Raising Money for COVID 19 Related Causes? Read this First.
Raising Money for COVID 19 Related Causes? Read this First.
By: Nicole Kardell
Social causes are an important part of both community and business culture. Increasingly, businesses identify social causes to support as a part of their company mission. When they fold that mission into their marketing, it can trigger federal and state consumer protection laws (as well as federal tax laws). Why? To prevent fraud and deception. Regulators do not want for-profit companies to mislead people into buying products or services under the pretense of supporting a charity if, in fact, little or nothing goes to that charity. Generally speaking, regulators’ purpose in the cause marketing space is to ensure transparency in charitable sales promotions: that businesses are upfront with consumers and the charities the say they support.
We provide here an overview of cause marketing and legal requirements that businesses need to explore.
What is cause marketing?
Cause marketing is a relationship between a charitable organization and a for-profit company in which the for-profit company engages in a sales promotion promising to donate to the charity. Commonly, the promotion will involve a donation to the charity tied to a consumer’s purchase of goods or services. For legalese, this type of arrangement is referred to as a “commercial co-venture” under legal frameworks.
To get a little more technical, the following is a definition of “commercial co-venturer” under New York law:
Any 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 who advertises that the purchase or use of goods, services, entertainment, or any other thing of value will benefit a charitable organization.
NOTE: Cause marketing is distinct from individuals raising money for different causes. It is specific to commercial/non-profit relationships.
What are the legal requirements of a cause marketing campaign?
If your for-profit company decides to team up with a non-profit for a charitable sales promotion, you should familiarize yourself with the legal ramifications of your campaign. Again, the law enforcers’ role in cause marketing is to prevent companies from misleading consumers or not following through with promises to charities. The two primary elements to legal compliance in cause marketing are (1) transparency with the consumer and (2) transparency with the charity. Depending on the nature of your charitable sales promotion, you may need to jump through a few regulatory hoops in several states that have frameworks in place to oversee these elements. For a little more detail on these elements, we break them out below:
- Transparency with the consumer – clearly describe the promotion to potential buyers
Your advertising/marketing campaign should include important disclosures outlining the who, what, where, when and why of your charitable sales promotion. Both advertising and labeling should include details on (1) who the charity is that you are supporting, including a brief description if the charity’s purpose is not readily discernible; (2) what you are doing to support that charity, e.g., making a flat donation, providing a fixed dollar amount per purchase or fixed percentage of proceeds, guaranteeing any minimums, or establishing any caps on the amount to be donated; and (3) how long the promotion will last. You should also provide information on any required consumer action or any restrictions.
This information should be provided to the consumer at or before the point of sale. And the terms of the promotion should be visible alongside the promotion. The goal is to ensure that consumers have enough information to understand how their purchase may or will benefit the charity. A charitable sales promotion gone wrong: Yoplait set out to support the Susan G. Komen foundation in a campaign that included details on the underside of its yogurt lids. The promotion thus required people to purchase the yogurt (and eat it) before they knew the terms. This led to an investigation by the Georgia Attorney General, and, perhaps worse, turned Yoplait’s saga into a popular example of what not to do.
The New York Attorney General provides helpful guidance on best practices for cause marketing campaigns, which companies should review before launching a campaign. In that guidance, they suggest the following template on donation information:
Name of Charity
10 cents Per Purchase
|Limitations on Donation
|$500,000 Maximum Donation
Dates of Promotion
10/1/12 through 12/31/12
Transparency means using clear language in your promotion. Do not use language like “profits” or “proceeds” without details on actual percentages or fixed amounts. Vague language could be viewed as misleading by regulators. Also, consider providing detail about how much was raised at the end of the campaign.
A couple of other items of note:
Social media campaigns fall within the purview of cause marketing and should also follow guidance on advertising and marketing disclosures.
Due to potential tax implications, charities are generally limited from active involvement in a companies’ cause marketing campaign.
- Transparency with the charity – manage the charity’s expectations
There should be a written contract between the for-profit company and the charity it seeks to support in its cause marketing campaign. Indeed some 20 states require written consent by the charity before the beginning of a promotion. Terms to include are: (1) the goods or services to be promoted, (2) the geographic territory of the promotion, (3) the duration of the campaign, (4) the actual or estimated dollar amount the charity will receive (or percentage of sales), (5) any minimum amount to be donated or cap on the donation amount, (6) how the company will provide an accounting to the charity and (7) when the company will transfer funds to the charity. These contracts generally will (and should) include licensing details on use of copyrights and trademarks.
- State registration and reporting
To ensure transparency and to reduce the risk of misleading consumers and charities, several states require registration and reporting for certain cause marketing campaigns. These states include Alabama, Illinois, Massachusetts, and South Carolina. Other states, such as Mississippi, require the company to file a copy of the contract between the company and the charity as well as a report on the campaign. There are often registration fees and renewal requirements. Alabama and Massachusetts also require companies to file a bond with the state. Part of the registration process is reporting to state regulators on the results of the campaign, including an accounting. And registration is not limited to the companies running the campaigns. Generally, the charities supported by the campaign must also file in the states where registration is required (and their registration generally must predate the for-profit company’s registration).
To minimize legal compliance burdens, companies that want to support a charity generally can avoid registration requirements if they do not require the purchase of a product or service to support the promotion. Under the general definition of commercial co-venturer (see New York example above), what triggers enhanced regulatory scrutiny is tying consumer purchases to charitable contributions. In other words, if a company simply decides on a flat fee contribution to a charity, it can provide details of that arrangement in its marketing and promotion materials and NOT have to register with states that have registration requirements. But, those companies need to make sure that it is clear in their materials that a purchase does not impact the donation amount.
In sum, before you launch a cause marketing campaign, it is important to familiarize yourself with the legal requirements that may be implicated. Identify the states where you plan to market. Research whether you need to register with any of those states. Determine whether those states have specific contract terms you need to include with your target charity. Above all, ensure your campaign is clear about the who, what, where, when and why. We have helped clients review their promotions to ensure compliance and to minimize risks. If you hope to gain some good will through promoting a charity, the last thing you want to do is find yourself the topic of false or deceptive advertising.