Developments in Association Law 2022 – 2024

The following is a review of notable cases and regulatory developments for nonprofit organizations at the federal and state levels during the last two years.

ANTITRUST

Federal Court in Arizona Limits FTC Jurisdiction on Nonprofits
FTC v. Grand Canyon Education, Inc., No. 2:23-cv-02711-DWL (D. Ariz. Aug. 15, 2024)

A federal court in Arizona dismissed claims in a Federal Trade Commission (FTC) lawsuit against Grand Canyon University. The case has potential ramifications for other kinds of nonprofits, especially those without voting members. The court held that the FTC Act did not authorize the FTC to bring claims against GCU, formed as a nonprofit corporation with federal income tax exemption under Internal Revenue Code Section 501(c)(3), because GCU was not “organized to carry on business for its own profit or that of its members,” which is an element of the definition of a “corporation” under Section 4 of the FTC Act necessary for the FTC to assert jurisdiction. The FTC asserted in its complaint that GCU was “organized ... to advance [Grand Canyon Education, Inc.’s] for-profit business and advance Defendant Mueller’s interests as officer, chairman, director, stockholder and promoter of investment in GCE.” (Mueller was both GCU’s president and GCE’s CEO.) But neither GCE nor Mueller were members of GCU.

The FTC argued that “GCU is a for-profit entity because it was organized to, and does, benefit its for-profit founder, GCE, and President, Defendant Mueller” and because a “genuine nonprofit does not siphon its earnings to its founder, or the members of its board, or their families, or anyone else fairly to be described as an insider.” The FTC also argued that “Arizona and IRS statutes [that] reference nonprofit or tax-exempt status … do not supplant the FTC’s authority.”

The court rejected the FTC’s view and held that “the FTC’s theory cannot be squared with the plain language of the statute.” The court reasoned that “if Congress had intended for [FTC Act] Section 4 to encompass nonprofit entities organized to carry on business for the profit of non-member ‘insiders,’ ‘related businesses,’ and ‘officers,’ it could have said so.” The court distinguished cases that have held that the “FTC [has] authority to pursue claims against a particular type of nonprofit entity—a nonprofit corporation with profit-seeking members that was expressly organized to benefit those members” (emphasis in original). It was fatal to the FTC’s asserted enforcement authority that the entities and persons allegedly wrongfully benefiting from GCU’s activities were not members of the nonprofit.

While this is just one case from one federal court, if not overturned on appeal it has potential ramifications for FTC jurisdiction over any nonprofit that cannot reasonably be found to be operating for the “business ... of its members.” That might include, for example, not only charities and educational organizations, which often do not have members, but also other kinds of nonprofit such as credentialing organizations which also often do not have members of any kind.

Second Circuit Expanded Antitrust Liability for Association Members in Soccer Promotion Case
Relevent Sports, LLC v. U.S. Soccer Fed’n, Inc., 61 F.4th 299 (2d Cir. 2023)

The plaintiff, a U.S.-based soccer promoter, Relevent Sports, LLC, brought an action against the Fédération Internationale de Football Association (FIFA) and the U.S. Soccer Federation, Inc., alleging that the defendants violated the Sherman Antitrust Act and Clayton Antitrust Act by conspiring to prohibit official soccer games in the United States through a 2018 geographic market division policy that unlawfully prohibited soccer leagues and teams from playing official season games outside of their home territory. The plaintiff claimed that the 2018 policy represented an agreement among competitors to restrict competition. After concluding that the plaintiff failed to allege that the 2018 Policy itself stemmed from or constituted direct evidence of such a prior agreement among the Defendants, the district court dismissed the complaint for failure to state a claim.

The Second Circuit vacated and remanded, holding that a plaintiff challenging an association rule governing the conduct of the members’ separate businesses need not allege an antecedent “agreement to agree” but that an allegation that separate businesses joined an association and agreed to abide by the association’s rules and policies was sufficient to allege concerted action under the Sherman Act. The ruling increases the risk that an association’s members could be held liable for the actions of the association itself without any direct involvement in those actions. The U.S. Supreme Court denied Defendant’s Writ of Certiorari on April 22, 2024.

