Pillsbury Winthrop Shaw Pittman LLP

A review of key legal developments for nonprofit organizations at the federal and state levels in 2019 and 2020.

TAKEAWAYS

  • Antitrust enforcement continues against nonprofits.
  • Nonprofits have litigated in other areas, including lawsuits brought by members, governance, and tax.
  • Nonprofits can enhance compliance by learning from the legal outcomes of others.

Antitrust

S&W Forest Prods. v. Cedar Shake & Shingle Bureau, No. C19-202 MJP, 2019 U.S. Dist. LEXIS 132569 (W.D. Wash. 2019)

The Cedar Shake & Shingle Bureau (CSSB) is the trade association serving the cedar shake and shingle industry, which operates a quality control rating labeling program that grades different varieties of shakes and shingles. Plaintiff, a mill competing with CSSB’s largest members, sued CSSB and two of the largest mills in the industry, alleging that they engaged in a conspiracy to restrain trade in violation of the Sherman Act, through a series of maneuvers within CSSB allegedly intended to consolidate their power, fix prices on their products, and eliminate bureau members attempting to price their products more competitively. Plaintiff also sued CSSB for breach of contract related to plaintiff’s removal from the trade association. The court dismissed the claim because the plaintiff did not plead facts sufficient to support its claims. Specifically, the court stated that under the Ninth Circuit’s holding in Kendall v. Visa U.S.A., plaintiff was required to, “allege facts such as a ‘specific time, place, or person involved in the alleged conspiracies’ to give a defendant seeking to respond to allegations of a conspiracy an idea of where to begin.” Additionally, the court held that the Defendants did not per se violate the Sherman Act because plaintiff did not plead evidence persuasive enough to show manifestly anticompetitive effects lacking any redeeming virtue. As such, the court dismissed plaintiff’s antitrust claims. The court denied, however, CSSB’s motion to dismiss plaintiff’s breach of contract claims, holding that the complaint adequately alleged that (1) the notice provision of CSSB’s bylaws was violated by a “non-noticed” termination meeting, and (2) CSSB’s forced “recusal” of plaintiff’s representative from the Board was an ultra vires act not sanctioned by the bylaws.

In re Cedar Shakes & Shingles Antitrust Litig., No. C19-288 MJP (W.D. Wash. 2020)

Three class action lawsuits against a number of “Manufacturer Defendants” and the Cedar Shake & Shingle Bureau trade association were consolidated. Plaintiffs alleged, via claims of a price-fixing conspiracy, violations of the Sherman Act, violations of various antitrust and consumer protection statutes, and unjust enrichment. Plaintiffs asserted that the Certi-Label™ certification brand controlled by CSSB accounts for 95% of the cedar shakes and shingles (CSS) sold in the United States, and further that the “Manufacturer Defendants” control the CSSB with a “combined voting power of more than 50%.” Plaintiffs alleged that the Manufacturer Defendants have utilized their majority voting bloc to institute a series of measures within the CSSB (e.g., reducing the number of seats on the Board of Directors and changing quorum requirements) to consolidate their power. Plaintiffs further claimed that the enforcement of an “All or Nothing Rule” (which they alleged prohibits CSSB members from selling non-Certi-Label™ products) and the convening of “secret” meetings “plausibly establish that Defendants have the means, motive, and ability to implement, police, and enforce a price-fixing conspiracy.”

The court found that the plaintiffs failed to adequately plead a “direct evidence” case of price-fixing. Citing the Ninth Circuit’s holding in Kendall v. Visa U.S.A., the court found that plaintiffs’ complaints were devoid of any allegations which plausibly suggested that anyone actually conferred, discussed and/or consented to any plan of action to fix the prices of any Certi-Label™ product; “the fact there were opportunities to do so is not enough.” On the issue of the sufficiency of plaintiffs’ pleadings to adequately allege a circumstantial price-fixing conspiracy case, the court found that, plaintiffs’ “parallel conduct” allegations did not disqualify them. However, the plaintiffs did not succeed in adequately alleging the “plus” factors (“economic actions and outcomes that are largely inconsistent with unilateral conduct but largely consistent with explicitly coordinated action”) required to convert indirect evidence into a satisfactory antitrust complaint, as generic price increase data, without more, is not sufficient to plausibly establish the required “plus” factors. Further, the court found plaintiffs’ allegations concerning the structure of the CSS (i.e., the relatively restricted number of major manufacturers, the fact that there really is no substitute for Certi-Label™ products, that the market is vertically integrated, demand is inelastic, and that the major players are all personally acquainted) insufficient to support an inference of plausibility that their antitrust allegations are true, “as industry structure alone cannot get the complaint across the finish line.” The court granted Defendants’ motion of dismissal of the Sherman Act claims with prejudice. The court declined to exercise supplemental jurisdiction over plaintiffs’ remaining state law claims.

Kenney v. Am. Bd. of Internal Med., 412 F. Supp. 3d 530 (E.D. Pa. 2019)

Internist doctors brought a class action against the American Board of Internal Medicine (ABIM) alleging unjust enrichment, Sherman Antitrust Act, and Racketeer Influenced and Corrupt Organizations Act (RICO) claims and alleging ABIM’s restraint on competition in the market for internists’ services, demonstrated conflicts of interests, and private anticompetitive motives forced internists, other than those grandfathered by ABIM, to purchase a maintenance of certification product or lose their certification. ABIM filed a motion to dismiss.

