• Avoiding Legal Pitfalls in Cause-Related Marketing
  • August 12, 2011 | Authors: Kristalyn J. Loson; Jonathan L. Pompan
  • Law Firm: Venable LLP - Washington Office
  • Increasingly, many marketers are looking to affiliate with charitable organizations in cause-related marketing efforts, such as arrangements in which a charitable donation is built into the cost of purchase of a good or service, to both raise donations and corporate image.  After two years of decline, charitable giving as a whole is increasing, according to a survey by the Chronicle of Philanthropy, and marketers may be even more interested in cause-related marketing campaigns.However, as seen by the recent lawsuit filed against Lady Gaga over charity wristbands for Japanese earthquake victims,2 good intentions are not enough to prevent scrutiny and legal trouble.

    The suit filed against Lady Gaga (real name, Stefani Germanotta) alleges that in selling $5 wristbands that say “We Pray for Japan,” Lady Gaga violated federal racketeering and consumer protection laws and engaged in unfair and deceptive advertising by stating that “all proceeds go the Japan Tsunami Relief.”  According to the complaint, filed by an attorney with 1-800-LAW-FIRM, a Michigan-based legal network, this statement was misleading in that it did not account for taxes and shipping fees on its wristbands.3

    While the legal merits of the claims are yet to be evaluated, this case serves as a reminder for any marketer seeking to enter a cause-related marketing relationship with a charitable organization to pay attention to potential legal issues prior to embarking on an advertising campaign.  Below we highlight a few of the key issues to be considered.

    Commercial Co-Venturer Registration

    Currently, over 20 states regulate “commercial co-ventures,” typically defined under state law as “arrangements between a commercial entity under which the commercial entity advertises in a sales or marketing campaign that the purchase or use of its goods or services will benefit a charity or a charitable purpose.”  While commercial co-venturer relationships come in many forms, the most common scenario involves a for-profit, taxable business using the name and/or logo of a charitable organization for the purpose of increasing sales of the for-profit entity’s products or services while at the same time increasing revenue to the charity.As their popularity has increased, such arrangements have come under increased regulation and scrutiny.

    In some states the commercial entity, often referred to as the “co-venturer,” is required to  register with the state prior to the advertising of the commercial co-venturer relationship and must meet requirements such as a bond and filing of financial reports.  In other states in which registration is not required, specific recordkeeping requirements and/or mandatory contractual terms between the organization and the commercial co-venturer are imposed.  State statutes may also specify required disclosures for advertising the good or service and typically prohibit the commercial entity from making false or misleading advertisements in connection with a solicitation. 

    States have been particularly active in enforcing commercial co-venturer statutes and charitable solicitation laws in general.  The Attorney General of each state generally holds enforcement power under these statutes and fines for violation can be up to $25,000.  Therefore, it is important that marketers embarking on campaigns with charitable organizations consider state regulation of commercial co-ventures and plan for registration where required before launching their campaign.

    Unfair and Deceptive Practices

    In addition to potential state registration requirements, both the Federal Trade Commission Act (“the FTC Act”) and state consumer protection statutes known as “Mini-FTC Acts” prohibit unfair and deceptive practices, which include misrepresentations of material facts regarding a product or service as well as omissions of information that would be material to a consumer’s decision to purchase a product or service.

    The FTC and state Attorneys General have collaborated on a number of actions to enforce the FTC Act and Mini-FTC Acts against charities and fundraisers alleged to engage in deceptive marketing, including in cause-related marketing efforts.  For example, the FTC has brought actions against companies alleged to deceptively offer advertising space under the guise that it would benefit a law enforcement organization,5 sellers of household goods alleged to have been manufactured by disadvantaged workers,6 and a company selling children’s activity books claiming to benefit children’s hospitals.7

    In one well-known example, the Georgia Attorney General investigated a Yoplait yogurt campaign for the Breast Cancer Research Foundation where the company advertised it would make a contribution for each lid collected without revealing the agreed-to maximum donation of $100,000.This investigation concluded with General Mills, the company behind the Yoplait campaign, paying an additional $63,000 to the Breast Cancer Research Foundation, representing the amount that would have been donated through the lid collection efforts of Georgia consumers.  Although it does not appear one was initiated in this case, Georgia, like several other states, includes a private right of action for persons injured as a violation of its charitable solicitation statute, adding another level of risk for a cause-related marketing campaign.

    As Lady Gaga discovered, claims of certain percentages going to charity are often closely scrutinized.  Therefore, marketers entering into ventures with charities should take care to look at their claims from every angle to ensure that in seeking to increase donations to a charitable cause, consumers are not misled.  Marketers should also review and make appropriate disclosures concerning applicable timeframes for campaigns and any contribution caps.

    Relationships with Charitable Organizations

    Marketers should perform due diligence on potential partners when entering into any new commercial venture, and cause-related marketing efforts should be no different.  In fact, because charities are themselves subject to legal and regulatory requirements, the marketer is opening itself to some unique legal and relationship risks in cause-related marking relationships.  For example, one risk may be that the charitable organization is not itself in compliance with applicable charitable solicitation requirements9 or found to be a “scam” organization.

    For these reasons, marketers should consider adopting contractual protections in their cause-related marketing agreements.  These protections could address such areas as compliance with charitable solicitations laws and the Internal Revenue Code.  The marketer should also develop a due diligence and reporting program in order to collect relevant information to confirm the charity’s compliance with applicable law.  Finally, provisions for indemnification of the marketer by the charitable organization for any claim related to the status of the charitable organization, as well as insurance to cover the indemnity obligation, also should be considered in the agreement with the charitable organization.

    *  *  *  *  *  *

    The rise in popularity of cause-related marketing allows consumers another way to contribute to worthy causes and raise corporate goodwill.  While there are certainly some risks involved for marketers, with appropriate attention these risks are manageable and marketers can take proper precautions to steer clear of legal pitfalls.

    1 Holly Hall & Heather Joslyn, Giving’s Recovery Lacks Momentum Says Charities, CHRONICLE OF PHILANTHROPY, June 26, 2011, available at:  http://philanthropy.com/article/Outlook-for-Giving-in-2011-Is/128011/.

    2 See Lady Gaga Sued Over Japan Earthquake Charity Bracelets, REUTERS, June 27, 20011, available at:  http://www.reuters.com/article/2011/06/27/us-ladygaga-idUSTRE75Q57220110627.

    3 See Complaint in Caitlin Demetsenare v. Stefani Germanotta et. al., No. 2:11-CV-12753-BAF-LJM (E.D.M.I. 2011).

    4 See What’s In a Nonprofit’s Name: Public Trust, Profit and the Potential for Public Deception; A Preliminary Multistate Report on Corporate-Commercial/Nonprofit Product Marketing Advertising of Commercial Products (1999) [hereinafter 1999 Attorneys General Report], available at http://www.oag.state.ny.us/press/reports/nonprofit/full&under;text.html.

    5 See FTC v. Southwest Marketing Concepts, Inc., Civ. No. H-97-1070 (N.D. Tex. 1997).

    6 See FTC. v. Crooked Oak Investments et al., Civ. No. 00-1496 PHX-ROS (D. Ariz. 2000).

    7 See FTC v. DPS Activity Publishing, Ltd. et al., Civ. No. C 03-1078C (W.D. Wash. 2003).

    8 See GA Secretary of State press release: http://sos.georgia.gov/pressrel/pr991221.htm.

    9 In the vast majority of states, the charitable organization is required to register prior to conducting solicitations or having solicitations conducted on its behalf.