District Court Dismissed Antitrust Claims against Association Citing Insufficient Evidence of Members’ Participation in Conspiracy
Alvarado v. W. Range Ass’n, 2024 WL 915659 (D. Nev. 2024)

Cirilo Ucharima Alvarado, a Peruvian sheepherder, filed a class action lawsuit against Western Range Association (WRA), an association of sheep ranches, and eight WRA member ranches. The Plaintiff alleged violations of Section 1 of the Sherman Antitrust Act, claiming the Defendants engaged in wage-fixing and market allocation for sheepherders. The case proceeded in the U.S. District Court for the District of Nevada. The Plaintiff worked for Little Ranch in Nevada from July to December 2020 on an H-2A visa. The Plaintiff sought to represent all sheepherders who worked for WRA or its members through the H-2A program since June 1, 2018. The court previously denied WRA’s motion to dismiss the original complaint, finding plausible allegations of an unlawful wage-fixing agreement between WRA and its members.

The Plaintiff’s amended complaint alleged that WRA and the ranch Defendants conspired to fix wages at the minimum allowable rate set by the Department of Labor for H-2A sheepherders. The Plaintiff also claimed the Defendants agreed to allocate the market for foreign H-2A sheepherders and not poach employees from one another. The ranch Defendants moved to dismiss, arguing the Plaintiff failed to sufficiently allege each Defendant’s specific assent to and participation in anticompetitive agreements. The court agreed, finding that merely identifying the ranches as WRA members was insufficient to establish liability. The court emphasized that membership in an association alone does not render members automatically liable for the association’s antitrust violations.

The court distinguished this case from Relevent Sports, LLC v. United States Soccer Fed’n, Inc., where an association’s binding policy and members’ agreement to adhere to all policies sufficed to allege an agreement. Here, the Plaintiff did not allege a comparable membership agreement binding ranches to WRA’s policies. The court found the Plaintiff’s allegations too conclusory, lacking specific details about who from each ranch entered into purported agreements with WRA. While acknowledging that detailed “defendant by defendant” allegations are not required, the court ruled that more specific factual allegations were necessary to plausibly suggest each ranch Defendant’s participation in the alleged conspiracy. The court granted the motions to dismiss but allowed the Plaintiff leave to amend, noting the possibility of additional specific allegations emerging from ongoing discovery.

Sixth Circuit Ruling Reinforced Legality of Standards-Setting Association Certification Policies
Hobart-Mayfield, Inc. v. Nat’l Operating Comm. on Standards for Ath. Equip., 48 F.4th 656 (6th Cir. 2022)

Petitioner Hobart-Mayfield, Inc. (“Mayfield”), a manufacturing company that makes a football helmet accessory, sued the National Operating Committee on Standards for Athletic Equipment (NOCSAE), Riddell, Inc., Kranos Corp. (d/b/a/ Schutt Sports), and Xenith, LLC (collectively “Helmet Manufacturers”).

Mayfield manufactures the “S.A.F.E. Clip,” which is an add-on product designed to be a shock absorber for football helmets. Mayfield contends that NOCSAE’s grant of a unilateral right to Helmet Manufacturers to void a NOCSAE safety standard certification when an add-on product is attached to a helmet is a violation of the Sherman Antitrust Act and the Michigan Antitrust Reform Act as well as tortious interference with business relations. The crux of its complaint was that the Helmet Manufacturers could decertify certain helmets if add-on products were attached to them, which restrained Mayfield’s ability to sell its S.A.F.E. Clip.

The district court granted the Helmet Manufacturers’ motion to dismiss, and the U.S. Court of Appeals for the Sixth Circuit affirmed, holding that the accessory maker failed to allege that the Helmet Manufacturers entered into agreement to restrain trade in violation of the Sherman Antitrust Act, 15 U.S.C. § 1 because Mayfield failed to allege that there was an agreement between NOCSAE and the Helmet Manufacturers. Furthermore, there was no conspiracy in violation of the Sherman Antitrust Act as there was no per se or rule of reason violation, and the petitioner failed to show tortious interference.

