STATEMENT OF WILLIAM C. MACLEOD,
DIRECTOR OF THE BUREAU OF CONSUMER PROTECTION
OF THE FEDERAL TRADE COMMISSION,
U.S. HOUSE OF REPRESENTATIVES COMMITTEE
ON ENERGY AND COMMERCE;
SUBCOMMITTEE ON TRANSPORTATION
AND HAZARDOUS MATERIALS; HEARING ON
DECEPTIVE FUNDRAISING BY CHARITIES
Absent some other grounds for jurisdiction, we are unlikely to open an investigation into charities that have been granted tax-exempt status by the IRS under Section 501 (c)(3) of the Internal Revenue Code.
The Commission has interpreted Section 4 of the FTC Act to permit it to assert its jurisdiction over any nonprofit association whose activities engender a pecuniary benefit to it's members, if that activity is a substantial part of the total activities of the association, rather than merely incidental to some non-commercial activity. American Medical Association, et. al, 94 F.T.C. 701, 982-83 (1979), aff'd, 638 F. 2d 443 (2d Cir. 1980), aff'd mem. by an equally divided Court, 455 U.S. 676 (1982).
See Community Blood Bank of Kansas City, Inc. v. FTC, 405 F. 2d 1011 (8th Cir. 1969); American Medical Association, 94 F.T.C. at 983-85.
As I mentioned earlier, under Sections 4 and 5 of the Act, we have jurisdiction only over corporations organized to carry on business for their own profit or for their members' profit. However, these sections have never been interpreted to deny the Commission jurisdiction over all non-profit organizations, and we could take action against any ostensible non-profit corporations that were, in fact, acting for their own profit or any non-profit corporations acting for the profit of their members. The Commission in the past has taken enforcement action against entities whose non-profit status appeared to be a sham.
This restriction on the Commission's jurisdiction has been in the FTC Act since it was first enacted. In fact, some sort of restriction was included in every version of the proposed legislation considered by the 63rd Congress, which created the FTC. Although the legislative history does not provide a discussion of why the exemption was necessary, it is clear that Congress was aware it was not providing a blanket exemption for all non-profit corporations. An early version of the proposed legislation would have exempted all non-profit corporations from the Commission's jurisdiction. However, in an August 1914 letter, Joseph Davies, Commissioner of the Bureau of Corporations (predecessor to the FTC), wrote a letter to Senator Newlands, Chairman of the Committee on Interstate Commerce and author of the Senate version of the Act, pointing out that under this definition, many trade associations would be exempt. Commissioner Davies described how these associations were often used by manufacturers to restrain trade. Perhaps as a result of this letter, the definition of corporation was expanded to include those organizations carrying on business for the profit of their members.
Section 5 (a)(2) of the FTC Act states:
Section 4 defines "corporation" to include:
Community Blood Bank of Kansas City, Inc. v. FTC, 405 F. 2d 1011, 1018 (8th Cir. 1969).
See Ohio Christian College, 80 F.T.C. 815 (1972) (Commission determined that the allegedly nonprofit Ohio Christian College was in fact a diploma mill).
S. 4160, 63rd Cong. 2d Sess., quoted at H.R.Rep. No. 1142, 63rd Cong., 2d Sess. 11 (1914).
This letter is quoted in Community Blood Bank of Kansas City, Inc. v. FTC, 405 F. 2d 1011, 1017-1018 (8th Cir. 1969).
15 U.S.C.§§ 1601 et seq.
Any determination of whether a corporation falls within the Commission's jurisdiction is usually made on a case-by-case basis. Although other agencies' interpretations under other statutes are not controlling, one of the factors we look at is a corporation's tax-exempt status. It is useful for us to know whether a corporation operates exclusively for religious, charitable, scientific, literary, or educational purposes and is tax-exempt under Section 501 (c)(3) of the tax code or whether its tax-exempt status comes from Section 501 (c)(6), which provides tax-exempt status to an association of individuals having a common business interest if the association's purpose is to promote that common interest rather than to make a profit.
For example in American Medical Association, the Commission found jurisdiction over the American Medical Association, Section 501 (c)(6) organization. The Commission also successfully sued the National Commission on Egg Nutrition("NCEN"), and a non-profit corporation owned by egg producers and organized to advertise the nutritional benefits of eggs. The Commission had jurisdiction because NCEN was organized for the profit of its members, even though it pursued that objective indirectly.
15 U.S.C. §§ 1601-1614
15 U.S.C. §1681.
15 U.S.C. §1691.
15 U.S.C. §1692.
On one occasion, the Commission found it necessary to enforce the Fair Debt Collection Practices Act against an allegedly non-profit corporation. See FTC v. Don Sly, Universal Church of Jesus Christ and Bureau of Collections, CV 81-H-427-E (N.D. Ala. 1982) (reported in 16 FTC Court Decisions 219). aff'd without opinion, 729 F 2d 1466 (11th Cir.), cert . denied, 469 U.S. 832 (1984).
26 U.S.C. § 501(c)(3).
Although expanding the Commission's jurisdiction over non-profits in general could aid our efforts to protect consumers, as a practical matter, its effect on our jurisdiction over fundraising matters may be seriously limited by the First Amendment. In Riley v. National Federation of the Blind of North Carolina, the Supreme Court held that soliciting for a charity, whether done directly by a charity or by a professional fund-raiser on its behalf is fully protected "speech" under the First Amendment. The Court also held that although anti-fraud laws could be enforced against charitable fundraising, the fact that a large percentage of funds is retained by the fund-raiser, standing alone, cannot serve as the basis for a fraud allegation.
Further, the Court held that neither a charity nor a fund-raiser could be compelled to disclose in its solicitations the percentage of funds actually used for charitable purposes in the preceding year. Thus, even though the Commission now has jurisdiction over professional fund-raisers, and even with jurisdiction over charities, it is doubtful that we could take action based solely on excessively high fees. Any such limitation on the Commission's authority would appear to apply to rulemaking as well as case-by-case enforcement efforts.
In conclusion, current statutory uncertainties and the First Amendment boundaries articulated by the Supreme Court have required the Commission's staff to move cautiously in their attempts to deal with the problems caused by the activities of non-profit entities, both those that are charitable and those that are not. We must be sure that our orders do not contain the same flaws as did the state regulations at issue in Riley. Of course, legislative repeal of the not-for-profit exemption to the FTC Act would not override First Amendment limitations on our authority. But the Subcommittee's consideration of our jurisdictional limitation could be an important step toward enabling the Commission to ensure that consumer contributions to charitable entities are based upon fair and honest solicitation practices.
The practical effect of Section 4 is to make more difficult the Commission's assertion of jurisdiction in areas other than charitable fundraising. As a result, the Commission may be precluded from pursuing fraudulent or anti-competitive practices by not-for-profit firms that we clearly would pursue if undertaken by for-profit firms.
108 S. Ct. 2667 (1988).
Id. at 2675
Id. at 2678