GUEST BLOG POST
By: Jim Seely, Esq.
A few years ago there weren’t as many ways for executives to embarrass themselves and their associations with schemes which promised to provide the association the way to financial independence–deliciously described as non-dues revenues.
Even then, some of these schemes were disastrous. The American Medical Association had to pay over $10 million to Sunbeam. An agreement had been signed and sealed between Sunbeam and AMA calling for AMA to endorse various Sunbeam home products. Sometime later, AMA's members became aware of the agreement and complained that the endorsement of the home products did not conform to AMA’s professional mission. The AMA Board acquiesced and reneged on the Sunbeam agreement. This action not only cost AMA $10 million but was also the root cause of the resignation or termination of five AMA executives. In this case, the staff had gotten ahead of the membership and had not given sufficient homage to AMA’s mission statement.
Moreover, all things considered, an association which honored its endorsement/affinity contract often ended up with non-dues losses. Many associations tended to focus only on the revenue side of these arrangements and failed to factor in the value of the marketing services (and administrative services) the association was obligated by contract to provide in connection with promoting the vendor’s product or service to association members. There are many other promotional services which an association commonly agrees to provide, which may include: letters of endorsement by the association president, free table tops at association meetings, free advertisements in association publications and free exhibit booths at trade shows. When the value of the association services is factored in, the revenues may turn into losses.
In addition, there is the cost of lost opportunity to be considered. An association often is required to devote considerable staff time to a significant endorsement/affinity agreement. The critical question is whether this is the best utilization of staff time. In other words, is there another project the staff could devote its time to that would return greater benefit to the members than the endorsement/affinity arrangement with a vendor?
This may or may not be an example of a financial loss, but should be considered a loss to the association if staff time could have been better spent.
More importantly, as in the AMA case, many associations, then and now, miss the primary step in accessing the value of a particular offer. Is the offered program one that will be of value to a significant number of association members? If not, should the association be devoting its time and energy to the project, even if it will return a net profit?
Many, perhaps most, executives have been burned or scalded by one or more of these non-dues programs. It should follow that executives have learned their lessons. But, that does not seem to be case. A new wave of non-dues revenue programs has arrived with the internet. The magic of the internet seems to have caused otherwise cautious executives to let their guards down and sign on for all manner of new programs. When boiled down, these programs are remarkably similar to the pre-internet programs.
There will be more of these get-rich-quick, non-dues revenue offers and every executive must be ready to spot those that are not suitable for the association. At this point, we should have gotten your attention to the effect that many programs that will be presented to as “non-dues revenue” are not panaceas and, in fact, may not be suitable for your association under any circumstances. With that said, you should also know that there are endorsement/affinity arrangements which may fit your association very nicely – provided you subject these arrangements to the “acid test,” which includes these procedures:
- Ensure that the program is one that fits pre-determined standards for your association's endorsement of vendor products and services.
- Ensure that you know exactly what will be required of your association. (This is necessary to give the program a fair chance. If there is any misunderstanding on a significant point later, the program is probably doomed.)
- Calculate what the program will cost the association in terms of the reasonable value of the marketing services you will have to perform.
- Early on request a copy of the vendor's standard agreement.
- Enlist the services of competent legal counsel to ensure that your agreement is both clearly stated and legally enforceable.
- Determine the tax consequences of the transaction and ensure that legal counsel has drafted the agreement with maximum (non-taxable) advantages to the association.
- Pay particular attention to the provisions in the agreement which address ownership of intellectual property, such as copyrights and trademarks.
- Pay particular attention also to the termination provisions so that anything provided by the vendor will be fully operational (by the association) after the termination.
- Ensure that the agreement contains adequate quality control provisions, such that the association may monitor the sufficiency of the product or service to meet your member needs.
- Ensure that the agreement contains a provision requiring the vendor to maintain adequate book and records, with the opportunity of the association to inspect them at reasonable times.
- The agreement should also contain such provisions as termination, indemnification and dispute resolution. Legal counsel should also be able to advise you on the tax consequences including any non-taxable income generated by the licensing of your name, logo and mailing list.
If you follow these basic steps, you will be able to demonstrate to your Board that you have exercised due diligence. Even then, you cannot guarantee that your non-dues project will turn a profit, but you will have improved your chances of returning a profit so that you project is truly a non-dues revenue project.
Jim Seely is the founding attorney of Association Legal Services whose practice focuses on trade and professional associations. He can be reached at firstname.lastname@example.org.