Unfair competition by nonprofits?

I just spent a few hours teaching about competitive advantage, which is normally (at least from the economic perspective of strategy) defined as above average profits. After class I came across two interesting examples about unfair competition involving nonprofits. (What does competition mean when you’re not allowed to make a profit? Hmmm....)

Example #1 is $5 in play money from our local public broadcasting station:

KQED WILL PAY YOU $5

Sounds cool. If you read the fine print, however, it says “you are invited to become a member for #5 instead of $40!” So they’ll never, ever write me a check or send me a $5 bill. This sort of lie is invidious — I’ve been spending years trying to break my daughter of the notion that you can ”save” money by spending it.

IMHO if this were a for profit firm, it would get investigated or chastised for misleading advertising. Of course, if it were a solicitation for a political campaign, nobody could claim they expected honesty and there would be no consequences.

So what standard applies? Would we expect a nonprofit to be more honest and ethical than a for-profit firm? Would we treat them the same as a political cause (i.e. guaranteed slimy?) Do they get a free pass under the “motherhood and apple pie” exemption?

I’d guess most of the letters went to Northern California addresses. If it had crossed state lines, then an aggrieved party could bring a Lanham Act claim for unfair competition — except that under 15 USC 1125 non-commercial corporations get a statutory pass:

Any person who … uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which--
…
in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.

Interestingly, the other clause of §1125(a)(1) refers to trademark confusion, while §1125(c) refers to dilution of “famous marks”. On the drive home from teaching, I heard the other 2nd example, a brief radio news report on a trademark suit filed against a famous nonprofit, the American Red Cross.

Let me quote from the ARC press release:

Wednesday, August 08, 2007 — Today, Johnson & Johnson (J&J) filed a lawsuit against the American Red Cross and four of its licensing partners for “unlawful conduct” related to the nonprofit's use of the Red Cross emblem.

Specifically, J&J demands that the Red Cross:

• Stop the Red Cross and its licensing partners from using the Red Cross emblem permanently on first aid, preparedness and related products sold to the public;
• Surrender to J&J for destruction the Red Cross' inventory of accused products;
• Hand over to J&J all Red Cross proceeds from the sale of these products with interest; and
• Pay punitive damages to J&J along with attorney fees related to its legal action against the Red Cross.

“For a multi-billion dollar drug company to claim that the Red Cross violated a criminal statute that was created to protect the humanitarian mission of the Red Cross—simply so that J&J can make more money—is obscene,” said Mark W. Everson, President and CEO of the American Red Cross.

So the ARC PR machine is framing this as a normal David vs. Goliath fight, under which we should assume that David is always on the side of the angels. It’s also set up as a good nonprofit against an evil for-profit company. Better yet, it’s a drug company.

But maybe it’s not that simple. First, the ARC’s sales are defended as being needed to support its nonprofit goals, i.e. the end justifies the means. Second, the code name “partners” means that there are for-profit firms that work with ARC (presumably to supply and/or distribute the product). so is there anything in the law that says they deserve to get treated as nonprofits?

As J&J argues:

“After more than a century of strong cooperation in the use of the Red Cross trademark. ... we were very disappointed to find that the American Red Cross started a campaign to license the trademark to several businesses for commercial purposes," Johnson & Johnson said in a statement.

J&J and the ARC licensees are selling the same product — bandages and first-aid cream. I somehow doubt that the crosses look very different (how different could you make them?)

The other paragraph of §1125(a)(1) prohibits a “false designation” which

is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person

So if for 100 years people buying bandages with a red cross have been getting J&J bandages, and now they are getting product from an unknown company who bought the rights from the ARC, is there confusion? It seems like there could be.

Executive hubris, arrogance or contempt for the law is not unheard of among US nonprofits. The local and national ARC chapters have had their share of scandal, including regular charges that local chapters deceived donors by raising money for a famous disaster and then spent the money on overheads or other programs.

Nonprofits are increasingly using for-profit efforts (gift shops, etc.) to subsidize their nonprofit goals. I can’t imagine any good reason why a nonprofit’s commercial activities (i.e. any sales or for-fee service) should be exempt from the same Lanham Act claims as a regular company.

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