NONPROFIT QUICKTIPSSM
An electronic publication of Pfau Englund Nonprofit Law, P.C.
Disclaimer: This publication is designed to provide accurate information in regard to the subject matter covered. However, it is not intended to provide legal or other professional advice. If legal advice is required, the services of a competent professional should be sought.
Nonprofit Affinity Programs – What's Your Risk?
Nonprofit groups are increasingly finding that lending their names, logos and mailing lists to commercial vendors is a good way to increase visibility and provide a source of non-dues revenue. When considering these types of arrangements, however, nonprofit groups should assess and attempt to limit their legal exposure to product liability claims and the tax on unrelated business income.
Product Liability
Product liability claims may arise based on theories of failure to warn, providing false or inaccurate information about a product (misrepresentation), and failure to exercise reasonable care in evaluating and supplying the product or service. To limit legal exposure for product liability, nonprofit groups should:
Limit their involvement with the commercial entity to licensing the use of the group’s name and logo. The nonprofit group should exercise no control over the commercial entity’s operations. In many cases, courts tend to find liability only where a nonprofit exercised some control over the outside vendor or assumed some of the vendor’s responsibilities;
Carefully review language related to program, being careful not to "endorse" the product or service, making sure that claims can be substantiated and including disclaimers where appropriate. All language related to affinity programs should be reviewed regularly to make sure that the language and claims remain accurate and timely;
Transfer some of the legal risks by including indemnification clauses and insurance requirements for the vendor in endorsement agreements. The nonprofit group should review its own insurance policies to determine if product liability claims based on endorsements are covered; and
Exercise care and due diligence when selecting vendors with whom to work. The nonprofit group also should consider indicating in information about the sponsored program that its sponsorship of the program is intended to supplement and not supplant the consumer’s own evaluation of available products and services.
Tax Implications
Affinity programs may subject a nonprofit group to the tax on unrelated business income if the fees to be received by the nonprofit group are not properly structured as royalty income. To limit liability for the tax on unrelated business income, nonprofit groups should:
Avoid active participation in programs they promote, requiring the vendor to develop and disseminate promotions for the program;
Charge fair market value for advertising and exhibit space provided to the vendor for promotion of the endorsed program;
Specifically state in agreements that fees paid are for the licensing of the group’s name and logo and/or use of its mailing list; and
Not assume any risk of profit loss with respect to the program.
Affinity arrangements can benefit your nonprofit organization. To maximize this benefit, however, it is important that you properly structure the arrangements to limit legal liability and exposure to the unrelated business income tax.
Nonprofit QuickTipsSM is a periodic electronic publication of Pfau Englund Nonprofit Law, P.C. It is intended to provide nonprofit executives with useful, quick legal tips. If you have a topic you would like covered in this publication, or know someone who would like to be added to our e-mail list, please contact the firm.