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The Hazards of Charitable Fundraising

We have all been touched by the Sept. 11 tragedy. Many marketers around the nation have sought to do what they can to help by incorporating cause-related claims in their advertising. Some have sought to create awareness for a charity. Others have sought to support the relief effort by donating a portion of sales to a charity.

While all of these efforts are laudable, marketers should be aware that cause-related marketing is a highly regulated and complex practice that poses numerous traps for the unwary.

Cause-related marketing can take a variety of forms, from simply listing a charity by name on a Web site and encouraging consumers to support it, to claiming that a portion of future proceeds will be donated to the charity, to direct fundraising. Though promotions that simply mention a charity and encourage consumers to support it on their own usually do not fall within the applicable charitable-solicitation laws [i.e., “support the Red Cross — donate blood”], promotions claiming that a portion of the proceeds of a purchase will be donated to a charity may trigger charitable-solicitation laws in many states. Other types of direct fundraising will trigger a maze of filing and reporting requirements in about 40 states. This article examines laws relating to promotions in which part of the purchase will be donated to a charity.

Many doubt that a legitimate temporary promotion undertaken in the aftermath of the tragedy, in which part of a marketer's sales will be donated to a charity (e.g., all profits from today's sales will be donated to a particular charity) will trigger an enforcement action under charitable-solicitation laws. However, any long-term cause-related promotion may be subject to these laws.

Commercial co-venturer. Generally, a person who regularly and primarily engages in nonfundraising business, and who conducts a promotion in which it is represented that the purchase of goods or services offered by it will benefit a charity, is considered a commercial co-venturer. In other words, a marketer of widgets who claims that $1 from every widget sold will be donated to XYZ charity would fall under this definition. About 20 states regulate these types of promotions. Other states may try to regulate these promotions through other charitable-solicitation laws aimed at fundraising counsel or professional fundraisers.

Be truthful and disclose what you are doing. It remains to be seen whether regulators will challenge marketers who make cause-related claims supporting the Sept. 11 relief effort to comply with the technical requirements of charitable-solicitation laws. However, separate from enforcing such laws, regulators undoubtedly will check whether a marketer is doing what he promised.

If a marketer claims that he is donating a portion of future proceeds, he should disclose the amount (i.e., 1 percent of gross; 2 percent of net profits, etc.). If there is a cap on the amount contributed (e.g., $50,000) or a threshold to meet before the marketer will make a donation (e.g., $25,000 in sales), all restrictions should be disclosed to the consumer in a meaningful manner before the purchase. Otherwise, a marketer risks regulatory challenge and the attendant negative publicity.

In the past, regulators have challenged marketers who failed to adequately disclose a contribution cap before the sale of the product. For example, one company's disclosure of a contribution cap was limited to statements under a product lid. This limitation could not have been discovered until after the product was purchased. Therefore, the regulator took the position that there was no meaningful disclosure of the limitation.

Some states expressly require disclosure of the expected portion of the sales price or other consideration the charity is to receive. In addition, the name and address of the charity should be disclosed.

Contract with the charity. Most commercial co-venture laws require a written contract between the charity and the commercial co-venturer. Moreover, a marketer should obtain the charity's permission to use its name and intellectual-property rights in a given promotion. The contract should include a description of the goods or services being offered to the public, the geographic area, the start and end dates of the promotion, the extent of the right to use the charity's name and intellectual property, provisions for an accounting and the dates for a payment to the charity. Usually, it is the charity's responsibility to file a copy of the contract before the promotion. A few states require the commercial co-venturer to be bonded and registered.

Any marketer that intends to use cause-related marketing as part of a promotion should discuss it with competent counsel.

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