DOJ, FTC Withdraw from Guidelines Establishing Antitrust Safety Zones for Information-Sharing Programs

In 2023, the U.S. Department of Justice (DOJ) and FTC withdrew from three joint antitrust policy statements that had provided antitrust safety zones for information-sharing programs involving competitors, which often are offered by associations. Under the antitrust safety zones, an information-sharing program was presumptively lawful if the information was collected, aggregated and disseminated by a third party (such as an association); the exchanged information was more than three months old; at least five providers supplied the exchanged information; and no single provider accounted for more than 25% of the exchanged information.

The antitrust safety zones set forth in the policy statements, although on its face applicable to the health care field, had been applied by the antitrust agencies to areas outside of health care and had been relied upon by parties, including many trade associations, professional societies and other nonprofits, when establishing their information-sharing programs.

When withdrawing from the statements, DOJ said that the guidance was “overly permissive on certain subjects, such as information sharing.” Press Release, DOJ (Feb 3, 2023). The FTC echoed DOJ, stating that “the Statements may be overly permissive on certain subjects, such as information sharing. In particular, companies have sometimes used the safety zone for information exchanges in contexts and industries that were never contemplated by the agencies, including to share competitively sensitive wage and benefit information with other employers.” Press Release, FTC (Jul. 14, 2023).

Neither DOJ nor FTC has issued new guidance. Each agency instead stated that it would be using “a case-by-case” enforcement approach going forward. As such, it is likely that it will take some time before we know whether information-sharing programs that operate within the antitrust safety zone that had been relied upon for years could be subject to legal challenge.

Massachusetts District Court Ruled That the American Red Cross Is a “Federal Instrumentality” and Immune from Antitrust Suits
Verax Biomedical Inc. v. American National Red Cross, 2024 WL 208127 (D. Mass. 2024)

Verax Biomedical, Inc. sued the American Red Cross (ARC), a federally chartered nonprofit corporation, for violating the Sherman Act. Verax claimed that ARC, the largest supplier of blood platelets in the United States, leveraged its power in the market to monopolize “mitigation services.” The District Court for the District of Massachusetts granted ARC’s motion to dismiss Verax’s antitrust claims.

Verax manufactures PGDprime, a Rapid Secondary Test designed to detect bacterial growth in blood platelets to mitigate the risk of platelets becoming infected. Prior to July 2020, ARC sold blood platelets to hospitals, which then separately employed mitigation services. In July 2020, ARC announced a plan to pretreat all platelets it sold using Cerus Corporation’s INTERCEPT Blood System, a test that is incompatible with Rapid Secondary Tests such as PGDprime.

The Sherman Act imposes liability on any “person” including “corporations and associations existing under or authorized by the laws of ... the United States.” However, the United States is not a “person” subject to the Sherman Act. ARC argued that, as a federal instrumentality, it is not a person separate from the United States. The court held that the ARC is “a federally chartered instrumentality of the United States” with rights that include immunity from antitrust suits. ARC’s charter requires it to fulfill a variety of public functions and, on the whole, ARC’s “goals, obligations, and powers” support treating ARC as a public rather than a private entity.

FIRST AMENDMENT

Fifth Circuit Affirmed Protection of Medical Association’s Guidelines Against Misrepresentation Claims
Torrey v. Infectious Diseases Society of America, 86 F.4th 701 (5th Cir. 2023)

Patients alleging that they suffered from “chronic Lyme disease” sued Infectious Diseases Society of America (IDSA), which published Lyme disease guidelines, seven of the 14 authors of IDSA’s Lyme disease guidelines (the “Doctors”), and major health plans (including Aetna, Cigna and United). Plaintiffs alleged that the health plans paid the Doctors large consulting fees to write false guidelines (which permitted the health plans to deny coverage for chronic Lyme disease), in violation of RICO and the antitrust laws.

The health plans settled. On the last day of fact discovery, Plaintiffs amended their complaint to add claims against IDSA alleging that the guidelines contained fraudulent and negligent misrepresentations regarding Lyme disease diagnosis and treatment. In response to summary judgment motions filed by IDSA and the Doctors, Plaintiffs dismissed their RICO claims against IDSA and their RICO and antitrust claims against the Doctors. The district court then granted IDSA’s motion for summary judgment on Plaintiffs’ antitrust claims against IDSA and then granted IDSA’s motion to dismiss the new misrepresentation claims, holding that “the statements in the IDSA Guidelines are not the type of statements that Plaintiffs can recover for based on misrepresentation, as they are medical opinions, not factual representations.”