The court granted ABIM’s motion to dismiss the complaint for failure to state a claim upon which relief could be granted. The court found that ABIM was not tying its initial certification and maintenance of certification, which the court held do not occupy distinct markets and instead constituted a single product. The court also held that the conditioning requirement for tying claim was not met as internists are able to court ABIM’s initial certification without also buying maintenance of certification. The court also dismissed the plaintiffs’ monopolization claims as supported by mere conclusory allegations that are insufficient to defeat a motion to dismiss and dismissed the RICO claims, finding that the requirement to purchase the maintenance of certification, and consequences for failure to do so, came from plaintiffs’ employers rather than any fraudulent acts by ABIM. Finally, the court dismissed the unjust enrichment claim because it is not inequitable for ABIM to keep the benefit of fees paid since it did not “force” plaintiffs to purchase the maintenance of certification.

Siva v. Am. Bd. of Radiology, 418 F. Supp. 3d 264, 271 n.1 (N.D. Ill. 2019)

A certified radiologist brought an antitrust action against the American Board of Radiology (ABR) contending that the maintenance of certification requirements for ABR-certified physicians constituted unlawful tying and monopolization under the Sherman Antitrust Act and unjust enrichment under Illinois law. The court held that the initial certification and maintenance of certification are not separate products, and therefore cannot be unlawfully tied. The court also found that the plaintiff failed to state a claim under the Sherman Act, in part because plaintiff offered no factual details in support of plaintiff’s argument that the maintenance of certification program provides no benefit to physicians, that ABR lied by extolling the maintenance of certification program benefits, or that ABR engaged in anticompetitive conduct. The court declined to exercise supplemental jurisdiction over the state law unjust enrichment claim, having determined that the plaintiff failed to state a federal claim.

Lazarou et al. v. Am. Bd. of Psychiatry and Neurology, 2020 WL 5518476 (N.D. Ill. 2020)

Two psychiatrists filed a complaint on behalf of themselves and as a class action against the American Board of Psychiatry and Neurology (ABPN), a nonprofit organization that offers certification that is separate from any state medical licensing requirement. In 1994, ABPN stopped issuing lifelong certifications and instead began offering 10-year initial certificates and requiring participation in a new maintenance of certification program; physicians who purchased initial certifications before October 1, 1994, are exempt from the maintenance of certification requirement. The complaint alleges that the ABPN maintenance of certification requirement constitutes unlawful tying under Section 1 of the Sherman Antitrust Act, monopolization under Section 2, and unjust enrichment under Illinois law. ABPN moved to dismiss.

The court granted ABPN’s motion to dismiss the complaint for failure to state a claim upon which relief could be granted. The court held that ABPN’s initial certification and maintenance of certification are not distinct products, and that, even if they were distinct products, tying occurs only when a firm sells the tying product on the condition that the buyer also purchase the tied product. The court found that if initial certification were deemed a separate product, it is a product known to have a fixed duration at the time of purchase and the plaintiffs are not forced to buy maintenance of certification. The court also dismisses the plaintiff’s claim that ABPN illegally monopolizes the maintenance of certification market because there is no separate maintenance of certification market and ABPN “cannot have a monopoly in a market that does not exist.” The court declined to exercise supplemental jurisdiction over the state law unjust enrichment claim having determined that the Plaintiffs failed to state a federal claim.

Ass’n of Am. Physicians & Surgeons, Inc. v. Am. Bd. of Med. Specialties, Case No. 14-cv-02705 (N.D. Ill. Sep. 22, 2020)

The Association of American Physicians & Surgeons, Inc. (AAPS) brought a Sherman Act claim against the American Board of Medical Specialties (ABMS), arguing that the requirement of ABMS’s specialty medical boards of that board-certified physicians “buy” recertification or maintenance of certification (MOC) from the board in order to maintain their certification status constitutes unlawful “tying” of products. AAPS also alleged an unlawful conspiracy among ABMS, hospitals, and insurers to require MOC from the specialty medical boards as a condition of hospital privileges or in-network approval by insurers. The court rejected these arguments, holding that the complaint did “not allege facts that suggest a tying arrangement between two distinct products or services,” and noting that the widespread choice by hospitals and insurers to require MOC has “an alternative explanation” more plausible than an unlawful conspiracy: hospitals and insurers “independently decided MOC provides useful information.”

United States v. National Association for College Admissions Counseling, 85 Fed. Reg. 1329 (U.S. Dep’t of Justice Antitrust Div. Jan. 10, 2020)

The National Association for College Admissions Counseling (NACAC) is a trade association made up of nonprofit colleges and high schools. NACAC promulgates recruiting rules that limit member colleges’ practices for recruiting students. The DOJ sued NACAC asserting that certain rules stifled competition between member colleges in violation of the Sherman Act. The NACAC and DOJ came to a final judgement agreement where NACAC would no longer enforce provisions that DOJ regarded as anticompetitive, including that member colleges were not permitted to offer incentives to students applying early decision, member colleges were not permitted to speak to student after they enrolled in another college, and member colleges were not permitted to solicit students for transfer applications.

Black Bear Sports Grp., Inc. v. Amateur Hockey Ass’n of Ill., Inc., 962 F.3d 968 (7th Cir. 2020)

Black Bear Sports Group is an organization in Illinois that owns skating rinks. Black Bear sued the Amateur Hockey Association of Illinois alleging that the Association monopolizes the sport of hockey in Illinois in violation of the Sherman Act by limiting sponsorship of teams to nonprofit entities, and seeking an order directing affiliate to admit it as a member and permit it to sponsor a team, which would use one of its arenas as its “home ice.” The district court had dismissed the case for lack of standing. On appeal, the U.S. Court of Appeals held that the plaintiff had standing but affirmed the dismissal on the grounds that the Sherman Act cannot be used to compel a cartel to admit a new member, and that the plaintiff did not allege facts supporting a plausible Sherman Act claim. The court determined that if Black Bear wanted the Association dissolved to create competition amongst leagues, that would be a valid antitrust claim. However, Black Bear was not seeking to have competition among leagues or sponsors made the norm in amateur hockey. As such, the court dismissed the claim.

