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NONPROFIT ORGANIZATION DIRECTORS –
LEGAL RESPONSIBILITIES AND RISKS
A Guide for Volunteer Directors of Charities, Cause Organizations, Trade
Nonprofit Organizations, Professional Societies and Other Nonprofit
Organizations
Association of Corporate Counsel Nonprofit Organizations Committee
Jerald A. Jacobs
Pillsbury Winthrop Shaw Pittman LLP
Washington, D.C.
In his published notes from traveling throughout the nascent United States of American
in the early 1800’s, the French commentator Alexis de Toqueville repeatedly observed that there
were already thousands of volunteer organizations throughout the land. He said when a new
endeavor would be undertaken by the government in France, or by a man of rank in England,
you can be sure that it would be undertaken by an association or society in the United States.
Internal Revenue Service statistics indicate that there are nearly two million nonprofit taxexempt organizations in this country (although that number includes churches and schools).
This guide attempts to summarize for volunteer directors of nonprofit organizations – charities,
cause organizations, trade nonprofit organizations, professional societies, etc. -- the major areas
of legal concern for those directors. It is no more than a summary; many texts have been
published on the legal aspects of nonprofits and a list of other writings on the subject by this
author is included in the “References” section. The serious student of organization law is
referred there.
Legal Characteristics of Nonprofit Organizations
Nonprofit organizations are virtually all (1) nonprofit corporations, and (2) tax exempt
entities, that are (3) governed by volunteers. Each feature has important legal ramifications.
A nonprofit corporation obtains that status by being chartered under the laws of a state
government. Ordinarily the criteria include a prohibition against the nonprofit corporation
issuing equity stock (there is no true “ownership” of a nonprofit corporation; it may be
considered quasi-public) and a requirement that it be governed according to the chartering state’s
laws applicable to nonprofit corporations. The “nonprofit” characterization is a bit misleading;
there is no prohibition against the corporation in one or more years having an excess of revenue
over expenditures (typically called “surplus,” not “profit,” in the nonprofit corporation context).
In some states the “charter” may be called “articles of incorporation.” And nonprofit
corporations may be called by other terms (i.e., not-for-profit, non-stock, non-equity, public
benefit/mutual benefit, etc.); those distinctions in denomination usually have no practical
differences.
A tax exempt organization is a nonprofit corporation that has been determined by the
Internal Revenue Service to be exempt from paying federal income taxes on any net of revenues
over expenditures (i.e., surplus) each year. There are numerous categories of tax exemption.
They include, for example, charitable, scientific or educational organizations with Internal
Revenue Code Section 501(c)(3) exemption. There are also “cause” and social welfare
organizations with Section 501(c)(4) exemption. And there are trade nonprofit organizations,
professional societies, and other business-related organizations with Section 501(c)(6)
exemption. Some organizations that enjoy federal income tax exemption in other categories may
resemble those listed here. All exempt organizations in any of these categories must be
organized other than as for-profit business entities; and they must avoid allowing dividend-like
sharing of net earnings with individuals (called “inurement”); exempt organizations in the (c)(3)
and (c)(4) categories have more specific inurement-type prohibitions, called the “excess benefit”
rules. Income received by a tax exempt nonprofit organization from programs, initiatives and
activities related to the purposes for which the organizations received exemption are not subject
to federal income tax. But net income from an “unrelated” activity may be taxable if it is: (1) a
business, that is (2) regularly carried on, and that is (3) unrelated to the purposes for which the
organization originally received exemption (called “unrelated business income tax” or “UBIT”).
There is an exception to the rule on taxation of unrelated business income, and thus no taxation,
for “passive” income received by an exempt nonprofit organization – rents, royalties, dividends,
or interest. An exempt nonprofit organization can have modest amounts of UBIT year after year
with no untoward consequences for exemption (although it must pay tax on the net from
unrelated activities). But if unrelated income becomes “substantial” compared with related
income, the nonprofit organization’s exemption is threatened. The usual protective measure is to
transfer UBIT-generating programs to an owned taxable subsidiary before the “substantial”
threshold is reached.
