Cause-Related Marketing: When Helping Others Helps Your Bottom Line

1. Cause-Related Marketing:When Helping Others Helps Your Bottom Line Sarah Duniway, J.D. 2010 Business Law Institute May 2010

2. Agenda • What is cause-related marketing • Overview of key issues • Case studies and analysis

3. Cause-Related Marketing • When a business supports a charitable cause or event to help the business get its name out • Advantages • Charitable goals • Raise funds • Raise awareness of issue, mission, programs • Business goals • Increase profits • Raise brand awareness • Promote business as good citizen to customers, employees

4. Key Issues • Use of charitable assets • Charitable solicitation regulations • Unrelated business income tax • Attribution of income • Managing risk • Sales tax

5. Use of Charitable Assets:Legal Principles • Charitable assets: • Money or goods donated to charitable cause or for charitable purposes • Charitable assets must be exclusively dedicated to charitable purposes • Federal tax law principle: • No private inurement to insiders • Insubstantial private benefit

6. Use of Charitable Assets:Application • Ensure funds raised from public that purport to be for charitable cause: • Are in fact used for charity • Overhead and fundraising expenses reasonable • Charities name, logo, brand used consistent with its charitable purposes

7. Use of Charitable Assets:Application, Con’t • Manage private benefit • Benefits to business partner are: • Reasonable • Proportional to its investment • If charity provides goods or services to product or event: • Must receive fair market value return • Either compensation or share of contributions

8. Charitable Solicitation Regulations:Legal Principles • Most states regulate solicitation of charitable contributions in the state • Regulations govern the ask, not the give • Most require: • Registration with state charity official • Reports regarding fundraising activities • Require honesty and fair dealing

9. Charitable Solicitation Regulations:Legal Principles, Con’t • Many states regulate professional fundraisers • Definitions vary by state • Example: Minnesota defines “professional fundraiser” as: • Person or entity (other than charity’s employees) • Who for compensation or profit • Solicits charitable contributions, • Includes sale of goods if portion of proceeds will be donated to charity • Manages, advises, consults, or prepares material for solicitation of charitable contributions

10. Charitable Solicitation Regulations:Application, Con’t • Co-ventured fundraising activities with a profit component can trigger professional fundraiser rules • Reach of rules is intentionally broad • Catches anyone who asks for donations or even prepares materials • If the person will be compensated or make profit

11. Unrelated Business Taxable Income (UBTI): Legal Principles • Nonprofits must pay income tax on net income from unrelated business activities • Unrelated business income is income from: • Trade or business • Regularly carried on • Not substantially related to organization’s tax-exempt purpose

12. UBTI:Definition • Activity itself must be related • Using $$ for good works not enough • Examples of activities that can generate UBTI: • Sale of advertising • Sale of consumer products where selling product does not further mission • Performance of services unrelated to mission

13. UBTI:Exceptions • Exceptions include: • Royalties (i.e., licensing fees) • Qualified sponsorship payments • Income from passive investments • Work performed substantially by volunteers • Resale of donated goods

14. UBTI Exceptions:Royalties • Royalties are payments for the use of valuable intangible property • Name, logo, mailing list • If nonprofit performs more than minimal activities, payment is for services and not a royalty • Limited oversight to ensure quality – ok • Limited activity to make availability known – ok • Active promotion – not royalty • Active involvement in event, campaign, sales – not royalty

15. UBTI Exceptions: Corporate Sponsorships • Qualified sponsorship payment is: • Flat sponsorship payment in excess of any “substantial return benefit” • Not UBTI • Substantial return benefit: • Advertising but not acknowledgments • Name, logo, tag line & contact info are “acknowledgement”, if value-neutral • Goods and services (de minimis ok)

16. UBTI Exceptions: Corporate Sponsorships • Substantial return benefit, con’t • Right to use nonprofit’s logo, trademark or goodwill • Exclusive provider arrangements

17. Income Attribution Issues:Legal Principles • Income is attributed to the party who gets to control it • Donor can take charitable deduction only for a contribution to a charity • If business partner receives the money, • Who gets the deduction? • Is it income to the business?

