Co-branding Credit Cards with Charities: Commercial Co-Venture Issues

A cobranded credit card program in which the “merchant” is in fact a charity may be subject to special rules relating to the regulation of “commercial co-ventures” (also known as “cause-related marketing”).  Issuers and charities contemplating or operating such programs should keep these rules in mind to avoid regulatory problems.

Although the definition of a commercial co-venture varies slightly from state to state, it generally includes any promotion that represents to the public that the purchase or use of goods or services offered by a business (the commercial co-venturer -- in this case the issuer) will benefit a charitable organization.  Thus, for example, a co-branded card whose consumer value proposition includes a donation to the charity branding the card, or to some other charitable organization, would likely be a commercial co-venture.

Currently, approximately half of the states regulate the activities of commercial co-venturers and subject commercial co-venturers to various registration, contract, reporting and disclosure requirements.  The commercial co-venture rules are designed to protect the charity and the public from false advertising and to make sure that monies claimed to be going to charity actually get there. Although the requirements vary among states, they generally include: (1) a written agreement between the charity and the commercial co-venturer (which may need to be filed with the state); (2) registration requirements (which may include the posting of a bond); (3) disclosure requirements for all advertising materials; and (4) financial recordkeeping and reporting requirements.

This type of activity has not escaped scrutiny by regulators.  For example, at the end of 2011, the Charities Bureau of the New York State Attorney General’s Office (the “NY AG”) sent questionnaires to approximately 130 companies and 40 charities involved in cause-related marketing campaigns that represented that a portion of the sale of a product or service would support breast cancer research or screening. The questionnaires requested detailed information about the advertising, promised donations, campaign duration and donation limits of the cause-related marketing campaigns. As a result of this investigation, in October 2012, the NY AG released  a list of five best practices for “Transparent Cause Marketing” designed to increase disclosure to consumers.

1. Clearly Describe the Promotion — Consumers should be provided with key information before making a purchase, including the name and mission of the charity, the specific dollar amount per purchase that will go to charity, any caps on the donation, whether any consumer action is necessary to trigger a donation, and the start and end dates of the promotion.
2. Allow Consumers to Easily Determine the Donation Amount — Instead of using vague language like “a portion of proceeds” will go to charity, companies should use a fixed dollar amount or percentage for every purchase in advertisements, marketing and product packaging.
3. Be Transparent About What Is Not Apparent — The NY AG urges companies to maintain consumers’ trust by disclosing information that may not be obvious to them. For example, if the campaign uses a ribbon, color, logo or other indicia commonly associated with a particular charitable cause, companies should clearly indicate if the purchase of their product or service will trigger a donation to such charitable cause.
4. Ensure Transparency in Social Media — Increasingly, companies are using social media to promote their products and contribute to charities. Companies often make donations to charities when a user “likes” a company on Facebook or follows a company on Twitter. Companies should operate campaigns through social media with the same standards of transparency they would use in traditional promotions.
5. Tell the Public How Much Was Raised — After the conclusion of a promotion, the company should clearly display the amount of the charitable donation generated by the promotion on its website.

There are several obvious lessons here for issuers of cards co-branded with charities -- as well as some conundrums.  One lesson is that the issuer’s compliance organization should become conversant in commercial co-venture law.  Second, the program agreement should be structured to comply with that law.  Third, if even a de novo program agreement is going to have to be disclosed in whole or part, it should be designed accordingly.  One conundrum may be how commercial co-venture law interacts with the CFPB’s and bank regulators’ vendor-management guidance in the context of co-branded credit card program agreements.  The charity may also be subject to constraints on how much it is permitted to promote the co-branded card to its membership without running afoul of unrelated business income tax issues.

We may address these issues in more detail in future PLA posts, as well as such related matters as the issues associated with offering charitable donations as part of a rewards program palette.  DWT is fortunate to have leading practices both in payments and in tax-exempt organizations; please let us know if we can be helpful with issues that could impact both areas.