An organization governed by volunteers means that the principal decision-making
mechanism of an organization is the governing board; it consists of individual directors (who
might also be called “trustees”) who are drawn from the field served by the nonprofit
organization and who usually serve as volunteers without compensation (although expenses are
sometimes reimbursed). Typically the board elects officers who often form an executive
committee to govern during the periods between board meetings. Depending upon its size and
budget, the nonprofit organization may also maintain employed executive staff who report to the
board and its officers. The volunteer governance of a nonprofit organization means that
decision-making sometimes occurs more slowly than in a business corporation and that
transactions can be more cumbersome. It can also raise singular challenges when attempting to
maintain consistent long-term policies and programs.
Legal Responsibilities of Directors
Directors of nonprofit organizations, even though they usually serve voluntarily and
without compensation, have “fiduciary duties” – including duties of both “care” and “loyalty” –
to their organizations. They are required to act reasonably and in the best interests of the
nonprofit organization, to avoid negligence or fraud, to avoid conflicts of interest, etc. In the
event that one of these duties is breached, the person breaching the duty is liable to the nonprofit
organization for any damages caused. There are three main legal principles encompassed in the
fiduciary duties.
1. The Duty to Act in the Best Interests of the Nonprofit Organization
This duty is very broad, requiring directors to exercise ordinary and reasonable care in
the performance of their duties, exhibiting honesty and good faith. Thus, a nonprofit
organization volunteer has the duty to exercise due care when acting on behalf of the
organization, to attempt to avoid generating legal liability for the organization, and to attempt to
further the organization’s collective interests rather than the individual’s own interests or the
interests of any other party. The duty also imposes an obligation to protect any confidential
information obtained while serving in the fiduciary role with the nonprofit organization.
2. The Duty to Avoid Conflicts of Interest
The duty of loyalty encompasses a duty to avoid conflicts of interest and to provide
undivided allegiance to the nonprofit organization’s mission. A conflict may exist when a
volunteer director participates in the deliberation and resolution of an issue important to the
organization while the individual, at the same time, has other professional, business, or volunteer
responsibilities outside of the organization that could predispose or bias the individual one way
or another regarding the issue. The organization and its constituency have a right to unbiased
governance; and it is the governing board of the organization that has the ultimate say in
determining in whether a director has a conflict, as well as what needs to be done to avoid that
conflict impinging upon the organization’s governance.
In these situations, it is typically not enough for the individual to be aware of the conflict
and to attempt to act in the nonprofit organization’s best interest despite the conflict. On the
contrary, for many conflicts, full disclosure to the organization and refraining from participation
in the organization’s deliberation and resolution of the issue (i.e.,”recusal”) may be required to
neutralize the conflict. For serious, visible, continuing, or pervasive conflicts, withdrawal from
the position, or from the outside conflicting responsibility, may be the only alternative to assure
unbiased decision making for the organization. It is important that one be sensitive to, and
avoid, apparent conflicts of interest as well as actual conflicts.
3. The Duty to Respect Corporate Opportunities
The duty of loyalty specifically prohibits competition by a nonprofit organization director
with the nonprofit organization itself. Those individuals may generally engage in the same “line
of business” or areas of endeavor as the organization, provided it is done in good faith, after full
disclosure, and without injury to the organization. One form of competition that is not permitted,
however, is appropriating “corporate opportunities.” A corporate opportunity is a business
prospect, idea, or investment that is related to the activities or programs of the nonprofit
organization and that the director knows, or should know, would be in the best interests of the
organization itself to accept or pursue. A nonprofit organization’s volunteer representatives may
take advantage of a corporate opportunity independently of the organization only after it has
been offered to, and rejected by, the organization.
Another aspect of directors’ duties to the nonprofit organization is that of “apparent
authority.” The U.S. Supreme Court has held that illegal activities of an nonprofit organization
volunteer are the responsibility of the organization itself if the volunteer only “appeared” to be
acting with the authority of the organization – even when the organization’s governing board did
not approve the activities, did not benefit from them, and did not even know about them. This
means that nonprofit organizations, lest they become legally liable for anything volunteers do or
say that even appears to be done or said with the organizations’ authority, must be careful to
limit who is authorized to act or speak for the organization. Directors should never assume they
have the power to represent their organization unless they are given specific authorization to do
so.