Am. Cricket Premier League, LLC v. USA Cricket, Civil Action No. 19-cv-1521-WJM-KMT, 2020 U.S. Dist. LEXIS 42924 (D. Colo. Mar. 12, 2020)

The plaintiff corporation sued the defendant nonprofit and other decisionmakers alleging that a corrupt bidding process prevented fair consideration of its bid to create a cricket league, in violation of state and federal antitrust laws. The plaintiff placed a bid to defendant to be a commercial partner and help operate a cricket league in the United States. However, the defendants did not choose the plaintiff’s bid. Plaintiff brought various claims under the Clayton Act claiming that the bidding process was unfair. However, the court held that it did not have subject matter jurisdiction to hear the case because there was “no prospective relief this Court can grant that will remedy Plaintiff’s claimed injury.” The plaintiff conceded that it could only ask for a “fair bidding process,” and not for an order that USA Cricket accept plaintiff’s bid. As such, the court dismissed the case.

U.S. Dep’t of Justice, Antitrust Div., The Association of Independent Commercial Producers Business Review Request Letter (Apr. 16, 2020)

The Association of Independent Commercial Products (AICP) is a nonprofit trade association that represents companies that produce commercials. AICP has a wholly owned subsidiary, ASI, which is a for-profit corporation. ASI is developing a platform that would allow advertisers to solicit and review bids from production companies for commercial production. The bidding program would allow advertisers to specify the needs of their projects, so then production companies could make bids to complete the project. All bids would be blind, and the software would not retain the specifics of any bid. The bidding platform would be open to members and nonmembers of AICP. Participation in the bidding process would be nonexclusive. AICP would own all the equity interests in the platform.

AICP asked DOJ if the platform is likely to give rise to antitrust enforcement actions. DOJ said that the bidding system was not anticompetitive. The DOJ noted that aggregation and exchange of price information can often facilitate coordination among competitors. However, they stated that since this information would not be stored or maintained by AICP there would be no significant risk of this information being used for anticompetitive purposes. Additionally, DOJ concluded that since participation by companies in the service was nonexclusive and voluntary, there would be no risk of subscribers being excluding from participating in other, similar, services. As such, the DOJ concluded that it had no intention to challenge the operation of the bidding platform on antitrust grounds.

U.S. Dep’t of Justice, Antitrust Div., National Pork Producers Council Business Review Request Pursuant to COVID-19 Expedited Procedures (May 15, 2020)

The National Pork Producers Council (NPPC) is a national association representing hog farmers. In response to challenges to pork production caused by the COVID-19 pandemic, the NPPC has proposed working in conjunction with the USDA and state and local agencies to aid hog producers. Specifically, the NPPC, in conjunction with the USDA, wants to create a system that would allow hog farmers to work with pork producers to more cheaply euthanize pigs that become unsuitable for pork production during lockdown. Additionally, the NPPC wants to help other state and local agencies implement initiatives to respond to the challenges of COVID-19 by informing its members of best practices for chain management and depopulation of animals.

The NPPC sought the opinion of the DOJ as to whether their proposals are anticompetitive. The DOJ concluded that they would not take antitrust enforcement actions against NPPC based on their proposal. The DOJ first considered the collaboration between the NPPC and state and federal agencies. The DOJ concluded that the collaboration is unlikely to be anticompetitive because it would only tell farmers where to have their hogs euthanized. Neither NPPC nor the agencies would have control over how many animals should be euthanized. Second, the DOJ decided that NPPC’s proposal to give members guidance over how to dispose of their animals does not raise concerns under antitrust laws. However, the DOJ cautioned NPPC against any sort of market allocation, price fixing or output restrictions that would be anticompetitive.

U.S. Dep’t of Justice, Antitrust Div., GSMA Business Review Letter Request (Nov. 27, 2019)

GSMA is a nonprofit trade association mostly representing mobile network operators, as well as companies in adjacent industry sectors. GSMA is developing technical standards for embedded-SIMS use on mobile devices. As GSMA started to develop their standards, DOJ began investigating the organization to determine whether the standards-setting process may be anticompetitive. DOJ was especially concerned because the standards development process was only open to the mobile communications industry, and therefore might unfairly benefit GSMA’s members. Responding to DOJ concerns, the GSMA changed their standards-settings process to allow input from non-operators. The DOJ stated that this change made the process less likely to be anticompetitive. As such, DOJ said that it would not begin antitrust enforcement actions but would continue to monitor the standards-setting process.

U.S. Dep’t of Justice, Antitrust Div., The American Optometric Association and the AOAExcel GPO, LLC Business Review Request (Jan. 15, 2020)

The American Optometric Association (AOA) is a trade association representing optometrists and ophthalmologists. AOA also operates a subsidiary group purchasing organization (GPO), which offers members of the association the option to purchase non-optometry-related products at discounted rates. The GPO would like to extend their offerings to optometry products such as eyeglass lenses, eyeglass frames and contact lenses, that its members would then offer for sale to their customers. This would provide discounts and better pricing to AOA members that would allow them to better compete against large retail stores and online glasses providers.

The DOJ stated that this expansion would be unlikely to produce anticompetitive effects. The DOJ analyzed the expansion under Statement 7 of the Statements of Antitrust Enforcement Policy in Health Care as promulgated by the DOJ and FTC. Statement 7 states that a joint purchasing arrangement between health care providers is unlikely to raise antitrust concerns unless the arrangement gives the organization market share control or will cause the creation of standardized costs. The GPO will not purchase enough products to drive prices below a competitive level. Additionally, the GPO has put in place safeguards such as non-exclusivity, third-party price negotiation, and price confidentiality to guard against the creation of standardized costs. Therefore, the DOJ concluded that they would not take antitrust enforcement actions against the proposed GPO expansion.