18. Income Attribution Issues:Application • If donors/customers will get deduction: • Must structure relationship with business partner as a true agency relationship • Agency means charity gets to control its agent and is liable for its actions • If business partner will get the deduction: • Be clear in materials that donors/customers are making purchases, not donations • Income is attributed to business and taxed as such

19. Sales Tax • Generally all sales of goods and services are subject to sales tax • Governed by state law • Nonprofits generally not excepted from collecting sales tax • Common exception: certain fundraising sales • Issue: if fundraising is performed by business partner, can it use charity’s exemption?

20. Sales Tax • Nonprofits often have exemption from paying sales tax • When purchasing goods used in conduct of charitable activities • Issue: can business partner use charity’s exemption for purchases to benefit the charity?

21. Contracting Principles • Who has risk of failure? • Who bears risk of expenses? • If agency relationship, specify scope, limitations, responsibility for conduct • Who controls communications? • Ensure charity has control over its charitable assets • Right to approve materials, certain transactions, etc. • Use of names • Registration and disclosure obligations • Standard contract principles

22. Case Study: First Monday • Burger Palace designates First Mondays • Donates 1/3 of profits from all sales on first Monday of the month • To charity selected by employees

23. First MondaysAnalysis • Who gets the deduction? • Donation of profits implies it is restaurant who is making the donation • Restaurant should get the deduction • Proceeds from sales on First Monday all income to restaurant

24. First MondaysAnalysis • Is restaurant a professional fundraiser? • Probably not – not soliciting charitable contributions from public • Contrast: “1/3 of your payment for dinner will go to charity” • Can restaurant use charity’s name? • Should have permission

25. Case Study: Walk for Heart • HeartCo, a heart device manufacturer sponsors Walk for Heart to benefit local heart association • Key underwriter • Provides employee volunteers • Runs advertising campaign to promote walk • Charity names walk for HeartCo • All promotions include HeartCo’s name, logo, web site, tag line • HeartCo has booth with models of devices and educational materials

26. Walk for HeartAnalysis • Are payments, contributions of services and advertising a qualified sponsorship payment? • Yes. • Naming, inclusion in promotions is mere acknowledgement • Booth also qualifies as acknowledgement

27. Walk for HeartAnalysis • Contrast: heart association grants HeartCo license to use its logo on promotions of HeartCo devices • Right to use logo is a substantial return benefit • Must determine FMV of use of logo • Only payment in excess of FMV, if any, would be qualified sponsorship payments • Logo payment may be royalty

28. Case Study: Co-Branding • Environmental group, CleanUP, and home cleaning company co-brand a cleaning product • Brand includes CleanUP’s logo and endorsement • CleanUP gets % of profits from sales • CleanUP promotes product to its members, through its web site and materials • Company promotes product to public

29. Co-BrandingAnalysis • Are CleanUP’s charitable assets used for charitable purposes? • Is there too much private benefit? • Allocation of $$ fairly reflect parties’ contributions • If product promoted as benefiting CleanUP, funds to organization should be consistent with this claim • CleanUP should ensure product, company, use of its name are consistent with its mission, reputation

30. Co-BrandingAnalysis • Is income UBTI? • Is endorsing and marketing an eco-friendly cleaning product substantially related to CleanUP’s exempt purposes? • Close call • If not substantially related, is there an exception? • CleanUP’s promotion activities eliminate ability to classify income as a royalty, so no exception

31. Co-BrandingAnalysis • Other issues • Written agreement • Responsibilities and rights of each party • How $$ allocated • How project unwound if not successful • Who bears what risk • No charitable contributions involved • No sales tax exemptions

32. Conclusion • Cause-related marketing can benefit both parties • Important to structure carefully at front end • Written agreement • Consider registration, tax, UBTI, charitable assets issues up front • Benefit to charity must be reasonable • Representations to the public are key • Must be consistent with actual practices

33. Sarah Duniway, J.D. Gray Plant Mooty (612) 632-3055 Sarah.Duniway@gpmlaw.com