The standards of appropriate conduct for directors of nonprofit organizations are evolving
rapidly, owing in part to the legislative governance reforms for business corporations under the
Sarbanes-Oxley law of 2002 and related influences. Two features of that law apply to all
entities, including nonprofit organizations, and carry criminal penalties for violations: (1) the
provisions prohibiting destruction of documents in connection with federal investigations, and
(2) the provisions prohibiting retaliation against “whistle-blowers.” But other features as well,
while not strictly applicable to nonprofit organizations, are being adapted in the nonprofit
community, including: (a) frequent and detailed financial reports to constituents, (b) certification
of the accuracy and completeness of financial reports by organization’s CEO and/or CFO; (c)
vesting in independent audit committees (those with no voting role for management) all authority
over auditors and audits; and (d) implementation of confidential paths for receipt of complaints
from employees, members or others.
Areas of Potential Legal Liability
There are numerous kinds of policies and programs of nonprofit organizations that can
lead to serious legal liability. The most important of those are summarized here. Directors
should become familiar with the legal risks facing nonprofit organizations so they can effectively
manage and control those risks.
1. Liability from Antitrust Generally
The federal antitrust laws (principally the Sherman and Clayton Acts) and the trade
regulation statutes (principally the Federal Trade Commission Act) are intended to promote open
and fair competition in all commercial endeavors. State antitrust laws generally follow the
federal pattern and have the same objectives. Since the 1970’s, it has been clear that the federal
antitrust laws apply with full force not only to businesses and business organizations but also to
professions and to their societies, including in architecture, law, engineering, medicine, dentistry,
and other professions.
Nonprofit organizations members often compete with one another. Therefore, virtually
any action that a nonprofit takes, and particularly actions that involve the attempted private
regulation of an industry, profession, or business, may raise antitrust issues. Many of these
actions are perfectly lawful. There is a broad range of lawful activities for nonprofit
organizations to undertake relating to standard setting, certification of products or professionals,
dispute resolution, and other forms of business or professional self-regulation. Great care must
be taken, however, to ensure that a nonprofit organization’s activities do not fall within the
special unlawful categories established by the courts as “anticompetitive.” The courts consider
an action to be anticompetitive when, on balance, it raises prices or fees or lowers the quantity or
quality of available goods or services. Prices and fees, in fact, are a particularly sensitive area.
Any action of an organization that directly raises, lowers, or stabilizes prices or fees has the
highest risk of antitrust scrutiny and the greatest potential penalties. Even action that may only
indirectly affect prices and fees, such as nonprofit organization-promulgated arrangements on
terms and condition of sale, warranties, limitations on the extent or type of advertising, and hours
of operation, can also be expected to attract antitrust scrutiny of the organization.
Violations of the antitrust laws may be prosecuted by the federal government, either
civilly or criminally, and by injured private persons or entities. Courts may award injunctive
relief against violators and may require violators to pay victims three times the financial injury
actually suffered (called “treble damages”), plus their attorneys’ fees.
Violations of the antitrust laws fall into two basic categories: (1) actions that are
unlawful without regard to their actual impact on competition (called per se violations) and (2)
actions that are not necessarily unlawful, but may be so, depending on their actual impact on
competitive conditions (called Rule of Reason violations). Actions that are likely per se unlawful
include the following: (a) agreements fixing prices or fees or setting floors or ceilings on prices
or fees; (b) agreements to boycott competitors, suppliers, third-party payers, or
customers/patients/clients; (c) agreements among competitors dividing or allocating markets; and
(d) agreements coerced by a provider with a dominant market position tying the purchase or
provision of one product or service to the purchase or provision of another product or service.
Any other agreement, including resolutions of an organization of competitors—may violate the
antitrust laws under a Rule of Reason analysis if its effect is generally to raise prices or fees or to
reduce the quality or quantity of available goods or services.