Governance

Fanning v. John A. Sheppard Mem’l Ecological Reservation, Inc., No. 2:18-cv-01183, 2020 U.S. Dist. LEXIS 20417 (S.D. W. Va. Feb. 6, 2020) & John A. Sheppard Mem’l Ecological Reservation, Inc. v. Fanning, 836 S.E.2d 426 (W. Va. 2019)

This case presented the question of whether a derivative action could be filed brought by members of the board of directors of a nonprofit corporation against a nonprofit corporation for claims that are not directly ultra vires acts under West Virginia law. After certification of a question from a federal district court, the West Virginia Supreme Court held that such actions are not valid under West Virginia law, and that West Virginia’s statute allows derivative actions against a nonprofit corporation only for ultra vires actions that are taken without authority under the bylaws. The plaintiffs then reframed their action as claims of breach of fiduciary duty, fraud, conversion, and conspiracy against other purported members of that board, which plaintiffs argued qualified as ultra vires claims because they arose from corporate mismanagement. The court rejected this argument, stating that this interpretation would essentially make all derivative claims ultra vires claims, and that plaintiffs could not bring derivative suits on behalf of nonprofits for director mismanagement or misconduct simply because that conduct results in ultra vires corporate acts. The court held that result would frustrate the West Virginia statutory provision that bars derivative claims against nonprofits except as ultra vires challenges. Although the plaintiffs challenged alleged misconduct by individual directors, the court noted that “none of the counts constitute causes of action that seek relief from a particular act undertaken by [the nonprofit corporation] for which it lacked the power to commit.”

In re Stueven Charitable Found., 933 N.W.2d 554 (Neb. 2019)

The Stueven Charitable Foundation is a nonprofit corporation with three members of the board of directors. One director was declared incompetent, and his daughter was appointed as his guardian and conservator. A second director and the Foundation filed a petition requesting the court to appoint additional directors because the third director was absent, that the Foundation board therefore lacked a quorum to take any action. As such, the Foundation requested the court appoint two new directors. The court held that Nebraska state law and the nonprofit’s bylaws did not grant the court authority to appoint new directors in this situation. The nonprofit’s bylaws only allowed the court to appoint a director in the event of a vacancy, which, per the bylaws, occurred only when a director has died or resigned.

Magnin v. Magnin Whole Corp., 936 N.W.2d 412 (Wis. Ct. App. 2019)

Magnin Whole Corporation is a Wisconsin nonprofit that was formed to buy real estate used as recreation hunting property. Members must be men in the Magnin family. Eight members of the nonprofit sought to expel Ronald Magnin. The directors held a vote without notifying Ronald. After the vote, the Corporation informed Ronald of his expulsion. Ronald refused to acknowledge his expulsion. Ronald sued, asserting claims of quiet title, breach of fiduciary duty, judicial dissolution, and partition of real property. As a central part of the case, Ronald argued his expulsion from the nonprofit violated Wisconsin law. At trial, the court found Ronald was lawfully expelled from the nonprofit. Ronald appealed this finding. The appellate court affirmed the trial court. The court determined that the nonprofit’s bylaws were silent on member removal. Therefore, the court applied the provisions of Wisconsin Statute § 181.0620(2) and concluded that the vote of two-thirds of the members of the nonprofit to remove Ronald was in compliance with the statute.

Crosby v. Champagne D’Argent Rabbit Fed’n., No. A19-0511, 2020 Minn. App. Unpub. LEXIS 433 (May 26, 2020)

The Champagne D’Argent Rabbit federation is a Minnesota nonprofit organization that promotes the breeding of Champagne D’Argent rabbits. The plaintiff was a member of the organization for several years. In one year, the organization received an influx of membership applications. The organization discovered that the plaintiff’s parents were responsible for the increase in applications. In response, the executive committee voted to suspend the plaintiff’s membership for one year. Plaintiff sued claiming that the nonprofit violated chapter 317A of the Minnesota Nonprofit Corporation Act (MNCA) because it did not expel her via a procedure that was “fair and reasonable” and “carried out in good faith.” The district court granted summary judgement to the nonprofit on the MNCA claim because the statute requires that members asserting a cause of action under chapter 317A join “at least 50 members ... or ten percent of the members with voting rights, whichever is less,” which plaintiff had failed to do. The Minnesota Court of Appeals affirmed the district court’s judgment.

Roman Polanski v. Acad. of Motion Picture Arts and Sci., No. 19STCP01398 (Cal. App. Dep’t Super. Ct. Aug. 25, 2020)

Film director Roman Polanski, in European exile since the early 1980s after fleeing the United States following his conviction for criminal rape of a 13-year-old girl, sued the Academy of Motion Picture Arts and Sciences. The Academy had withdrawn Polanski’s membership based on violation of its member code of conduct, citing the criminal action 40 years ago. Initially Polansky was merely told about the Academy governing board’s decision on membership. Later, in view of a California statutory requirement for due process in certain membership removal situations, the Academy invited input from Polanski, who provided extensive background documents and a recorded video presentation. The board voted again to withdraw membership. The court denied Polanski’s petition for an order compelling the Academy to restore his membership, holding that Polanski was “given the opportunity to present any evidence he deemed relevant” to the Academy. The decision reinforces the importance of providing due process in association self-regulation decisions, including redoing decisions if the due process originally provided was inadequate.

