Non Profit Report - March 2012

Date: March 19, 2012

Could Your Association’s Chapter Program Be Considered a Franchise System?
By: David L. Cahn

In the July 2011 issue of our WTP Nonprofit Report, we described a highly unusual development; the decision by a United States Court of Appeals in Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America, Inc., 646 F.3d 983 (7th Cir. 2011), that the national Girl Scouts organization, a nonprofit incorporated by an Act of Congress, violated the Wisconsin Fair Dealership Law by dissolving a local Wisconsin chapter of the national organization "without good cause."  The 2011 decision is notable both because of its author, the extremely well-known, respected and conservative Judge Richard Posner, and because of the language used by the Court in rejecting the Girl Scouts of the United States’ arguments for immunity based on its nonprofit mission.  This article is designed to help the leaders of nonprofit organizations and associations identify ways to mitigate risks posed by this decision.

Under the Wisconsin law, a "dealer" is one who is granted the right by contract to "use [the grantor's] trade name, trademark, service mark, logotype, advertising or other commercial symbol" and has "a community of interest" with the other party to the contract "in the business of offering, selling or distributing goods or services at wholesale, retail, by lease, agreement, or otherwise."  The Girl Scouts of the United States argued that its contract with the affiliate was not “commercial” and that the affiliate was not “in business.”  To that, the Court said:

. . . one doesn't usually think of nonprofit enterprises as being "commercial" and engaged in "business." Or didn't use to--for outweighing these hints is the fact that nonprofit enterprises frequently do engage in "commercial" or "business" activities, and certainly the Girl Scouts do. Proceeds of the sale of Girl Scout cookies are the major source of Manitou's income. The local councils sell other merchandise as well. Sales of merchandise account for almost a fifth of the national organization's income, and most of the rest comes from membership fees and thus depends on the success of the local councils in recruiting members; that in turn depends on the councils' revenues and thus gives the national organization an indirect stake in the cookie sales.

646 F.3d at 987.  The Court went on to emphasize that, when competing with for-profit entities in commercial enterprises and endeavors, nonprofits may be held to the same legal standards of conduct.

Laws that prohibit termination or cancellation of a dealer or franchisee, except for “good cause,” are called “franchise relationship” laws.  Wisconsin’s definition of a “dealer” is similar to the definition of a “franchise” under the franchise relationship laws of Arkansas, Connecticut, Delaware and New Jersey.   Another 11 states have franchise relationship laws, but require the “franchisee” to prove that it was required to pay some sort of “fee” as a condition of selling goods or services under the “grantor’s” trademark.  Such “fees” have been deemed charged if the “franchisee” was required to pay the “franchisor” for a policies and procedures manual, for its director to attend a training conference, or even for marketing materials to distribute to prospective customers of the good or service.

The 15 states that have laws regulating the granting of a franchise, typically known as “franchise sales laws,” mandate certain disclosures be provided to prospective franchisees and that the franchisor refrain from certain actions in recruiting franchisees.  All of those laws also contain a requirement that the “grantee” directly or indirectly pay some sort of “fee” to the grantor as a condition of operating under the grantor’s trademark.   Most of those laws do not require that the fee be paid up front, and thus the fee could be a percentage of the grantee’s cash received in operating the business.  However, payments from the grantee to the grantor for products at their “bona fide wholesale price” cannot be franchise fees, and the payment of commissions to the grantee when it has acted as a bona fide sales agent of the grantor are excluded.   However, if the fee element is satisfied and there is substantial association with a common name, then Judge Posner’s reasoning on what is a “commercial endeavor” and operation of a “business” could be meaningful in proving the existence of a franchise.

The Federal Trade Commission also has a trade regulation rule that contains disclosure requirements and recruitment prohibitions that are similar to the state franchise sales laws.  Fortunately for nonprofit organizations, the FTC has issued several advisory opinions finding that a nonprofit engaging in transactions that would otherwise be considered franchising were exempt from the Franchise Rule provided that (a) the licensor is not engaged in the relationship “for its own profit or the profit of its members,” and (b) the licensees are also bona fide non-profits.  The first requirement is driven by the limit of the FTC’s jurisdiction, since it may only regulate a company “which is organized to carry on business for its own profit or that of its members.”  15 U.S.C. § 44.  However, when the nonprofit associations of glass makers and insurance agents collaborated to form “The Glass Network” to enable the insurers to obtain lower cost auto glass replacement services and the glass makers access to that market, the FTC staff found that “network” to be covered by the Franchise Rule, notwithstanding its ownership by nonprofits.  The Glass Network, LLC, FTC Informal Staff Advisory Opinion 04-4 (2004).   