It is very important to understand that the antitrust laws can be violated by mutual
understandings or other informal arrangements falling far short of a formal contract or written
resolution. Directors of an organization, or just ordinary members, can implicate the
organization in antitrust violations by using the organization to facilitate their undertaking
anticompetitive arrangements among themselves, even without invoking any of the formal
mechanisms of the organization. As noted above under the “apparent authority” doctrine, an
organization may be held responsible for anticompetitive conduct by volunteers who appear to
be acting in the name of the nonprofit organization.
2. Liability from Codes of Ethics
Many nonprofit organizations formulate and enforce codes of ethics or conduct for their
memberships. Ethics codes of nonprofit organizations often set forth both desirable goals and
behavioral requirements considered essential for the protection of the public and for the optimal
development of the field represented by the organizations. Enforcement ordinarily occurs
according to a detailed set of procedures intended to ensure objectivity and fairness. Both the
establishment of ethical requirements and their enforcement are legally sensitive areas. For this
reason, ethics enforcement should be entrusted solely to a discreet group within a nonprofit,
either its board or a delegated committee, operating with the close assistance of legal counsel.
The first area of risk from nonprofit organizations’ codes of ethics is that of antitrust law
violations. Any action taken by an nonprofit organization that is viewed by a court as
“anticompetitive” may violate federal or state antitrust laws. Actions are anticompetitive when
they raise prices or fees, restrict the supply of products or services, or lower the quality of
products or services. Some kinds of actions are so likely to be anticompetitive that they should
be avoided entirely. Examples include; (1) provisions or procedures setting or suggesting
maximum or minimum prices or fees to be charged or paid, or otherwise imposing upon the
freedom of members to freely and individually establish prices or fees for their own products or
services; (2) provisions or procedures limiting or discouraging non-deceptive advertising of
members’ products or services; and (3) provisions or procedures requiring or suggesting
boycotts of suppliers, competitors, or customers/patients/clients.
Many ethical rules of nonprofit organizations are pro-competitive—they result in better
products or services, increased availability or access, or lower prices or fees. All ethical rules,
however, must be evaluated to ensure that the motives and effects of the rule are to benefit
competition in the ways deemed appropriate by the antitrust laws.
The second area of risk from nonprofit organization codes of ethics is the risk of
inadequate procedures. Nonprofits can impose discipline, of course, only upon their members.
In doing so, the law requires that the organizations be careful to establish and observe rules and
procedures to assure “due process” for members. Minimal due process includes: (1) written
notice outlining the alleged violation, possible sanctions, and right to respond; (2) opportunity to
respond to the allegations of unethical conduct and to review and respond to all charges and
evidence to be considered by the decision maker; and (3) with respect to the most serious
sanctions, the right to appeal an adverse decision to an unbiased decision-making body such as
the organization’s board of directors or some specially-constituted, unbiased appeals board.
3. Liability from Standards, Testing, and Certification
Product standardization, testing, and certification are among the oldest and most common
activities of United States nonprofit organizations. Since colonial times, groups of businesses
have issued statements on common terminology, simplification of parts or styles, and, most
typical of all, uniform design or performance specifications. Tens of thousands of nonprofit
organization-promulgated product standards are now in place. Nonprofits that have developed
product standards have often gone the next steps and engaged in testing and certification of
products against the established standards. Testing might be performed by the organization itself
or by commercial or nonprofit laboratories approved or recognized by the organization.
Although it is most often trade or business groups that undertake these programs, it is also not
unusual for a professional organization to develop standards, testing, and certification programs
for the products used by the profession. These product quality endeavors have manifest benefits
for manufacturers and sellers of products. They raise the level of competition, provide common
targets and goals, simplify ordering and communication, and help assure interchangeability of
parts. The programs also have very substantial benefits for buyers and users of products. They
help upgrade and maintain quality, provide benchmarks for consumers, and often limit the
numbers and types of items that must be purchased. Programs of privately-issued standards,
testing, and certification are always voluntary—there is no compulsion of law for compliance or
participation; nevertheless, government agencies have often adopted nonprofit organization
product quality programs through mandatory regulations.
