By: Bennett Napier, CAE
In the previous blogs, we provided context to how to structure affinity partnerships and how to select the proper company to join with . Such programs and services are generally provided by a third party provider.
One of the crucial areas to achieve value, ensure accountability and meet legal requirements is proper contract language. In this blog, key provisions to be included in a formal contract/agreement are covered.
Key Contract Provisions:
- The contract should be called a “Royalty Agreement” or “License Agreement,” and the fees to be earned by the association should be expressly referred to in the contract as “royalties.”
- The contract should specify that fees to be earned by the association are solely in consideration for the association s licensing of its intangible property (and not for any services), and such intangible property to be licensed should be specified (e.g., name, logo, membership list, facsimile signatures, letterhead, and stationery design).
- The contract should specify that the association may exercise quality control over all uses of its intangible property. Specifically, the contract should reserve to the association the right to review and approve in advance all marketing materials and all other uses of its intangible property to protect the association s name and goodwill.
- The contract should not list any required duties or activities pursuant to which the association will assist the vendor in the marketing or administration of its products or services.
- All marketing and administration of the product or service should be conducted and paid for at fair market rates by the vendor, an unrelated third party, or the association’s taxable subsidiary.
- The association’s programs or facilities may only be used to promote the vendor’s product or service if such promotions are created and paid for by the vendor or a party other than the association..
- The association may, however, review, edit, and approve such items as part of the exercise of its quality control rights. However, the vendor or other party must then pay fair-market value for the placement of the ad in the association’s magazine (taxable advertising income to the association), for the exhibit booth (tax-free tradeshow income to the association), or for the right to be included in an association membership mailing, new member packet, broadcast fax or e-mail, and so forth (taxable advertising income to the association). The association should not share in the vendor’s expenses for such items.
- The association may list and refer to one or more endorsed products or services in printed lists of member benefits, but such listings should be of minimal descriptiveness so as to not be construed as ads or promotions on behalf of the vendor.
- If the association charges other vendors for the right to maintain a hyperlink to its Web site, then it certainly should charge an endorsed vendor similarly.
- The IRS has suggested informally that if the link goes directly to a page on the vendor’s website where the endorsed product or service may be ordered, this is more likely to constitute the provision of an advertising service and should be paid for by the vendor.
- It is permissible for the association to license the facsimile signature of one of its staff members or volunteer leaders for use on a marketing letter that is drafted and paid for by the vendor; this is merely the licensing of intangible property. The vendor should pay postage costs.
- Always use gross income as a measurement tool for determining royalty payments (e.g., royalties calculated as a percentage of gross sales of the endorsed product or service to members.) The association should never contract for any percentage of net profits from the sale of the product or service since this is indicative of a joint venture and can turn otherwise tax-free royalty income into taxable UBI.
- The contract should expressly state that it is not intended to create a “joint venture” or “partnership” between the parties. In addition, the contract should avoid the word “agent.” The vendor should not be referred to as an agent of the association, nor should the association be referred to as an agent of the vendor.
- The endorsed product or service always should be referred to as the vendor’s product or service and should never be referred to as a product or service of the association.
Each situation is different, so when possible consult with a nonprofit contract lawyer before executing a contract with an affinity partner.