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Cause-Related Marketing: Doing Good Has Legal Strings Attached

on Tuesday, 8 November 2016 in The Closer - M&A, Securities and Corporate Counsel: Kevin P. Tracy, Editor

Cause-related marketing is nothing new. Most consider the cause-related marketing program by American Express to be the forefront of this “win-win” money-raising structure. In 1983, American Express offered to its customer to donate a penny for every American Express card transaction and to donate a dollar for every new card issued. Win for Charity? Yes: American Express raised $1.75 million in just four months. Win for American Express? Yes: American Express new users grew by 17 percent and transaction activity increased 28 percent.

For many businesses offering goods and services to the general public, cause-related marketing seems like a no-brainer. But many states across the country have adopted their own cause-related marketing laws to protect the general public from schemers.

Cause-related marketing implicates two major areas of law: charitable solicitation laws and commercial co-venturer (“CCV”) laws. Charitable solicitation laws are often invoked when a business makes a request for someone to make a donation or to purchase something with the implication that such purchase will benefit a charity. CCV laws apply when a business represents that a portion or dollar amount of the purchase price of their good or service will benefit a charity. Most cause-related marketing programs involve one or both of these areas of the law, which implicate registration and reporting requirements of a number of states.

The most difficult part of these laws is that they vary significantly from state to state. Does your business only transact business in Nebraska? If yes, you are in luck, because Nebraska does not (yet) have charitable solicitation or CCV laws. But if your business is web-based or makes sales in other states, a number of different requirements could apply.

There are seven (7) main requirements under these laws that can apply to commercial entities that partner with charitable organizations:

1) Written authorization from or a written contract with the charity;
2) Maintaining books and records for three years;
3) Disclosing certain information to prospective donors;
4) Filing of a contract with the charity with the state (currently applies in 5 states);
5) Registration or reporting to the state (currently applies in 3 states);
6) Reporting to the charity (currently applies in 2 states); and
7) Filing a bond with the state (currently applies in 2 states).

Many states require that the business have a written agreement or written authorization by the charity before engaging in the cause-related marketing program. Depending on the state in which the business operates, the business may need to file a copy of the agreement with the attorney general or other state officer. The agreement should satisfy the following:

• Must be signed by two officers of the charity;
• Describe the services to be offered and the geographic area of the offering;
• Describe the manner in which contributions to the charity will be used; and
• Include a provision that the business will provide an annual accounting.

For every request or representation that a purchase will benefit a charity, the business may need to disclose one or all of the following (again, depending on the state of operation):

• Contact information and tax-exempt status of the business;
• Contact information and tax-exempt status of the charity;
• Purpose and description of the promotion;
• A statement specifying the portion of the purchase price that will go to the charity;
• A statement specifying whether the purchase is tax-deductible; and
• A statement that the customer may request additional information from the business or the state.

Other states require certain registration with the attorney general, filing of bonds, filing of closing statements, annual financial reporting, and other state-specific requirements.

Many businesses wade into this area with the best intentions. However, as a result of fraud and misrepresentations by unscrupulous marketers, even doing good has legal requirements.

Hannah K. Fischer

Michael L. Sullivan

1700 Farnam Street | Suite 1500 | Omaha, NE 68102 | 402.344.0500