Why Should Nonprofits Care About Trademarks? (cont'd)
By: Kenneth E. Liu

Protect against rogue affiliates. Many nonprofits, including associations, clubs, and advocacy groups, have local chapters or foreign affiliates that are legally independent entities. Unlike a for-profit parent-subsidiary relationship, usually a nonprofit parent can exert control over its affiliates solely through contractual arrangements. Therefore, when permitting affiliates to use its marks, the parent organization should always require a written license agreement that defines the conditions under which the affiliate can use the marks and, importantly, the terms under which the parent can terminate the license. Such an agreement is a crucial means of preserving the integrity of a mark in the event of a dispute.

It is not uncommon for affiliates to “go rogue” when, over time, the parties diverge in their priorities and missions. If an affiliate engages in activities contrary to the mission or policies of the parent, revoking permission to use the mark may be the best, and possibly only, means of preventing the rogue group from tarnishing the parent’s reputation.

In conjunction with licensing marks to foreign affiliates, the U.S. entity should also be sure to register its marks in such affiliates’ countries. Because trademarks are only protected on a country-by-country basis, a U.S. entity may not be able to enforce its marks against the foreign affiliate unless its marks are registered in the affiliate’s country.

Watch out for UBIT. As tax-exempt entities, nonprofits are subject to a host of arcane IRS regulations that can trap the unwary. As discussed above, branding and licensing products with one’s trademarks can be an effective way of generating revenue. But before launching into a new line of merchandise, a nonprofit must be careful to avoid unintended consequences. One such consequence may be the creation of inadvertent unrelated business income which is subject to tax. The IRS levies an “unrelated business income tax” (“UBIT”) on income earned from activities regularly carried on that are not substantially related to the organization’s tax exempt purpose.

For example, a nonprofit health care group might sell books and DVDs that educate the public about health issues, as well as mugs, calendars, and other memorabilia bearing the organization’s logo as promotional items. Income derived from the sale of books should not be subject to UBIT because the books further the organization’s tax-exempt purpose of education and awareness. But income from the other products could be taxable on the ground that they do not primarily advance the organization’s tax-exempt purpose.

Avoid creating a joint venture. When entering into co-branding arrangements or any other relationships with commercial entities, a nonprofit should be careful to avoid creating a “joint venture” which is regulated by the Internal Revenue Code. Careful construction of licensing agreements is critical to avoid such a finding.

Avoid creating “private benefit.” Private benefit transactions are those that benefit individuals to the detriment of the tax-exempt organization. When licensing a nonprofit brand to a for-profit company that would benefit private persons, the commercial venture must clearly benefit the nonprofit and reflect fair market terms and conditions. Terms such as license fees should be scrupulously analyzed. Engaging in transactions that lead to private benefit can trigger IRS sanctions, or worse, jeopardize an organization’s tax-exempt status.

Conclusion.

Nonprofits often overlook the importance of trademark protection until a problem arises. Nonprofits should properly protect their brands in the early stages of creating a new organizational name or launching a new program or service, keeping in mind the unique legal obligations imposed on their brand maintenance by the Internal Revenue Code. Taking steps early to protect an organization’s brands will help ensure the integrity of an organization’s goodwill, reputation, and long term success.

© 2010 Gammon & Grange, P.C. This article is for discussion and informational purposes only, and should not be considered legal advice.

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