Plaintiffs appealed only the district court’s order dismissing their new misrepresentation claims against IDSA. The Fifth Circuit affirmed, holding that “merely publishing a medical opinion—even a hotly debated one—in a peer-reviewed journal cannot give rise to a misrepresentation claim” and that the challenged statements in IDSA’s Lyme disease guidelines regarding Lyme disease diagnosis and treatment were protected medical opinions.

Fifth Circuit Found That an Association of Physicians Has Standing in a Censorship Case Against Medical Boards
Ass’n of Am. Physicians & Surgeons Educ. Found. v. Am. Bd. of Internal Med., 103 F.4th 383 (5th Cir. 2024)

The Association of American Physicians and Surgeons Educational Foundation (AAPS) alleged that the Defendants coordinated to censor the speech of physicians in violation of the First Amendment, antitrust law, and the Administrative Procedure Act (APA). AAPS argued that Defendants, various medical boards (“Board Defendants”) and the Department of Homeland Security (DHS), threatened to strip certifications from physicians if they took certain positions on COVID-19, vaccination and abortion. The District Court for the Southern District of Texas dismissed the AAPS’s claims, and the AAPS appealed to the Fifth Circuit,

The AAPS argued that Board Defendants leveraged their medical certification monopolies to chill the speech of physicians who disagreed with the Biden Administration’s positions on COVID-19 and abortion. The AAPS also alleged that the DHS’s Disinformation Governance Board (DGB) coordinated with Board Defendants to censor speech. The district court dismissed the claims against the Board Defendants because the AAPS lacked standing, and DHS had mooted claims against it by dissolving the DGB.

On appeal, the Fifth Circuit held that AAPS did have standing because AAPS physicians were “willing speakers” that would have voiced their opinions but for the threat of decertification. Board Defendants argued that AAPS lacked standing because physicians are independent third parties who engaged in self-censorship, but the Fifth Circuit stated that the physicians acted in a predictable way when confronted with the choice of censorship or decertification. However, the Court refused to address whether Board Defendants are state actors subject to the prohibition against abridging free speech and remanded to the district court. Finally, the Fifth Circuit found that the district court had improperly denied AAPS an opportunity to amend its complaint but agreed that the claims against the DHS were moot due to the dissolution of the DGB.

Eleventh Circuit Granted a Preliminary Injunction to Prevent a Racially Discriminatory Contest from Proceeding
American Alliance for Equal Rights v. Fearless Fund Management, LLC, 103. F.4th 765 (11th Cir. 2024)

The American Alliance for Equal Rights (AAER) challenged Fearless Fund Management, LLC’s (FFM) entrepreneurial contest as an illegal contract that discriminates on the basis of race in violation of 42 U.S.C. § 1981. The District Court for the Northern District of Georgia denied AAER’s preliminary injunction, but, on appeal, the Eleventh Circuit reversed.

FFM is a venture capital fund that sponsors the Fearless Strivers Grant Contest. The Contest grants $20,000 to each winner and, according to its rules, is open only to “black females who are ... legal U.S. residents.” A business must be at least “51% black woman owned” to qualify. The rules also state that “by entering this contest, you agree to these official rules, which are a contract.” The AAER, a membership organization, sought a preliminary injunction to prevent FFM from closing the Contest application process on the grounds that it is a contract that “categorically excludes non-black applicants from eligibility because of their race.” The district court refused to enter the injunction on the grounds that the contest may be protected under the First Amendment as “expressive conduct,” and that AAER had not demonstrated that it would suffer irreparable harm. AAER appealed to the Eleventh Circuit.

Despite the fact that the AAER refused to identify its members by name, both the district court and the Eleventh Circuit agreed that AAER satisfied the standing requirement. This holding conforms with the Tenth and Fourth circuits but not with the Second. (See Do No Harm v. Pfizer, Inc., 96 F.4^th106, (2d Cir. 2024).) On the merits, the Eleventh Circuit agreed that the Contest is a contract within the meaning of § 1981, and that the remedial-program exception did not apply. However, the Court held that the First Amendment would not protect the Contest because the First Amendment “does not protect the very act of discriminating on the basis of race.” Furthermore, the Court held that AAER’s members would suffer irreparable harm as a result of their exclusion from the contest. The Eleventh Circuit reversed the district court’s decision.