Legal problems that can arise from nonprofit organization-sponsored standards, testing,
or certification programs are substantial and significant. As one indication of the prominence of
the subject, antitrust opinions of the United States Supreme Court have addressed it repeatedly.
Product quality programs can, whether intentionally or inadvertently, restrict competition by
limiting the availability of products or services, excluding competitors from a field, or affecting
pricing and fees. There are also potentially serious defamation and product liability risks for
organizations engaged in these areas of endeavor.
The basic legality of nonprofit organization-sponsored standards, testing, and
certification programs has frequently been affirmed by courts, which have typically noted the
many benefits made available to suppliers, users, and government from the programs. Legal
challenges against product quality programs, however, have also resulted in many instances of
liability, from which some general guidelines can be distilled: (1) product standards, testing, and
certification programs must not be used as vehicles for raising, lowering, or stabilizing prices; (2)
the programs must not have a purpose or effect of excluding competitors; (3) they must not be
intended for, or result in, limiting production or availability of goods; (4) design, specification, or
construction standards are less preferable than performance standards because the latter permit
more latitude and innovation; (5) standards should be developed with the input of as wide a
group of interested parties as possible and should then be offered for comment to all who will be
affected by the standards; (6) standards should be updated periodically to assure that they reflect
state-of-the-art technology; (7) use of standards, testing, and certification programs must be
completely voluntary; (8) those who oppose or object to decisions in connection with standards,
testing, or certification programs should be afforded notice of the decisions, opportunity to
object, and, in some states, appeal of adverse determinations to an impartial body not involved in
the original determination; (9) testing in connection with standards or certification programs
should be by recognized laboratories following objective testing criteria in an unbiased manner;
organizations sponsoring testing should periodically ensure that the laboratories are fully
performing their obligations; (10) there should be no implicit or explicit representations
regarding product testing that are not accurate and verifiable; no attempt should be made to force
or require the use of testing or certification by producers or users; (11) no one should be denied
access to a standards, testing, or certification program because of non-membership in the
sponsoring organization; and (12) interpretation of standards, testing, or certification
requirements should be nonbiased, unaffected by competitive pressures, and consistent with due
process requirements.
4. Liability from Membership Decisions
Membership in trade associations, professional societies, and other nonprofit businessrelated organizations is ordinarily available in one or more categories to entities or individuals
meeting criteria set out in the organizations’ bylaws or other governing documents, the
organizations’ membership applications, and the organizations’ membership solicitation
materials. Business-type organizations that deny applications for membership or terminate
existing members run a high risk of legal challenge unless the reasons for denial or termination
are clear, reasonable, and straightforward ones—for example, nonpayment of dues, failure to
meet objective definitions of eligibility, or unwillingness to comply with a reasonable code of
ethics. In fact, many nonprofit organizations have in the past been required to defend against
legal challenges resulting from adverse membership eligibility decisions. In general, the more
important membership in an organization is for employment, engagement, sales, work
assignment, or reimbursement in a business, profession, or field, the more closely a court will
scrutinize membership criteria and procedures and the more readily it will overturn what it
perceives to be unreasonable criteria or unfair procedures. Where organization membership can
be shown to be essential, or even just very important, for financial success, arbitrary exclusion of
an applicant can be deemed an illegal boycott, because the decision is considered to be made
collectively by a group of entities or individuals, already members of the organization, who are
in competition with the applicant.
The century-old federal antitrust law, the Sherman Act, prohibiting “contracts,
combinations, and conspiracies in restraint of trade” has often been applied to invalidate denial
or termination of nonprofit organization membership. Where a challenger can show that
organization membership has significant competitive value and was withheld by the organization
on arbitrary or unreasonable grounds, the finding of an antitrust violation is likely. A court’s
conclusion would be that: (1) there was a “contract,” “combination,” or “conspiracy,” because an
organization is -- by definition -- a group of competitors; and (2) there was an unreasonable
“restraint of trade,” in view of the value of the membership withheld.
