STATEMENT OF WILLIAM C. MACLEOD,
DIRECTOR OF THE BUREAU OF CONSUMER PROTECTION
OF THE FEDERAL TRADE COMMISSION,
BEFORE THE
U.S. HOUSE OF REPRESENTATIVES COMMITTEE
ON ENERGY AND COMMERCE;
SUBCOMMITTEE ON TRANSPORTATION
AND HAZARDOUS MATERIALS; HEARING ON
DECEPTIVE FUNDRAISING BY CHARITIES
Section 4 of the FTC Act gives the Commission jurisdiction
over corporations that are operated for their own profit or
that of their members. Although the Commission has
successfully asserted jurisdiction over various non-profit
entities, purely charitable organizations have been
considered outside the Commission's jurisdiction under the
FTC Act.
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:
The Commission is hereby empowered and directed to prevent
persons, partnerships, or corporations *** from using unfair
or deceptive acts or practices in or affecting commerce.
Section 4 defines "corporation" to include:
any company, trust, so-called Massachusetts trust, or
association, incorporated or un-incorporated, which is
organized to carry on business for its own profit or that of
its members.
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
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