separating professional fundraiser and cause-marketer is thin. A non-regulated volunteer is not compensated and all donated funds are given to charity. When both requirements are met, the risk of being classified as a professional fundraiser is low.
However, if a retailer only accepted donations with a required purchase, this might be construed as soliciting a donation separate from the price of the good and receiving compensation in the form of a sale. The distinction is small, but retailers who build their donation into the price of the goods or do not require a purchase to make a separate donation will likely avoid classification.
Conclusion
This year, many retailers may be looking to give back to their communities that helped them stay afloat during such a tumultuous time. It is nevertheless critical that retailers are aware of, and comply with, the various state and federal regulations for such altruistic action to avoid penalties that can be avoided with careful attention to the relevant requirements. This is definitely an area where knowing how to avoid pitfalls can prevent good deeds from being punished.