Tort & Negligence

Milwaukee Ctr. for Indep., Inc. v. Milwaukee Health Care, LLC, 929 F.3d 489 (7th Cir. 2019)

Milwaukee Health Care, LLC (MHC) entered a contract with the nonprofit Milwaukee Center for Independence, Inc. (MCFI) whereby MCFI operated a brain-injury program in MHC’s facility. As part of the arrangement, MHC handled MCFI’s billing. MHC began using MCFI’s funds to pay its own debts. MCFI sued MHC alleging breach of contract and conversion. The trial court entered summary judgement for MCFI and awarded them $2 million in damages. MHC appealed. On appeal, MHC argued that MCFI could not pursue conversion claims because they did not have an ownership interest in the converted property. MHC claimed that because MCFI’s money went into a repository controlled by MHC that MCFI did not have an ownership interest in the money until the money was remitted to MCFI. The court disagreed and held that MCFI had an ownership interest in the general account containing funds paid by third parties to MHC for services provided by MCFI, and that their contractual relationship did not limit MCFI to breach of contract recovery nor preclude liability for conversion and civil theft. As such, the appellate court affirmed the trial court’s ruling.

Intersal, Inc. v. Hamilton, 834 S.E. 2d 404 (N.C. 2019)

Intersal, a marine research and recovery corporation, signed a contract with the North Carolina Department of Natural and Cultural Resources (DNCR) to salvage two historic ships, the Queen Anne’s Revenge and El Salvador, off the coast of North Carolina. Intersal contracted to forgo its entitlement to artifacts salvaged from the ship in return for the right to make and market all commercial media coverage of the salvage. Intersal claims that DNCR employees violated this agreement’s conflict of interest provisions and infringed on Intersal’s exclusive media rights. Intersal sued for breach of the agreement by DNCR and tortious interference by co-defendant Friends of the Queen Anne’s Revenge (FoQAR), a nonprofit with several DNCR employees serving on its board; FoQAR contracted with an independent media company to film the salvage project and posted the video on its website. Intersal alleged that FoQAR’s actions interfered with Intersal’s contract by inducing DNCR to forgo creating educational materials that Intersal would have the right to make and market. The trial court dismissed the tortious interference count against FoQAR, holding that “[m]ere allegations that DNCR employees also served as members of F[o]QAR’s board of directors, or that DNCR permitted F[o]QAR to film recovery operations and post videos to its website or to dive the QAR wreck do not amount to allegations of purposeful conduct on the part of F[o]QAR that was intended to induce DNCR to breach any contracts.” In affirming the dismissal of the tortious interference court, the Supreme Court of North Carolina held that Intersal’s allegations showed, “at most,” that the DNCR employees sitting on FoQAR’s board “induced themselves to breach” DNCR’s contract with Intersal; Intersal failed to allege facts showing “any conduct by FoQAR that intentionally induced DNCR to not perform on its contract with plaintiff.

Spagna v. Phi Kappa Psi, No. 8:19CV481, 2020 U.S. Dist. LEXIS 23994 (D. Neb. Feb. 12, 2020)

Phi Kappa Psi is a nonprofit fraternity organization with a chapter at Creighton University. Christopher Wheeler is a member of the organization. According to plaintiff’s Complaint, the president and members of Phi Kappa Psi gave Wheeler beers and cannabis while at the fraternity house. Later that night, Wheeler entered plaintiff’s dormitory room and cut her in the jaw with a pocketknife. The plaintiff sued Wheeler and the fraternity. Plaintiff alleged that Phi Psi negligently acquiesced to the events that caused her injuries. The court dismissed plaintiff’s claim against the fraternity, holding that the national fraternity had no duty to her. The court held the fraternity did not engage in any affirmative act that would have created a duty and that the plaintiff had not pleaded facts that could prove the national fraternity had knowledge the members had given Wheeler alcohol at the house. Accordingly, the national fraternity could not be held liable for Wheeler’s actions.

City of Charleston v. Joint Comm’n, No. 2:17-cv-04267, 2020 U.S. Dist. LEXIS 127253 (S.D. W. Va. July 20, 2020)

The City of Charleston and a group of municipalities filed suit against a nonprofit health care accreditation organization, The Joint Commission on Accreditation of Health Care Organizations. The Joint Commission accredits health care organizations. The plaintiffs allege that between 2001 and 2017, The Joint Commission collaborated with pharmaceutical companies to release pain management standards and other publications that touted and misrepresented the safety of opioids.

The plaintiffs sued The Joint Commission for negligently promulgating pain management standards. They also claimed that The Joint Commission was unjustly enriched by pharmaceutical companies by accepting funding while failing to warn hospitals and providers about the dangers of opioids. The court dismissed both claims. In regard to the negligence claim, the court held that The Joint Commission did not owe a duty to the plaintiffs because The Joint Commission could not have reasonably foreseen the harm that their standards could have caused with the crisis of widespread opioid addiction and overdoses. Additionally, the court held that The Joint Commission did not owe a duty to the plaintiff municipalities because they were too tangential to the scope of The Joint Commission’s standards. The court dismissed plaintiffs’ unjust enrichment claim because the municipalities did not prove that there was proximate cause between The Joint Commission’s pain management standards and the social harms caused by the opioid epidemic. The court held that the casual link between the two events was too attenuated to sustain an unjust enrichment claim.

Benton v. Little League Baseball, Inc., 2020 Ill. App. LEXIS 436 (Ill. App. Ct. 2020)

Little League Baseball, Inc., is a nonprofit organization that granted a charter to the Jackie Robinson West team after the team submitted documentation of its residency boundaries for team players. In August 2014, the team won the Little League U.S. World Series. After the team won, Little League Baseball discovered that some of the team members did not meet the team’s residency requirements. Little League Baseball then stripped the Jackie Robinson West team of their title. The teams’ parents and children sued Little League Baseball on counts of infliction of emotional distress and promissory estoppel. The plaintiffs alleged that Little League Baseball either knew or should have known of the residency issues before the World Series, failed to comply with its own rules, and actively concealed the eligibility problems so as to attract media attention to the championship.

