Developments in Association Law, 2016 – 2017

by Pillsbury Winthrop Shaw Pittman LLP
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There have been important legal developments at the federal and state levels for nonprofit organizations.

Takeaways

  • Nonprofits continue to experience Federal government and private litigant antitrust enforcement.
  • Nonprofits have litigated in other areas including governance, finances, intellectual property and records disclosure.
  • Nonprofits can enhance their own compliance by learning from the legal outcomes of others.

“Antitrust Guidance for Human Resource Professionals,” U.S. Dept. of Justice and Federal Trade Commission (October 2016)

The Department of Justice Antitrust Division and the Federal Trade Commission (FTC) jointly released guidance for Human Resource professionals to alert those involved in hiring and compensation decisions to potential violations of antitrust laws. The release instructs HR professionals to avoid entering into agreements with other employers not to recruit certain employees or not to compete on terms of compensation.

These agreements, which are per se illegal, often take the form of wage-fixing agreements, in which an individual agrees with a person at another company about employee salary or other terms of compensation, or “no poaching” agreements, in which an individual agrees not to solicit or hire another company’s employees. The offending agreements can be formal or informal, written or unwritten, spoken or unspoken. Further, HR professionals should avoid sharing sensitive information about terms and conditions of employment with competitors as it could serve as evidence of an implicit illegal agreement. Nonprofits should be aware that, in the view of the DOJ and FTC, cutting costs is not a justification for entering an agreement with other organizations to cap wages, and such an agreement would likely violate the antitrust laws. Similarly, agreeing to hire the same consultant to communicate current pay scales to other nonprofit organizations would likely also violate antitrust laws.

Talone v. American Osteopathic Ass’n, 2017 WL 2539394 (D.N.J. June, 12 2017)

Plaintiffs, American Osteopathic Association (AOA) members, filed a class action alleging that the AOA engaged in unlawful tying arrangements through a rule adopted in 2012 requiring AOA-certified Doctors of Osteopathic Medicine (D.O.s) to purchase AOA memberships and pay annual membership dues in order to maintain their AOA professional specialty certification. The AOA is both a professional membership organization and a certification body. The plaintiff AOA members alleged that his requirement violated the Sherman Act and state antitrust laws as a “rule of reason” and per se tying violation.

AOA filed a motion to dismiss the class action claims, which was denied by the U.S. District Court for the District of New Jersey. The Court found that the plaintiffs had sufficiently stated claims for both rule of reason and per se antitrust violations. It ruled that, if the plaintiffs’ allegations are taken as true, they show that the AOA ties two distinct products, that it has market power in the tying product market, and that it affects a substantial amount of interstate commerce. Finally, the court ruled that the allegations, if accepted as true, show that the AOA’s tying arrangement substantially lessens competition so that other professional membership organizations are foreclosed from competing for AOA board-certified D.O.s’ business. As this case proceeds, nonprofits may have at least one court’s perspective on the limits on tying organizational membership to maintaining credentials.

In re Mushroom Direct Purchaser Antitrust Litig., No. 06-0620, 2017 U.S. Dist. LEXIS 31892 (E.D. Pa. Mar. 6, 2017)

The defendant, John Pia, was a fifty-percent co-owner of Kaolin Mushroom Farms, a member of the Eastern Mushroom Marketing Cooperative (EMMC), and president of the EMMC for a period after its formation. The plaintiffs, various mushroom consumers, contended that during Pia’s tenure as president, EMMC implemented price-fixing agreements for mushrooms in violation of the Sherman Act, and that corporate agents like Pia may be individually liable for antitrust violations if they personally participate in, ratify, or otherwise authorize anti-competitive activity.

Pia moved for summary judgement, and argued that the plaintiffs must show that he knowingly participated in actions he knew to be anti-competitive and that, because unrebutted evidence shows that he relied on counsel who endorsed the creation of the EMMC and its operations, summary judgment should be granted as he lacked the requisite knowledge for individual liability under the Sherman Act. The court denied Pia’s motion for summary judgement, holding that the plaintiffs did not need to prove that Pia specifically knew the EMMC’s alleged efforts to fix mushroom prices or control supply were in violation of antitrust laws. Rather, civil antitrust claims could be established by either unlawful purpose or anti-competitive effect. The court further noted that even if a higher standard applies, there was a genuine issue of material fact about whether Pia’s participation in various EMMC committees amounted to exerting his influence so as to shape the EMMC’s intentions.

