COVID-19 Giveaways: Avoiding the Pitfalls of Charitable Promotions and Marketing
Date: April 21, 2020
Many organizations have substantially increased their charitable contributions, corporate giving and philanthropy to assist those affected by the COVID-19 pandemic. For example, businesses and organizations have set up funds to match monetary donations used to provide financial relief to agencies and people impacted by this extraordinary situation up to a stated dollar value. Others have announced that they will support the cause by matching or even doubling donations that their employees make to organizations providing COVID-19 relief. Still others have committed to donating certain profits from their sales to first responders. In fact, companies from around the world have donated products, time and other resources to assist in the effort to stop the spread of COVID-19.
Yet despite the generous nature of these efforts, businesses must exercise diligence when seeking to implement charitable programs, as there is a broad set of federal and state laws designed to protect consumers and regulate charitable contribution arrangements. In addition, businesses should be aware of the unique privacy regulations that may apply to them as they collect personal information and financial data from individuals looking to participate in these worthy causes. Violations could result in enforcement actions by the Federal Trade Commission, state attorneys generals' offices, and other federal and state agencies.
Charitable Sales Promotions
An organization seeking to implement a promotion in which a portion of its sales will be donated to a COVID-19 or other charitable cause must conduct the program in accordance with federal law and the charitable solicitation laws of all states in which the promotion will be run. To avoid legal risk in these areas, the organization should create a set of promotional rules that clearly disclose:
- the promotion sponsor;
- the start and end dates of the promotion;
- the specific products included in the promotion;
- the exact percentage or amount from each sale (e.g., 10% of sale, $1.00) that will be donated to the charitable organization; and
- the charitable purpose that will be supported.
To satisfy legal requirements, the organization should ensure that its charitable promotional rules are easily accessible from the website banner where the promotion is advertised or on any printed advertisements about the campaign. The promotional rules must clearly and accurately state all material terms of the promotion, and the promotion must be conducted in strict accordance with those rules. In addition, promotional product sales must be separately tracked, recorded and retained in accordance with the company’s standard accounting rules, and the actual amount of the donation must be paid in strict accordance with the promotional rules.
Commercial Co-Venture Agreement
If a business is running a charitable sales promotion campaign in which an advertised portion of sales proceeds will be donated to a specific, named nonprofit entity (e.g., the American Red Cross), a commercial co-venture (CCV) agreement is likely required prior to the start of the sales promotion. Although state and local laws may define a CCV slightly differently, it is generally described as a commercial entity that conducts a charitable sales promotion in which a portion of its sales benefit a specifically identified charity.
Although individual states regulate CCV arrangements differently, there are many commonalities. For example, many states require a written contract or agreement between the CCV and the nonprofit setting forth the nature and scope of their relationship. Pursuant to some state laws, the organizations must register with designated state agencies both before and after the promotion is conducted. In addition, some state laws prescribe specific language that must be included in promotional advertisements, and some states even require the CCV to post a bond to guarantee the payment to the nonprofit. Most states require the CCV to maintain records of sales under the charitable sales promotion, which may be subject to audit. Given the potential application of dozens of different laws and rules regulating CCVs, it is important that a company research the state-specific requirements for all states in which it plans to run a charitable sales campaign well in advance.
Charitable Sweepstakes and Giveaways
As noted above, many organizations are responding to the COVID-19 crisis with giveaways that honor the frontline responders (e.g., medical professionals, restaurant workers, essential employees) or that offer products currently in short supply as prizes. Before running this type of program, however, a business must understand the myriad state and federal rules that dictate how the promotion must be structured to comply with applicable laws and to abide by any state-specific registration requirements.
Under state and federal lottery laws, a private institution is prohibited from running a “lottery,” which is any promotion including the following three elements: payment or giving something of value/effort, chance or luck, and a prize. For a corporate promotion to avoid being labeled as an unlawful lottery, the promotion must eliminate one of these three elements. Typically, (non-lottery) giveaways take the form of a “sweepstakes” (which allows participants to enter without payment) or a “contest” (which awards a prize based on skill, rather than luck). For example, a promotion that accepts nominations for COVID-19 first responders and awards a prize based on merit or other criteria to determine the most deserving nominee would be considered a contest. A promotion in which participants “like” a company’s post or submit mail-in entries for a giveaway chosen by random drawing would be considered a sweepstakes. It is important to structure the promotion appropriately to avoid classification of an illegal lottery.
There are additional issues to consider before conducting a giveaway in the current climate. In light of potential supply chain disruptions, postal or delivery stoppages, and other issues that may delay or prevent the company from providing the advertised prize within the specified timeframe, the official giveaway rules should permit the sponsor to cancel, terminate, modify or suspend the giveaway in whole or in part and should reserve a right for the sponsor to make necessary changes to the administration of the giveaway. In addition, the business should consider whether giveaway prizes are being obtained from reputable sources that adhere to current standards regarding worker health and welfare and product preparation and sanitization. Lastly, a business should ensure that any prizes for which it is responsible for shipping are sent in accordance with recommendations and best practices to prevent the spread of COVID-19.
Charities and Data Privacy
Although U.S. federal and state privacy laws are not unique or generally tailored to charitable activities, they are relevant to any scenario in which a business is collecting and retaining personal information or financial data. For example, the California Consumer Privacy Act of 2018 (CCPA) creates a broad range of obligations on certain businesses anytime they are collecting California residents’ “personal information.” The CCPA broadly defines personal information to include several categories of personal data often collected in charitable programs, such as name, postal or email address, financial data, and the products or services purchased from a business. Although the CCPA does not, in some circumstances, apply to nonprofit organizations, it does otherwise apply to covered businesses that are engaging in charitable activities.
In accordance with the CCPA, an organization may have to provide individuals participating in its charitable campaign with notice of how it will collect, use and share their personal information, and the data privacy rights afforded to them under the law. If the charity is part of a covered business’s “financial incentive” program (as the term is defined under the CCPA), it may have to furnish additional disclosures to the participants and formally obtain their “opt-in” consent to the program. Other state laws have privacy notice requirements analogous to the CCPA, and an organization seeking to operate a COVID-19 charitable program should assess each state’s privacy framework to ensure that it is properly addressing these requirements through appropriate website privacy statements or other similar disclosures.
It is common that organizations and individuals want to recognize others’ sacrifices and selfless acts. Often, a business may seek to operate a charitable program where such courageous individuals are nominated by friends or family members to receive an award or a prize. However, in these circumstances, it is the friends or family members (rather than the individuals themselves) who are providing personal information to the business. In other words, the individuals who have been nominated to receive a prize have not agreed to the program’s official rules or authorized the use or disclosure of their name, video, picture or other information that may be contained in the nomination. Before uploading or publicly posting a giveaway entry provided by a third party, the business should obtain from the nominee a publicity release and consent to the official rules and ensure that other privacy notification and disclosures have been satisfied.
Many of the charitable donations that have been forthcoming since the beginning of the COVID-19 crisis have been generous and heartwarming. However, federal and state authorities often scrutinize charitable programs to ensure that consumers and others who are seeking to contribute to a charitable cause are not subject to fraud or other illegal actions. Therefore, businesses should be aware of the many requirements that may apply to the programs and promotions they design to support the COVID-19 response.
FOR MORE INFORMATION
For more information, please contact:
Darcy M. Brosky
Jennifer N. Elleman
Steven G. Stransky
We have assembled a firmwide multidisciplinary task force to address clients’ business and legal concerns and needs related to the COVID-19 pandemic. Please see our COVID-19 Task Force page for additional information and resources.
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