Separately or together with the theory of antitrust liability, the denial or termination of
nonprofit organization membership can also be overturned on the theory of “fairness”—failure of
the organization to afford fundamental “due process.” While private organizations such as
nonprofit organizations are not required to meet the same procedural standards as those
applicable to courts, in most states, basic due process requirements apply to membership
decisions and mandate at least: (1) notice to the person whose membership is to be denied or
terminated, and (2) opportunity to respond to the organization’s notice. Some situations may
even require, as an element of fundamental due process, that there be access to an unbiased
appeals body not involved in the original adverse decision.
Nonprofit business related organizations must not be confused with social clubs;
membership decisions may well come under legal attack if they even seem to be made on criteria
beyond whether the applicant meets the reasonable, published, and consistently-applied criteria
for membership. Courts are suspicious of membership exclusions of any kind; nonprofit
organizations that otherwise expend considerable resources to promote membership necessarily
come under close scrutiny when they instead try to exclude those who desire to join.
5. Liability from Surveys of Prices or Costs
Many nonprofit organizations have as one of their central activities the collection and
dissemination of information about prices, costs, credit risks, production or sales levels, or other
statistics about the businesses, professions, or fields represented by the organizations. Indeed,
statistical surveying was one of the main reasons that many nonprofit organizations were
originally formed during the early history of the United States. Members benefit from learning
about average or composite data against which to measure their own progress and success or lack
of success. Surveys of data and information about the field represented by an organization can
be undertaken with little legal risk if some important guidelines are carefully observed. These
programs can raise liability risks for nonprofits. The U.S. Supreme Court determined in a 1925
seminal case that the exchange of information among competitors actually spurs competition; the
antitrust laws are only violated, the Court said, when the information exchanged becomes the
basis for anticompetitive agreements among the recipients of the information. In short, nonprofit
organizations should be encouraged to assist members by conducting surveys of important
information, but they must also be warned about the serious pitfalls from improperly using that
information.
Several principles or guidelines emerge from the numerous court cases, primarily older
cases, in which nonprofit organizations were challenged legally in connection with the collection
and dissemination to members of information such as the prices or costs of products or services.
Most important is the antitrust concern. Information surveys by nonprofits must not be
used to effect or facilitate illegal agreements among members to fix prices or terms of sale;
establish uniform production levels; allocate markets or customers; or boycott suppliers,
competitors, or customers. There is also the risk that dissemination of inaccurate data could
involve defamation.
Nonprofit organizations can become drawn into antitrust investigations or lawsuits when
members use organization-sponsored price or cost surveys as the bases for the members’ own
anticompetitive arrangements; thus, steps should be taken to minimize the ability of members to
use nonprofit organization-published statistical information for illegal ends: (1) only gross sales,
or average prices or costs, or other composites should be reported in an organization’s
dissemination of statistical information; (2) no composite data should be reported in a category
where only a few submissions were received, thereby permitting the submitters to gauge their
competitors’ submissions as well (3) individual submissions should be accorded confidentiality;
ideally, the individual submissions should be discarded once they have been used to determine
the reportable composite data; (4) only past information, not projected future prices or costs, for
example, should be reported so that this information is not used to influence future prices
actually charged; (5) participation in any statistical program should be voluntary; there must be
no direct or indirect coercion to participate; distribution of results can be limited to those who
provide input to the program; (6) there must be no explicit or implicit agreement by members or
other users to take action in response to the data published by the organization; (7) the
nonprofit’s staff should not have discretion to make subjective determinations of composites,
missing data, or other matters; ( 8) in publishing statistical information, neither the organization
nor any volunteers, employees, or consultants should make exhortations or recommendations for
action by members based on the information; and (9) results of statistical programs, if they
become very important or essential for doing business in a field and if they cannot be replicated
elsewhere, will have to be made available to nonmembers as well as to members; nonmembers
can be charged more than members for participation to reflect members’ dues support for the
program.
6. Liability from Discussions at Meetings
Nonprofit organizations of every kind and size hold meetings. Meetings may be the most
universally common activity of nonprofit organizations at the national, state, and local levels.
