The Legalities of Cause Marketing

In the United States the practice of cause marketing is subject to governmental regulations, mainly at the state and local level.

If your organization is a nonprofit just beginning a cause marketing relationship, you’d be well served by seeking out expert legal advice before you sign any deals.

On that count, today’s post on the legalities of cause marketing comes courtesy of a guest poster, Maria E. Recalde, Shareholder and Chair of the Corporate Department, Sheehan Phinney Bass + Green PA, a law firm founded in 1937 with four offices in New Hampshire and Massachusetts.

My thanks to Maria for allowing me to post this article that originally appeared in Sheehan Phinney's newsletter.

A cause marketing venture (also known as a "charitable sales promotion" or "commercial co-venture") is generally defined as a sales campaign in which part of the consumer's purchase of a product or service from a business - in cause marketing parlance "a commercial co-venturer" - will benefit a charitable organization (generally defined as a tax-exempt organization described in Section 501(c)(3) of the Internal Revenue Code). Cause marketing ventures are not only subject to general laws and regulations applicable to advertising, but they are also highly regulated by state laws.

Currently, a majority of states have some form of commercial co-venturer ("CCV") laws in effect. In general, CCV laws are triggered where the commercial co-venturer sells a product or service and represents to consumers that part of its purchase or use will benefit a charitable organization. Some CCV laws, however, apply where the commercial co-venturer promises to support a cause (e.g., "Alzheimer's research") without naming a specific charitable organization. Other states, such as Massachusetts, do not even expressly require an actual sale for their CCV laws to apply, but rather only that a commercial co-venturer use the name of a charity in advertising a product or service. See, e.g., Mass. G.L. c. 68, §18. Irrespective of the variations found in CCV laws, however, CCV laws are designed to protect consumers and charitable organizations against fraudulent or misleading advertising, and to ensure that the designated charitable organization actually receives its share of the proceeds that the commercial co-venturer commits to donating.

CCV laws cover a wide range of activities and can subject violators to significant fines and even criminal penalties. By way of example, and in no way exhaustive:

(a) A number of states, including New Hampshire, require the commercial co-venturer and charitable organization to execute a written contract (and the inclusion of certain terms in the contract) and to file an executed copy with the state. The charitable organization, not the commercial co-venturer, frequently must file the contract.

(b) Some states require registration and the posting of a bond (the amount varies by state).

(c) Some states require commercial co-venturers to file annual activity reports detailing the total dollar amounts raised from public contributions, disbursed to the charitable organization and retained by the commercial co-venturer.

(d) A number of states, including Massachusetts and New Hampshire, require the commercial co-venturer to make written disclosures in advertising. Some states require ads to disclose the expected portion of the sales price, percentage of gross proceeds, or other consideration the charity is to receive. Many states require this disclosure on a per-unit basis — often either as a dollar amount or as a percentage of the value of the goods or services purchased or used (e.g., "$1.00 per 6oz. juice box" or "5% of the purchase price").

Cause marketing campaigns can be structured in many different ways including online promotions, in-store promotions, direct mail coupon programs or solicitations made on product packaging. For example, a business might advertise that it will donate a certain portion of the proceeds of a purchase to a charitable organization, that it will donate "X" dollars to a charitable organization for every "Y" items purchased, or that for every item purchased the business will make a donation to a charitable organization.

The bottom line is that, when running a cause marketing campaign, businesses should evaluate the extent to which the promotion will implicate CCV laws and take steps to ensure compliance. When running a nationwide cause marketing campaign, a commercial co-venturer must ensure compliance with the CCV laws of each state.

Compliance with CCV laws is, of course, in addition to all general advertising and state consumer protection laws that apply with equal force in a cause marketing campaign to prevent false or misleading advertising. Common pitfalls include failure to disclose donation amount, suggesting a connection with a cause when none really exists, and failing to disclose applicable caps or minimum donations related to the campaign. Failure to follow applicable laws and regulations can lead to fines, penalties and bad publicity for both the commercial co-venturer and the charitable organization that it is supporting.

(1) Enter into a written agreement with the charitable organization, and include all provisions required by applicable state and federal laws.

(2) Comply with state requirements of registration and bonding to the extent applicable.

(3) When using a per-unit standard in the marketing campaign, state the amount of donation per unit and establish and state a maximum donation amount.

(4) Consider alternatives to a per-unit donation standard in an effort to avoid CCV laws while still showing support for a particular charitable organization or cause, such as donations per Facebook "like" - "we will donate $1 per like for our Facebook page, up to $5000" - or donations in a specified amount. Beware of states like Massachusetts, however, where CCV laws still may apply.

(5) Develop a standard set of disclosures that must appear in all advertising and avoid any variation, keeping in mind that some states may impose specific disclosure requirements. With regard to Massachusetts and New Hampshire and generally applicable advertising laws, for example, each advertisement used in connection with a cause marketing campaign in which a business is acting as a commercial co-venturer should include the following information: (i) name, address and phone number of the charitable organization;

(ii) a description of the charitable purpose of the promotion; (iii) the promotion period - the dates the promotion will run; (iv) the amount of each purchase that will benefit the charitable organization - the dollar amount or percent per unit; (v) any limit on the commercial co-venturer's matching contribution (e.g., any maximum or guaranteed minimum contribution — e.g., up to a maximum of $50,000); and (vi) any other material terms/conditions of the promotion.

(6) Ensure that consumers can clearly see all of the material terms on point-of-purchase materials and packaging before they purchase the product. For example, any limit on the amount that will be donated to the charitable organization should not appear inside the packaging.

(7) Ensure that advertisements do not mislead, deceive or confuse the public about the effect of the consumer's purchase on charitable contributions or otherwise.

(8) Avoid increasing the price of the product or service that is the subject of the marketing campaign during the campaign period.

(9) Ensure that the charitable organization's share of the proceeds are promptly paid to it and in the amount committed.

(10) Set up verifiable accounting and inventory tracking systems to maintain accurate, up-to-date records of applicable sales. Retain a copy of the final accounting.

(11) Avoid advertisements that represent that the charitable organization has endorsed the advertised product or service. If the charitable organization has not made an endorsement, the advertisement should clearly disclose this fact.

(12) Have the marketing department (or whatever operational unit is running the cause marketing campaign) obtain internal clearance for the particular promotion and consult counsel for legal advice as needed.

This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.

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