The trial court dismissed the parents’ intentional infliction of emotional distress claims but denied Little League Baseball’s motions to dismiss the children’s claims. The appellate court held that both the parents and the children had standing to bring the suit based on the injury-in-fact of the stripping of the children’s championship title and the parents’ and players’ investment of time and money in the organization. The appellate court affirmed dismissal of the parents’ intentional infliction of emotional distress, finding the conduct by the League not extreme or outrageous enough to sustain the cause of action. The appellate court, however, held that the plaintiffs could recover on a theory of promissory estoppel or breach of implied contract in fact because they relied on the Little League’s “alleged failure to follow its own rules regarding verifying eligibility and/or reporting problems, and the player’s reliance on the League’s promise to follow its own rules,” to their own detriment. The appellate court held that a suitable remedy could be to reinstate the team’s title and remanded the case to the trial court to proceed in accordance with their ruling.

Finance & Tax

Pardeux v. U.S. Mendicant Buddhist Congregation, No. 2:19-cv-0881-JAM-AC, 2019 U.S. Dist. LEXIS 117588 (E.D. Cal. July 12, 2019)

Guillaume Pardeux sued two tax-exempt organizations, the U.S. Mendicant Buddhist Congregation and the Minh Quang Meditation Center. Pardeux claimed that the organizations failed to produce their tax documents for him to inspect in violation of the Internal Revenue Code. Pardeux argued that 26 U.S.C. § 6104(d) and 26 C.F.R. § 301.6104(d)-1 required the organizations to give him their tax documents. The court dismissed the Complaint, holding that while 26 U.S.C. § 6104(d) provides that “certain tax-exempt organizations must make the returns available ‘for inspection during regular business hours by any individual at the principal office of such organization,’” the statute does not create a private right of action.

State Compliance

Gross v. A New Missouri, Inc., 591 S.W.3d 489 (Mo. Ct. App. 2019)

Elad Gross sued the nonprofit, A New Missouri, for not turning over records that he requested. A New Missouri is a nonprofit that advocates for social policies and legislations to better the lives of Missourians. Gross claimed that his request was proper under the Missouri Nonprofit Corporations Act (MNCA). The court dismissed his complaint, holding that Gross was not entitled to review A New Missouri’s records. The MNCA states that “[w]hen a corporation has no members and makes provision for a self-perpetuating board of directors, any recipient or beneficiary of the services or activities of such corporation may inspect and copy the books and records of such corporation ...” The court determined that Gross’s complaint failed to allege that A New Missouri made provision for a self-perpetuating board of directors. The court also held that Gross’s complaint had not plead facts that established him as a beneficiary of the services or activities of the nonprofit. Instead, Gross simply concluded he was a beneficiary because the nonprofit has the mission of advocating for all Missourians. The court rejected this argument and stated that the legislature established this provision of the MNCA to limit the scope of parties who may examine a nonprofit’s records to those who actually benefit from the organization’s activities. The Missouri Court of Appeals affirmed the dismissal.

Property & Zoning

Auto Club Grp. v. Anderson, No. A19-0327, 2019 Minn. App. Unpub. LEXIS 890 (Sep. 16, 2019)

In 1982, the Duluth Automobile Club, a Minnesota nonprofit membership association, owned land containing a golf club. The Duluth club merged into another nonprofit, the Minnesota State Automobile Association (MSAA). The merger agreement included use covenants requiring MSAA to “continue to own and operate” the golf course, and it also created an advisory group to advise on matters relating to the property. MSAA later merged into the Auto Club Group. In 2017, the Auto Club agreed to sell the golf course property and petitioned the court to remove the use covenant. The Auto Club argued that under Minnesota law covenants become inoperative after 30 years. The members of the advisory committee opposed the petition and argued that the 1982 agreement created a trust, not a covenant, and thus that the use restrictions could not be removed. The court held that the 1982 agreement did not create a trust because the provisions of the agreement lacked “a definite, unequivocal, explicit declaration of trust” and did not include any elements of a trust, such as trustees, beneficiaries, or a trust fund, nor was there unjust enrichment from the sale of the property that could provide a basis to impose a constructive trust. Therefore, the appeals court affirmed that trial court’s holding that, under Minnesota law, the covenants in the merger agreement expired after 30 years.

First Amendment

Spellman v. Disability Rights Wis., Inc., No. 18-cv-1856-pp, 2020 U.S. Dist. LEXIS 44918 (E.D. Wis. Mar. 16, 2020)

Rosa Spellman, a woman with a disability, sued Disability Rights Wisconsin (DRW) and National Disability Rights Network (NDRN). The nonprofit membership organizations advocate for individuals with disabilities and had published a booklet criticizing sub-minimum wages paid to individuals with disabilities who work in sheltered workshops. Spellman alleged that the organizations discriminated against her by conspiring to deny her the ability to work for a “special minimum wage” and lied about the individuals which the organizations were supposed to protect. The court dismissed Spellman’s claims. The court first held that the nonprofits were not state actors because they were not exercising functions traditionally reserved to the state. The court concluded that there were no laws prohibiting nonprofit advocacy groups from taking positions contrary to those held by members of their constituency, and that nonprofit organizations have a First Amendment right “to advocate for what they believe to be the best policy solutions.”