Clarkwestern Dietrich Bldg. Sys., LLC. v. Certified Steel Stud Ass’n, Inc., 2017 WL 1131928 (Ohio Ct. App. Mar. 27, 2017)

Steel Stud Manufacturing Association (SSMA), a trade association, created a building code compliance program to help members prove that their structural or nonstructural steel framing (NSSF) products were noncombustible. NSSF products are required to be certified noncombustible for use in commercial buildings by the International Building Code. The plaintiff, Clarkwestern Dietrich, manufactured NSSF products with a proprietary coating and was a member of SSMA. SSMA’s compliance program adopted requirements that negatively impacted SSMA members that utilized the plaintiff’s coating. The plaintiff alleged that SSMA adopted the requirements to benefit manufacturers that did not invest in the plaintiff’s proprietary coating.

Clarkwestern Dietrich claimed that SSMA violated the Ohio Valentine Act and filed a restraint of trade claim. The Ohio legislature patterned the Valentine Act after the federal Sherman Antitrust Act; and the Ohio Supreme Court has held that it must be construed in harmony with the federal act. The Valentine Act prohibits agreements that unreasonably restrain trade and hurt competition, including price-fixing agreements, refusals to deal, and other such practices. The trial court granted SSMA’s motion for summary judgment because the plaintiff failed to prove harm to competition or antitrust injury. On appeal, the court upheld the trial court’s decision, ruling that, since SSMA did not set, adopt or enforce the industry standard, SSMA’s compliance program was not the only way to show compliance; customers were not prevented from purchasing, and the plaintiff was not prevented from selling its products; and a claim does not exist under the Valentine Act simply because others refuse to promote, approve or buy products.

Governance

Bronner v. Duggan, No. CV 16-0740, 2017 WL 1208402 (D.D.C. Mar. 31, 2017)

The American Studies Association (ASA) boycotted Israeli academic institutions on the basis that Israel restricted academic activity in formerly Jordanian-occupied territory. Members of the ASA brought a derivative action that, among other things, sought to enjoin the ASA’s adoption of a boycott resolution as an ultra vires act that the organization did not have power to execute. The plaintiffs argued that that the boycott violated the express purposes of the ASA as well as a provision of the ASA’s Articles of Incorporation that bans the carrying on of propaganda, and that the ASA’s longstanding practice of not becoming involved with American political issues effectively created a bylaw of ASA, which was violated by the boycott.

The court dismissed the plaintiffs’ ultra vires claim since they had not pled facts plausibly showing that defendants acted ultra vires. First, the boycott resolution was in furtherance of the ASA’s stated purposes in its Articles of Incorporation, which provide that the ASA was organized exclusively for educational and academic purposes. The ASA’s objectives were to promote American culture through encouraging research, teaching and publication, as well as to strengthen relations among persons and institutions in the U.S. and abroad devoted to such studies. Consistent with those objectives, the boycott resolution was aimed at promoting academic freedom abroad, solidarity with foreign institutions and scholars, and encouraging an array of studies at foreign institutions. Second, the boycott resolution did not violate an ASA bylaw because the bylaw only restricted the use of propaganda to influence legislation. Finally, although longstanding practice may give rise to a bylaw, ultra vires acts must be expressly prohibited by statute or the organization’s governing documents. The plaintiffs did not show that an existing bylaw precluded the ASA’s commentary on U.S. governmental policy.

Boomer Dev., LLC v. Nat’l Ass’n of Home Builders of United States, No. CV 16-2225, 2017 WL 2623804, at *14 (D.D.C. June 16, 2017)

The National Association of Home Builders of the United States (NAHB), a Nevada nonprofit corporation operating as a trade association, allegedly began promoting a loan program through North Star Finance to NAHB members and prospective members. The program offered non-recourse debt financing for building projects up to $10 million at attractive interest rates and with other favorable terms. The plaintiffs, who were members or prospective members of NAHB, alleged that they applied to the loan program and paid North Star application fees ranging from $30,000 to $190,000 in reliance on representations made by NAHB, which they claim suggested NAHB had reviewed and approved of North Star. North Star’s financing never materialized because the program was a fraudulent investment scheme. In addition to losing application fees, the plaintiffs also claimed they lost expected profits and incurred development costs in connection with construction projects that they were unable to complete. The plaintiffs filed a lawsuit directly against NAHB for, among other things, breach of fiduciary duty.

Under Nevada law, a breach of fiduciary duty claim required the plaintiffs to prove that NAHB had a fiduciary duty to its members. The legal issue was whether a fiduciary relationship existed between the NAHB and the plaintiffs solely by virtue of the plaintiffs’ membership in the organization. The court noted that the legal issue had not been addressed by the Nevada Supreme Court; and therefore the trial court’s duty was to choose the rule it believed the Nevada Supreme Court would likely adopt in the future. The plaintiffs argued that since officers and Directors of a corporation owe a fiduciary duty to the corporation and its shareholders, by analogy that principle should apply to membership organizations. The court held that the Nevada Supreme Court would likely not recognize a fiduciary duty owed by nonprofit trade associations to their members, because, as held by numerous courts across the country, organizations themselves do not owe a fiduciary duty.  Because the plaintiffs brought their claims against NAHB and not against its officers or Directors, the court found that there was no fiduciary relationship between the parties and dismissed plaintiffs’ breach of fiduciary duty claims.