There are conventions, seminars, trade shows/exhibitions/expositions, symposiums, board and
committee meetings, and other gatherings of members. Meetings are one of the most important
ways for nonprofits to fulfill their essential mission of assisting members in communicating to
one another, networking with one another, and learning from one another. Beyond
communication, networking, and education, of course, additional meetings are necessary to plan
and carry out the governance functions of organizations.
Extensive discussions occur at meetings among those that are engaged in competition;
therefore, nonprofit organization meetings present unique opportunities for violations of the law
to occur. Antitrust conspiracies can be, and often have been, developed through discussions at
nonprofits’ meetings. Defamation can occur, product liability can be incurred, and other legal
risks are present.
Awareness and understanding of several legal principles can assist nonprofit organization
directors in minimizing the risk that liability will arise from discussions among participants at
meetings.
It is obvious that nonprofit organizations are not always in control of what discussions
might occur among attendees at meetings sponsored by the organizations. Questions and
answers exchanged between the podium and the audience at educational sessions, conversations
at social events surrounding educational or governance meetings, and off-agenda items raised by
participants at board or committee meetings are difficult or impossible to “police.” Nonprofits
do risk being held responsible for whatever discussions they are able to control, however,—
program content of educational sessions, agendas of governance meetings, publications issued by
the organizations, etc. Nonprofits should be careful to ensure that, at least when they are in
charge of what is discussed at their meetings, there is due regard paid to the legal ramifications
of those discussions.
In the antitrust context, courts have often stretched to find that attendees at meetings have
“agreed” upon joint anticompetitive business conduct. It is certainly not necessary, when
government or private challengers are attempting to prove an antitrust conspiracy, to show that
the alleged conspirators actually signed a document committing themselves to illegal conduct, or
even to show that they agreed clearly in conversations to commit to the conduct. Discussions at
meetings in which the plans for a conspiracy were “signaled” among the meeting attendees,
followed by parallel anticompetitive activity of the attendees consistent with the discussions, has
been sufficient to support a finding of an antitrust “contract, combination, or conspiracy” in
violation of the law. It is thus essential for nonprofits to avoid, to the extent possible, discussions
in which competitors attending nonprofit organization meetings are “signaling” their illegal
intentions.
7. Liability from Defamation
Directors of a nonprofit organization frequently communicate within the organization or
outside of it regarding other people, entities, or products and services. Care must be taken in all
of those communications to avoid defamation. Defamation is an oral utterance (“slander”) or
written publication (“libel”) of false facts or false implied facts that damaging to the reputation
of an individual, entity, product, or service. Typically, defamation may be committed even by
those who believe that they are communicating the truth. The defamed individual may sue
anyone who publishes, prints, or repeats the defamation and, depending on the circumstances,
may recover from the speaker sums of money to compensate for the harm to reputation and to
“punish” the speaker as well. In some circumstances, “privileges” apply that may protect the
speaker from legal liability. Defamation can occur in most any kind of nonprofit, such as
scientific societies, charities, cause organizations, etc. as well as business-related organizations
In order to help avoid defamation, its essential elements should be understood. (1) There
must be a particular target of the allegedly offending communication. A statement must be about
a particular, living individual or existing entity, or a product or service line of a particular entity.
The reference need not be by name; a statement may be defamatory if the listener or reader of the
communication understands it to refer to a particular individual, entity, product, or service. (2)
A statement must be actually communicated to a third person (in other words, to someone other
than the speaker). Anyone who republishes (i.e., prints, reprints, repeats, paraphrases, or quotes,
even with attribution) is equally responsible with the original speaker; therefore a nonprofit
organization can be liable for defamation merely by publishing the offending statement of
someone else. (3) A statement must be derogatory or damaging to the person’s, entity’s,
product’s, or service’s reputation. Accusing someone of dishonesty or other moral deficiency, or
of professional or business deficiency, raises particularly significant risks of liability for
defamation. Any derogatory statement of fact or implied fact may be defamatory, however. (4)
A statement must be false or misleading. Truth is an absolute defense to virtually any
defamation claim. Generally, the allegedly offended party bears the burden of proving that the
statement was false, at least where the statement is about a “matter of public concern.”