What follows are some key questions to ask in determining whether your chapter or affiliate program could be deemed a franchise system, or should otherwise focus on franchise law matters:

  1. Are your members for-profit companies or professionals?
  2. Is there an upfront affiliation fee or annual dues to maintain affiliate status, or a requirement that the affiliate purchase certain quantities of goods or services, regardless of customer demand? 
  3. Do your affiliates pay you a share of membership dues they receive, or does the affiliate receive membership commissions from you?   
  4. Is your association’s name or logo a prominent or significant part of the affiliate’s name or identity, from the perspective of its members? 
  5. Do your affiliates provide direct business development opportunities for their members (as opposed to general promotional benefit)?  
  6. Does a substantial portion of each of your affiliates’ revenues come from the sale of the same type of products or services, and are those products or services also sold by for-profit companies? Examples besides cookies are travel tours, function facility space, summer camps, or sports leagues.
  7. Do your affiliates have exclusive territorial rights?  
  8. Is there a minimum quota of memberships that the affiliate must maintain? 
  9. Is good cause required to terminate the affiliate’s charter? 
  10. Is there a covenant not to compete after revocation of the charter, and if so who does it bind (i.e., just the affiliate as a nonprofit entity, or also its officers and directors)? 

As Technology Advances, Testing Accommodations Under the ADA Must Keep Pace
By: Megan C. Spratt

As computer technology continues to make rapid advances, the issue of what constitutes an appropriate accommodation for test-takers under Title III of the ADA is being re-examined by the courts.  Specifically, in the case of Enyart v. National Conference of Bar Examiners, Inc., the U.S. Court of Appeals for the Ninth Circuit ruled that accommodations should be evaluated under a “best ensure” standard, rather than a reasonable/effective standard. 

As background, Stephanie Enyart, a legally blind law school graduate, applied to take the Multistate Professional Responsibility Exam (“MPRE”) and the Multistate Bar Exam (“MBE”), and requested a number of accommodations for her disability, including a yoga mat, extra time, a private room, and hourly breaks, as well as assistive technology computer software known as JAWS and ZoomText.  JAWS is an assistive screen-reader program that reads text aloud on a computer screen.  ZoomText is a screen-magnification program enabling the user to adjust the font, size, and color of text and to control a high-visibility cursor.  National Conference of Bar Examiners (“NCBE”), the developer of both exams, granted all of her requests except for the computer equipped with JAWS and ZoomText.  Instead, NCBE offered to provide her with a human reader, an audio CD of the test questions, a braille version of the test, and/or a CCTV with a hard-copy version in large font with white letters printed on a black background.  These accommodations, however, were deemed insufficient by Enyart, who contended that the auditory accommodations offered would not permit her to sufficiently comprehend and retain the language used on the test, while the other accommodations offered would cause her to suffer eye fatigue, disorientation, and nausea.  As a result, Enyart filed suit under the ADA seeking injunctive relief.  The U.S. District Court for the Northern District of California issued preliminary injunctions mandating that NCBE permit Enyart to take the exams using the software.   On NCBE’s appeal, the Court of Appeals affirmed.

Title III of the ADA requires entities that offer professional licensing exams to offer such exams in a place and manner that is “accessible” to persons with disabilities or offer “alternative accessible arrangements” for such individuals.  Pursuant to its power to issue regulations administering Title III’s mandates, the Department of Justice has adopted a regulation delineating the duties of testing entities, requiring such entities to assure that the exam is selected and administered so as to “best ensure” that the exam results accurately reflect the test-taker’s aptitude or achievement level, rather than the person’s disability.  Enyart argued that the Department of Justice’s “best ensure” standard should be followed when analyzing testing accommodations, while NCBE countered that the regulation is invalid and instead asked the Court of Appeals to require only that a “reasonable” accommodation be required to make the tests accessible to Enyart.

The Court of Appeals found that Title III’s use of the phrases “accessible” and “alternative accessible arrangements” is ambiguous, since nowhere in the entire ADA are those terms defined.  As a result of this ambiguity, the Court of Appeals determined that it must defer to the Department of Justice’s interpretation of the statute (i.e., the “best ensure” test), and underscored its support of the new standard by noting, “assistive technology is not frozen in time: as technology advances, testing accommodations should advance as well.”  In applying the “best ensure” standard, the Court of Appeals concluded that the District Court did not abuse its discretion in finding that the accommodations offered by NBCE did not make the exam accessible to Enyart.    

Other courts have also adopted the “best ensure” standard, indicating a growing trend.  For example, in Jones v. National Conference of Bar Examiners, another case involving an MPRE examinee’s use of a computer equipped with screen access software, the U.S. District Court for the District of Vermont determined that the “best ensure” test “is entitled to controlling weight and governs the outcome in this case.”  Likewise, in the case of Bonnette v. District of Columbia Court of Appeals, brought by a blind law school graduate taking the MBE, the U.S. District Court for the District of Columbia applied the “best ensure” standard, rather than simply requiring that a “reasonable” accommodation be made. 

The growing application of the “best ensure” standard indicates that testing accommodations must keep pace with advances in technology.

District of Columbia Two-Year Report Filing Deadline: April 2nd

April 2, 2012 is the Two-Year Report filing deadline for those domestic and foreign nonprofit corporations scheduled to file with the District of Columbia in this reporting period. The filing deadline was previously January 15th. The new April 1st date was implemented by D.C. for 2012 and future years (April 2nd in 2012 due to April 1st falling on a Sunday) in connection with the recent revisions to the D.C. corporations law. The filing fee is $80 for nonprofit corporations. The late fee is $50.