Intellectual Property

Moffat v. Acad. of Geriatric Physical Therapy, No. 15-cv-626-jdp, 2016 U.S. Dist. LEXIS 177209 (W.D. Wis. Dec. 22, 2016)

The defendant, the Academy of Geriatric Physical Therapy, is a nonprofit corporation with Section 501(c)(3) tax exemption operating as a professional membership organization of physical therapists who specialize in treating older adults. The plaintiffs, highly credentialed physical therapists and members of the Academy, taught parts of a certification class offered by the defendant to certify physical therapists in exercise for the aging. The plaintiffs claim to have written the materials for the course, for which they obtained copyright registrations in their own names. They then brought suit against the defendant for infringing their copyrights by using a version of the course materials. After both parties brought motions for summary judgment, the court concluded that the plaintiffs’ copyright infringement claims failed because the course materials were prepared as works for hire. The defendant owned the course itself and had the right to control the course content. Further, the copyrighted course materials were based on earlier versions owned by the defendant. Additionally, by using the plaintiffs’ materials in connection with the defendant’s course, the plaintiffs granted an implied, non-exclusive license to the defendant, which caused plaintiffs’ claim to fail.

Political Law

Independence Institute v. FEC, 216 F. Supp. 3d 176 (D.D.C. 2016)

The Bipartisan Campaign Reform Act (BRCA), passed in 2002 to address developments in the role of money in federal elections, requires disclosure of the names of donors that contribute at least $1,000 for any communication that falls under the Act’s definition of “electioneering communication.” The definition applies to “any broadcast, cable, or satellite communication” that references a candidate for federal office within a certain time period before the election. Prior to the 2014 general election, Independence Institute, a nonprofit with charitable organization tax exemption, sought to run a radio advertisement for the reelection of Sen. Mark Udall of Colorado but chose not to do so out of concern that it would be subject to the BRCA’s disclosure provision. Instead, the Institute filed suit against the Federal Election Commission (FEC) seeking a declaratory judgment that the BRCA’s disclosure provision was unconstitutional as applied to radio advertisements. The Institute argued that its radio advertisement was constitutionally different from prior advertisements which fell under the disclosure rule because it referenced more than one candidate and “a general category of executive power.” It also argued that its status as a 501(c)(3) organization exempts it from the disclosure requirement because it is precluded from engaging in political activity. The court disagreed, and reasoned that the voting public’s interest in information related to the election favored disclosure. In following McConnell v. FEC, 540 U.S. 93 (2003), a prior case in which the BRCA’s disclosure rule was held to advance substantial and important governmental interests, the court concluded that the Institute’s arguments against the BRCA’s disclosure provision failed.

Citizens for Responsibility & Ethics in Washington v. FEC, 209 F. Supp. 3d 77 (D.D.C. 2016)

The plaintiff, a nonprofit watchdog organization, filed complaints with the Federal Election Commission against two tax-exempt organizations that produced sponsored election communications, claiming that they were unregistered political committees in violation of the Federal Elections Campaign Act. The FEC concluded that neither organization was required to register as a political committee and dismissed the claims. The plaintiff challenged the FEC’s decision to dismiss complaints against the organizations. On a motion for summary judgment, the plaintiff argued that the FEC’s definition of “political committee” was too narrow; further, by evaluating only the group’s campaign-related spending and reviewing the group’s activities over its entire existence instead of a calendar-year approach, the FEC improperly interpreted the requisite “major purpose” test. The court agreed with the plaintiff and concluded that the FEC’s dismissals were contrary to law and remanded the case to the FEC.

Public Records Act

Fortgang v. Woodland Park Zoo, 187 Wash. 2d 509 (2017)

After the plaintiff requested records pertaining to some of the Woodland Park Zoo’s animals, Woodland Park Zoo Society (WPZS), a nonprofit organization that operates the Zoo in Washington State, responded by delivering some records but not all of the requested information. WPZS argued that, as a private organization, it was not subject to a public disclosure request, but that it was willing to supply some documents. The plaintiff challenged WPZS’s decision, alleging that it violated Washington’s Public Records Act (PRA) by refusing to disclose the records she requested. The court ruled for WPZS and reasoned that, while a factors test from Telford v. Thurston County Board of Commissioners, 354 P.2d 886 (1999), should be utilized to determine whether WPZS was the functional equivalent of a government entity subject to the PRA, the factors as a whole weighed against PRA coverage. WPZS did not perform an inherently governmental function in operating the Zoo, and the government did not exercise sufficient control over the Zoo’s daily operations to implicate the PRA. As such, WPZS was not the functional equivalent of a government agency, and was not subject to the disclosure requirements under the PRA.