Prager Univ. v. Google, 951 F.3d 991 (9th Cir. 2020)

PragerU is a nonprofit corporation that creates politically conservative videos and shares them on YouTube, which is owned by Google. PragerU sued YouTube and Google for placing several of their videos in the “restricted” category on the site. When YouTube labels a video as restricted, viewers can only watch the video on an account where their age is verified. Additionally, YouTube also displays a warning that restricted videos may contain mature or offensive content. PragerU asserted First Amendment claims and a False Advertising Claim under the Lanham Act. A district court dismissed the claims, and the U.S. Court of Appeals for the Ninth Circuit affirmed.

To advance its First Amendment Claim, PragerU claimed that YouTube is a state actor because it performs a public function by hosting speech on a private platform. The court rejected this argument, holding that YouTube does not perform an activity that only governmental entities have traditionally performed, despite its “ubiquity” and role as a public-facing forum. Alternatively, PragerU argued that YouTube has converted itself from a private entity into a public forum because it invites public discourse onto the site. The court also rejected this argument, holding that only government action can convert a private entity into a public forum. Following established precedent, the court held that, as a private entity, YouTube is not bound by the First Amendment and is permitted to abridge PragerU’s speech.

PragerU also claimed that YouTube had engaged in false advertising under the Lanham Act by placing warnings on their videos in the restricted category that misrepresented their content. The court held that held that neither YouTube’s statements concerning its content moderation policies nor its designation of certain videos for Restricted Mode constitute “commercial advertising or promotion” as the Lanham Act requires. Per the Lanham Act, advertisements must “seek to penetrate the relative market.” The court concluded that YouTube’s statements about their moderation policies on restricted videos are not for promotional purposes.

Rio Grande Found. v. City of Santa Fe, 2020 U.S. Dist. LEXIS 15710 (D. N.M. Jan. 29, 2020) (appeal pending in U.S. Court of Appeals for the Tenth Circuit)

In 2015, the Santa Fe City Council changed their Campaign Code to require any person or entity spending more than $250 to endorse or defeat a ballot proposition to file campaign statements with the city clerk. These statements were required to include all expenditures and all contributions. In 2017, the Santa Fe City Council held a referendum and asked voters to decide whether the city should implement a soda tax. The Rio Grande Foundation (RGF), a 501(c)(3) nonprofit that participates in legislative and policy advocacy in New Mexico, opposed the soda tax and made expenditures in excess of $250 to oppose the policy. The City ordered RGF to file a campaign finance report. However, RGF did not file a report with the city clerk until after the election.

After the election, RGF challenged the Campaign Code provisions as unconstitutional under the First Amendment of the United States Constitution and under the New Mexico Constitution. The court held that the Campaign Code provisions were neither facially unconstitutional nor unconstitutional as applied to RGF. On the as applied challenge, the court held that the city had a substantial government interest in campaign transparency, to “hel[p] citizens evaluate who stands to gain and lose from proposed legislation.” The court determined that the reporting and disclosure burdens were low and narrowly tailored to the government’s interest in financial disclosures, and that any chilling effect on the exercise of free speech did not outweigh the government’s “substantial informational interest” in this case. The court also denied the facial challenge to the statute because there was no evidence on the record suggesting that the law would penalize a substantial amount of protected speech. RGF also argued that the provision is invalid under the New Mexico constitution, which provides, “Every person may freely speak, write and publish his sentiments on all subjects ... and no law shall be passed to restrain or abridge the liberty of speech or of the press.” The RGF argued that the use of the word “restrain” implies greater protection than the language of abridgement in the federal constitution. The court rejected this argument and held that the New Mexico constitution does not supply greater speech protections in this case. The court granted summary judgement in favor of the City of Santa Fe.

Intellectual Property

Trial Lawyers Coll. v. Gerry Spences Trial Lawyers Coll. at Thunderhead Ranch, No. 1:20-cv-80-JMC, 2020 U.S. Dist. LEXIS 105962 (D. Wyo. June 16, 2020)

The plaintiff nonprofit ran a trial advocacy training program and held registered trademarks in “TRIAL LAWYERS COLLEGE” and a stylized logo. The individual defendants had served on the board of the plaintiff organization until, following an internal dispute, they left the organization and founded a new nonprofit organization registered as “Gerry Spences Trial Lawyers College at Thunderhead Ranch.” The defendants also accessed the plaintiff organization’s listservs to send mass emails claiming that the old listserv was experiencing difficulties and directing them to the new organization. Defendants also posted a video on YouTube touting the new organization, with the plaintiff’s trademarks in displayed. The plaintiffs filed a lawsuit alleging violations of the Lanham Act by infringement of plaintiff’s trademarks, unfair competition, and false advertising, among other claims.

The court granted the preliminary injunction, holding that the defendant’s use of the marks was likely to cause consumer confusion. The court held that the confusion is “self-evident” since the defendant used the plaintiff’s mark while referring to their entity as the plaintiff on the plaintiff’s email listserv, and determining that the plaintiff is likely to succeed on its Lanham Act claims.