There are also several privileges; if one of them exists, there is no liability for
defamation. (1) In many or most states, if a speaker takes reasonable precautions to ensure
accuracy in every derogatory detail, including making reasonable inquiry, the speaker will not be
held liable for defamation, even if a statement turns out to be false and defamatory. (2) Where
the statement concerns a public official or “public figure,” the speaker will not be held liable
unless the speaker actually knew that the accusations were false or made the statement in
“reckless disregard” of its truth or falsity. (3) Publication or communication of a derogatory
statement within an organization, including to members or other constituents, for the purpose of
promoting a common interest, may be protected by a “qualified privilege.” For example,
communications among an organization’s directors regarding actual board business, or
deliberations in the context of legitimate enforcement of a code of ethics, are likely to be
protected by this “common interest” privilege. Employment recommendations or evaluations,
made within or outside the employer organization, enjoy a similar qualified privilege in most
states. Where the privilege applies, these statements may give rise to liability only if motivated
by spite or ill-will, or if communicated to persons beyond the management group or ‘‘need to
know’’ circle.
Avoiding Legal Liability
It will be apparent by now that there are many legal pitfalls for directors of nonprofit
organizations. How to avoid those pitfalls? A few suggestions are offered here.
First, and perhaps most essential, is a top-down commitment by the directors to operate
fully within the law. Where the law is unclear, a conservative approach is warranted. Leaders of
nonprofit organizations almost by nature tend to be conservative in their decision making.
Directors are justly proud to serve as volunteers; they desire most of all to have a role in
advancing the organization’s mission and cause during their limited tenure in leadership
positions. They necessarily shrink from any accepting any acute risk of becoming embroiled in
governmental or private legal disputes, with their attendant diversion from the nonprofit
organization’s goals, seemingly endless delays, difficult-to-control costs, and potential adverse
affects on image.
Next, education is important. A key element in any nonprofit organization’s legal
compliance efforts is frequent explanation to the volunteers of the legal risks facing the
organizations. Many legal concepts that arise in the nonprofit context, for example apparent
authority, UBIT, and fair use, are non-intuitive. As part of the orientation of each newly elected
or appointed director, there should be a component on unique nonprofit organization law
compliance challenges. And there should be periodic reminders to directors of the organization’s
unwavering commitment to operating within the law.
The availability of trusted and experienced legal counsel is also essential. One attorney
or a team of attorneys should be identified and engaged by the nonprofit organization based upon
reputation and credentials from assisting other comparable nonprofits. Counsel should be
charged with the role of monitoring the organization’s policies and programs and bringing issues
of potential risk to the attention of the directors.
Every state permits nonprofit corporations to indemnify their directors. Indemnification
can be written into the organization’s bylaws, or effected merely by a board resolution when
necessary. Indemnification is the promise of the organization to pay for the legal defense – and
any ultimate damages – if a director, officer, or other volunteer, employee, or agent of the
organization is accused of legal wrongdoing while acting on behalf of the organization.
Finally, there is perhaps the ultimate safety net – insurance. There are many carriers that
offer broad liability insurance policies tailored to the needs of nonprofit organizations. The
policies ordinarily treat as “insured parties” not only the entity itself but also all volunteers and
staff. Most policies will pay the legal defense costs and any resulting settlements or damages
from claims of wrongdoing by the insured organization or its leadership, including in the areas in
which claims against nonprofits are most frequent – employment and human resources – and
most serious – antitrust and trade regulation. Nonprofit organization liability insurance coverage
is virtually always a good investment in the long run.
References
Legal Duties for Directors: An Association Board Member’s Guide to Avoiding Risk While
Advancing the Mission, Jerald A. Jacobs, Washington, D.C. ASAE, 2014.
Association Law Handbook, Fifth Edition, Jerald A. Jacobs, Washington, D.C.: ASAE, 2012.
Associations and the Law, Jerald A. Jacobs, Editor, Washington, D.C.: ASAE, 2002.