Bankruptcy

In re Cent. Illinois Energy Coop., 561 B.R. 699 (Bankr. C.D. Ill. 2016)

The defendant Smith was one of the incorporators of a co-op, created by a group of farmers under the Illinois Agricultural Cooperative Act to construct and operate an ethanol facility; Smith served as the co-op’s president and general manager. After an involuntary bankruptcy petition was filed against the co-op, the appointed bankruptcy trustee filed an adversary complaint against Smith, asserting claims totaling more than $4.5 million for Smith’s alleged breaches of the fiduciary duties of loyalty, good faith and due care. In evaluating Smith’s motion to dismiss, the court concluded that directors and officers of an agricultural cooperative association owe the same fiduciary duties to creditors upon insolvency that they owe to the association at all times without regard to solvency. Therefore, officers and directors of a nonprofit must take into consideration the interests of the creditors when making decisions on behalf of an insolvent or soon-to-be-insolvent nonprofit. Defendant Smith’s motion to dismiss was denied.

Privacy

Private Action Provision in Canadian Commercial Email Law Suspended

Canada’s anti-spam legislation (CASL) was passed on July 1, 2014. The law generally prohibits individuals and businesses from sending commercial e-mail to Canadians without their consent. CASL’s private right of action provision allowed anyone that received an unsolicited commercial electronic message to pursue legal action against the sender. However, less than a month before the provision’s effective date—July 1, 2017—the Canadian government suspended its implementation in response to concerns raised by businesses, charities and the nonprofit sector. The Canadian government noted that charities and nonprofit groups should not have to bear the burden of unnecessary red tape and costs to comply with the legislation, and that it supported eliminating any unintended consequences for organizations that have legitimate reasons for communicating electronically with Canadians. Note that the other provisions of the law remain in effect, with very serious potential penalties; only the private right of action provisions have been suspended.

Other

U.S. v. Kukla, 2017 WL 2266699; No. 16-cr-00168-JEB (D.D.C.; April 5, 2017)

Tamara Kukla was the Director of Membership for the American Association for Justice, a national membership organization for plaintiffs’ legal counsel. As part of her position, she was issued a corporate credit card to assist her with her duties and responsibilities. After signing a cardholder agreement with her employer, Kukla used the credit card for personal purposes and expenses in violation of the agreement for over two years. Kukla pleaded guilty to a federal felony for embezzling nearly $250,000 from her employer and was sentenced to one year in prison.

Department of Justice Policy on Third-Party Donation Settlements (June 2017)

Attorney General Jeff Sessions issued a memorandum prohibiting U.S. Attorneys’ offices from requiring defendants to make donations to unrelated third parties as a condition of settlements in federal cases. While the Obama administration often required settling parties to make donations to third-party groups, including nonprofit organizations that were not directly harmed by alleged wrongdoing, defendants will no longer be required to do so under the Trump administration. The policy, which became effective immediately when the memorandum was released in June, prohibits Department of Justice attorneys from entering into any settlement agreement for federal claims or charges that directs or provides for payment to any nongovernmental person or entity that is not a party to the dispute. The DOJ will still be allowed to enter agreements that provide for payments to directly offset harm from defendants’ alleged wrongdoing or to cover legal or other costs directly related to the proceedings.

California Nonprofit Administrative Dissolution
The 2015 Amendments to the California Nonprofit Corporation Law included provisions regarding involuntary administrative dissolution of a nonprofit corporation. Administrative dissolution can occur if corporate powers were suspended or forfeited by the California Franchise Tax Board for at least 48 consecutive months. The Tax Board’s dissolution authority was effective January 1, 2016. At the time of adoption, the Tax Board estimated that there were around 60,000 nonprofits eligible for administrative dissolution. Administrative dissolution applies to nonprofit public benefit corporations, nonprofit mutual benefit corporations, nonprofit religious corporations, and foreign nonprofit corporations qualified to transact intrastate business.

To avoid administrative dissolution, a nonprofit corporation can pay all accrued taxes or fees and file a current statement of information with the California Secretary of State. Otherwise, upon receiving a notice of pending administrative dissolution, the organization can provide a written objection to the Tax Board to extend the process by 90 days. If no action is taken, a nonprofit corporation will be administratively dissolved 60 calendar days after notice is received or 60 days after notice is posted to the California Secretary of State’s website.

(Special thanks to Pillsbury 2017 Summer Associates Dinesh Dharmadasa and Stephanie Howell for their invaluable assistance in preparing the text).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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