Great Minds v. Office Depot, Inc., 945 F.3d 1106 (9th Cir. 2019)

Great Minds is a nonprofit that makes a math curriculum, Eureka Math, which it offers for free download online as a limited public copyright license through Creative Commons. The license allows the individual or entity exercising the licensed rights a “worldwide, royalty-free, non-sublicensable, non-exclusive, irrevocable license to ... reproduce and Share [Eureka Math], in whole or in part, for NonCommercial purposes only ... .” However, the license reserves Great Minds’ right to collect royalties from commercial use of Eureka Math. Office Depot prints worksheets for school districts from Eureka Math. In 2015, Great Minds discovered that Office Depot was creating copies of Eureka Math. In response, Office Depot and Great Minds entered a licensing agreement which allowed Office Deport to make copies of Eureka Math in exchange for paying royalty payments to Great Minds. After the parties entered this agreement, the Eastern District of New York ruled in Great Minds v. FedEx Office and Print Servs., Inc., that the Great Minds limited public copyright license did not prohibit licensees from hiring someone to make copies of Eureka Math for their use. Thereafter, Office Depot terminated their agreement with Great Minds. In response, Great Minds sued Office Depot for infringing on their copyright by soliciting customers to reproduce and distribute Eureka Math without authorization. The court dismissed the complaint, holding that Office Depot did not infringe the Great Minds copyright. The court held that the licensee school districts could exercise their license rights by having an agent (here, Office Depot) make copies of Eureka Math materials for their permitted noncommercial use, without that agent becoming a licensee who is bound by the terms of the license. As such, the court dismissed Great Minds claim. The U.S. Court of Appeals for the Ninth Circuit affirmed.

J & J Sports Prods. v. Brentwood Veteran War Mem’l, Inc., No. 17-CV-6833, 2019 U.S. Dist. LEXIS 148590 (E.D.N.Y. Aug. 30, 2019)

J & J Sports Production (J & J) company was granted nationwide commercial distribution of a wrestling match. J & J then entered into sublicensing agreements to allow commercial establishments in the hospitality industry to publicly stream the match. The defendant nonprofit organization, the Brentwood VFW (VFW), broadcasted the match without receiving a sublicense. J & J sued the VFW alleging that it unlawfully aired the program for its own commercial advantage. The court held that the VFW was not a commercial establishment and, therefore, it did not infringe on J & J’s commercial distribution agreement. J & J argued that because the VFW has a state liquor license that they should be treated as a commercial establishment. However, the court determined that since the VFW is a nonprofit organization with a limited club liquor license that only allows the VFW to serve alcohol to members of the organization, it is not a commercial establishment. As such, the court concluded that the VFW did not air the match for their commercial gain. The court, therefore, ordered J & J’s claim dismissed unless it could submit evidence to the contrary at a hearing.

Packaging Mach. Mfrs. Inst., Inc. v. Data Marketers, Inc., No. 1:19cv1583, 2020 U.S. Dist. LEXIS 33087 (E.D. Va. Feb. 7, 2020)

The Association for Packaging and Processing Technologies sued Data Marketers after discovering it had used its registered marks relating to the Association’s annual Expo without permission, was otherwise misrepresenting itself as the official event producer, and was selling purported (and false) lists of Expo attendees. In a default judgment, the court held Data Marketers liable for trademark infringement, false advertising, false association advertising, and unfair competition under the Lanham Act. The court permanently enjoined Data Marketers from advertising, offering, or selling any goods or services using plaintiff’s Expo-related registered marks, and ordered Data Marketers to pay damages and attorney’s fees.

Miscellaneous

Norris v. Acadiana Concern for Aids Relief Educ. & Support, 421 F. Supp. 3d 399 (W. D. La. 2019)

Plaintiff, Virginia Norris, is a former employee of the Acadiana Concern for AIDS Relief Education and Support nonprofit organization that employed her to administer a state-sponsored program that tests and tracks positive cases of HIV. Norris alleges that her supervisor requested her to obtain and report health information of individuals who tested negative for HIV. Norris refused to disclose the information because she believed it violated HIPAA and Louisiana law. Norris also reported her supervisor to state officials. After doing so, she was fired. Norris sued the nonprofit, alleging that her termination violated the Louisiana whistleblower statute. The defendant filed a motion to dismiss the claim, arguing that Louisiana’s whistleblower statue does not apply to nonprofits. The court rejected the defendant’s argument that nonprofits were excepted from the definition of “employer” in the statute and denied the motion to dismiss.

In re Roman Catholic Church of the Archdiocese of Santa Fe, Nos. 18-13027 t11, 20-1026 t, 2020 Bankr. LEXIS 1211(Bankr. D.N.M. May 1, 2020)

The plaintiff is a Catholic archdiocese, a New Mexico nonprofit corporation. The plaintiff applied for Paycheck Protection Program (PPP) under the CARES Act. However, the organization was in bankruptcy. The Small Business Administration (SBA) issued an interim final rule that disqualified organizations in bankruptcy from receiving PPP funding. After the rule was issued, the SBA denied the plaintiff’s application. As there were no administrative remedies, the plaintiff sought the court’s review of the agency’s action.

The court held that the SBA’s interim final rule barring organizations in bankruptcy from receiving PPP funding was arbitrary and capricious, beyond the agency’s statutory authority, and discriminatory. First, the court held that the rule was arbitrary and capricious because an organization’s bankruptcy status has no relation to whether they would use PPP funding for authorized purposes. Second, the court concluded that the rule exceeded SBA’s authority under the CARES Act because Congress’s intent explicitly prohibited them from making this restriction. Third, the court held that rule was discriminatory in violation of 11 U.S.C. § 525(a) because it discriminates against grant recipients because they are debtors. As such, the court held that the organization was entitled to PPP funding and struck down the SBA’s rule.

Agency Pronouncements & Guidance

Guidance Under Section 6033 Regarding the Reporting Requirements of Exempt Organizations, 85 Fed. Reg. 31959 (May 29, 2020)

This new guidance from the IRS applies to reporting regulations under IRC § 6033 that are generally applicable to organizations that are tax exempt under Section 501(a). This guidance clarified which tax-exempt organizations must report under IRC § 6033 and what they must report. The proposed rule states that tax-exempt organizations that are not private foundations, charities, or political organizations are no longer required to report the names and addresses of contributors to the IRS on their 990 form.

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