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Cautions for association product endorsements.

Associations often grant third parties permission to use their names and logos in connection with various programs and activities. Legal concerns arise, however, when such use is perceived as giving official advice or providing a formal endorsement of a product or service related to the field or industry the association represents. In this column, Lauren W. Bright outlines some steps associations should take to reduce the risks associated with product endorsements.

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Trade and professional associations typically develop numerous publications and sponsor many educational programs in which statements regarding the safety, efficacy, propriety, or other aspects of products, services, individuals, or entities might be considered advice. When statements are attributed to authors, speakers, or others independent of the association, readers or listeners generally understand clearly that the statements are not those of the association.

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In comparison, sometimes situations arise where an association may reasonably be regarded as giving its official advice or providing its official endorsement of a product or service related to the field it represents. Associations, however, face liability risks in connection with such endorsements because of the potential for legal claims based on the alleged failure of the products to conform to purchaser expectations.

Specifically, legal action can be brought against an association for conspiracy to restrain trade or for personal injury or property damage allegedly resulting from the reliance on the association's advice. Because tax consequences are also associated with endorsement programs, associations must also assess how the Internal Revenue Service will treat revenues gained from endorsements. Given these concerns, consider the following issues prior to starting a product endorsement program.

Defining product endorsements

Essentially, a product endorsement communicates to the public the association's acceptance or approval of certain products, services, or individuals. For example, if a company uses an association's name and logo (i.e., its trademarks) in connection with the marketing and sale of a product, the association may be regarded as vouching for the product's safety, efficacy, or propriety.

Associations can also assume a more active role with respect to product endorsements, such as by developing an endorsement program and establishing criteria and conducting activities that allow selected products to carry certification labeling or seals of approval on packaging, advertising, and other promotional items for the products.

Reducing legal risks

In planning product endorsement programs, consider the following tips to minimize exposure to risk:

* Protect your intellectual property. Because any product endorsement program involves the third-party use of an association's name and logo, the structure of the program and the form of the relationship with such third parties are crucial. The potential exists for misuse of intellectual property, which may result in misrepresentation to consumers or dilution of the value of the association's trademarks. Therefore, consider creating a license agreement, which outlines the terms of use of an association's intellectual property. Structure the agreement to enable the association to maintain close control over the licensee's use of its name and logo, including the right of the association to review all use of its intellectual property and to prohibit the licensee from using it in any manner other than that expressly authorized by the association.

* Consider the market power of your endorsement. Some people may view certain aspects of a product endorsement program as anticompetitive. These third parties may claim that the program gives an unfair advantage to certain entities at the expense of others. To short-circuit such allegations, avoid activities or communication suggesting or requiring the exclusive use of endorsed products by association members. Structure endorsement programs to be both substantively and procedurally fair, providing to applicants due process with regard to administration and enforcement of the program. Develop criteria that reflect such fairness, with valid, demonstrable, and reasonable bases upon which to determine that applicants are deserving of endorsement. Furthermore, ensure that the evaluations and process of testing the products are accurate and reliable.

* Assess your tort liability. By virtue of the endorsement, the association is deemed as holding itself out as an expert with respect to the product being endorsed and is opening itself up to negligence claims. Courts have ruled that by standing behind a product, the association has a duty to use reasonable care in issuing any statement of approval or endorsement and to assume financial responsibility in the event that the product proves to be harmful or ineffective. To determine whether reasonable care has been exercised, courts will likely review endorsement program structure, procedures, and criteria.

An association might also be the subject of a lawsuit based on claims related to matters of safety. Plaintiffs may indicate that the association issued guidelines, standards, or directions that arguably proved to be not only inaccurate but harmful. Such a claim might be made by someone who, based on an association's seal of approval, purchases a product that subsequently causes injury.

While it is conceivable that an injured party could bring a legal claim based on theories of strict liability in connection with an endorsement, it is well established by the courts that the mere endorsement or promotion of a product or service does not automatically render an endorsing entity strictly liable for defect in a product or service.

Accordingly, three basic elements are necessary to hold an association responsible for injuries or damages based on a theory of negligence for endorsement or approval of a product or service: 1) the existence of a duty on the part of the association to protect the user/consumer; 2) actual reliance on the association's advice or endorsement by the user/consumer; and 3) the claimant's injury actually having resulted from wrongdoing (or negligence and causation) on the part of the association.

* Consider the tax implications. The key tax concern for endorsement programs is that revenue generated from the endorsements may be considered unrelated business income and thus subject to the unrelated business income tax. If the income is taxable, the tax would be due on the association's net revenues from the program. However, if an association is able to show that the primary goal of the endorsement arrangement is to assist consumers in identifying reliable products for public benefit, the Internal Revenue Service may consider revenues received under such an arrangement to be related to the tax-exempt purposes of the association and, therefore, exempt from taxation.

In the event that such revenues are not considered related income, the payments received may fall within a specific exemption for passive income, such as a royalty. In general, the level of involvement of the association in the activity generating the fee or payment will dictate the characterization of income. Structure the endorsement agreement in a way that does not require the association to take action beyond that required to ensure the quality of the product and protect the interests of consumers.

Legal risks for an association are inherently related to advice or endorsements. Accordingly, endorsement programs must be understood clearly and managed carefully. By taking steps to establish a sound program structure, an association can develop endorsement programs that minimize its exposure to risk.

EDITED BY JERALD A. JACOBS

Lauren W. Bright is an attorney and Jerald A. Jacobs is a partner with the Nonprofit Organizations Practice of the law firm of Shaw Pittman, Washington, D.C. Jacobs edits this column and is general counsel to ASAE.
COPYRIGHT 2004 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2004, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Legal
Author:Jacobs, Jerald A.
Publication:Association Management
Geographic Code:1USA
Date:May 1, 2004
Words:1214
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