Court Ruling Shows Risks of Acting Too Much Like a Business

Google. Microsoft. Coca-Cola. Louis Vuitton.

If all of language is metaphor, then no translation is needed for the power of a well-established brand. These words connote particular products and services that are known worldwide, and companies go to great lengths to protect their brands. Tongue in cheek, Xerox even implores us in its ads not to misuse its trademark. It is an adjective, not a noun or verb.

Harvard. Lincoln Center. Amnesty International. The nonprofit world also has iconic brands that convey a rich sense of history and identity. In some cases, they even rival commercial brands for their impact.

The use of name and logo—and the investment to assure devotion to the character of the brand—is perhaps even more pronounced in the nonprofit world. There the message is imbued with a sense of mission and purpose sufficient to cause volunteers to give their time and contributors to open their wallets, all with no promise of return aside from the betterment of humankind (and perhaps a tax deduction).

But what happens when the use of a nonprofit brand starts to resemble the market-driven world of business?

In that case, should the same laws that govern the relationships between Dunkin’ Donuts and the people who run its local franchises apply to the Girl Scouts of the USA? Could the world’s preeminent organization dedicated solely to girls be confused with a cookie franchise?

According to a court decision on a case involving the Scouts, the answer is yes.

As a result of an appeals court’s decision in Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America, nonprofits and their affiliates will now need to examine their structure through the lens of state franchise law—even though those statutes were constructed with decidedly commercial relationships in mind.

The ruling issued this month by Judge Richard Posner of the Seventh Circuit Court of Appeals involves a challenge by a local Wisconsin council to prevent the national Girl Scouts of the United States of America from merging the local chapter out of existence.

When the Girl Scouts national organization undertook a nationwide reorganization, it probably did not imagine that state franchise laws were an uninvited guest to its relationships with its affiliates nationwide. Those relationships are usually bound by contracts that outline how an affiliate can use the name and logo of a national nonprofit organization. Typically the contracts also demand that local groups stay true to the values and operating procedures of the organization.

In some cases, those contracts are very detailed, as the nonprofit wants to assure that people who benefit from its services have the same level of confidence in the organization as the consumer does when buying a coffee from Dunkin’ Donuts.

Sometimes affiliates must make payments to the central organization for the use of the name and logo or must purchase products and services from national headquarters.

The lawyers from the Manitou Girl Scout council seized on such requirements and charged in federal court that Girl Scouts of the USA had violated the Wisconsin Fair Dealership Law’s requirement that an organization offering franchise rights may not “terminate, cancel, fail to renew, or substantially change the competitive circumstances of a dealership agreement without good cause.”

In a prior decision about this case, the Seventh Circuit specifically considered—and rejected—the argument that the Girl Scouts as a nonprofit was exempt from the state’s franchise law.

The court noted that the local and national Girl Scouts groups shared a “continuing financial interest” because they both sought to earn revenue, especially in the form of Girl Scout cookie sales.

That commercial aspect seemingly overwhelmed the court’s appreciation of the Girl Scouts’ almost century-long service to girls and the organization’s need to preserve and enhance its presence into the future. Noting the millions of dollars of revenue generated by the sale of Girl Scout cookies, the court concluded that “the national organization … relates to the councils as franchisor to franchisee” and that “from a commercial standpoint, the Girl Scouts are not readily distinguishable from Dunkin’ Donuts.”

The case portrays a clear focus on margin over mission in the structuring and the administration of the affiliations between the national and local Girl Scouts organizations.

This apparent lack of a consistent and compelling story of charitable service clearly constitutes the defense of the case. The court noted that the “original stated reasons for reducing the number of local councils were to improve the marketing of Girl Scout cookies, exploit economies of scale, and do more effective fund raising.”

When the Girl Scouts argued on appeal that their motivation was actually to increase racial and ethnic diversity, the court was unimpressed. In fact, the decision even offered a rare reprimand of the national organization’s legal counsel as “unprofessional” and “misleading,” further tarnishing the image of the organization and those who work within it.

Tax-exempt organizations are not immune from challenges to their nonprofit status. Congress, the courts, local tax assessors, the IRS, and state attorneys general are on constant watch to ensure that the privileges enjoyed by these entities are well deserved. Motive matters and should imbue the decision-making and even structure of nonprofit affiliations.

But national and statewide organizations should not view the Girl Scouts decision as a reason to avoid setting up local affiliates. Rather, they should be sure to structure those relationships to emphasize and protect the nonprofit nature of the enterprise. Organizations will need to consider more closely the extent to which they might need to conform to the rules more commonly applied to commercial relationships. Among the issues that will need to be spelled out are standards for conduct, requirements for product use, and franchise fees.

This combination of nonprofit and franchise expertise would not have seemed obvious for most organizations until the Manitou Council case, but the impact on relationships affecting the lives of so many people in need could not be more real.