Nonprofit’s Associational Standing Denied in Vaccine Policy Challenge
Children’s Health Rts. of Massachusetts, Inc. v. Belmont Pub. Sch. Dist., 102 Mass. App. Ct. 747, 213 N.E.3d 88 (2023)

Children’s Health Rights of Massachusetts, Inc. (CHRM), a nonprofit corporation representing parents of students in Belmont and Cambridge public schools, appealed the denial of its motion for a preliminary injunction against the school districts’ COVID-19 vaccination policies. These policies required students aged 12 and over to be vaccinated to participate in extracurricular activities. CHRM filed a verified complaint and motion in Superior Court seeking declaratory judgment and injunctive relief. The Superior Court denied CHRM’s motion, citing a failure to identify specific harmed parties.

CHRM challenged the school districts’ authority to implement vaccine mandates, arguing the policies were preempted by state regulations and violated parents’ constitutional rights to direct their children’s care. The nonprofit claimed associational standing on behalf of its members. The Appeals Court focused on whether CHRM demonstrated a likelihood of success on the merits.

The court held that CHRM needed to show its members would independently have standing to pursue the claim. However, CHRM’s complaint only generally alleged its members had children subject to the policies, without specifying any particular harm or risk of harm. The court rejected CHRM’s argument that it did not need to show injury for constitutional claims, explaining that plaintiffs must still allege an injury within the area of concern of the constitutional guarantee. Without allegations of specific children being compelled to vaccinate unwillingly or excluded from activities, the court found CHRM failed to establish the particularized legal harm required for standing to challenge governmental action. Consequently, the Appeals Court affirmed the denial of the preliminary injunction based on CHRM’s failure to demonstrate standing.

GOVERNANCE

D.C. Law Limited Judicial Review of Nonprofit Merger Challenges
OverDrive, Inc. v. Open eBook F., 288 A.3d 305 (D.C. 2023)

Plaintiff Overdrive, Inc., a member of Open eBook Forum’s nonprofit corporation, which does business as International Digital Publishing Forum (IDPF), opposed a merger between IDPF and the World Wide Web Consortium (W3C). After trying, unsuccessfully, to preclude a membership vote on the merger, Overdrive petitioned the District of Columbia Superior Court to review the merger under D.C. Code § 29-401.22(a), which permits members of nonprofit corporations to challenge corporate actions in certain circumstances.

The Superior Court found that IDPF’s bylaws permitted any group of 14 members to petition the board for a new vote, which constituted a way to internally challenge the merger. Thus, the court explained, its review of the merger was limited to ensuring that it complied with IDPF’s articles and bylaws. In the court’s view, it did. Overdrive timely appealed.

The D.C. Court of Appeals affirmed the judgment below, finding that because the nonprofit corporation’s bylaws provided a mechanism for appellant to raise an internal challenge to the merger, the trial court properly concluded that its own review under D.C. Code § 29-401.22(a) on review of contested corporate actions was limited to ensuring that the merger complied with the nonprofit corporation’s articles and bylaws. The Court of Appeals confirmed that the merger did comply with such articles and bylaws, and further explained that the District’s Nonprofit Corporation Act carefully circumscribes the types of challenges to nonprofit corporate actions that can be raised in court.

D.C. Superior Court Granted Summary Judgment on Private Inurement Claim Against Nonprofit Director
Dist. of Columbia v. Delta Phi Epsilon, Inc., 2022 WL 6862954 (D.C. Super)

The District of Columbia brought an action for equitable relief against Delta Phi Epsilon, Inc. (DPE), a 501(c)(7) DC nonprofit corporation, the Delta Phi Epsilon Foundation For Foreign Service Education (“Foundation”), a 501(c)(3) DC nonprofit corporation, and Terrance Boyle for violations of the DC Nonprofit Corporation Act (NCA) and the common law. Boyle served as an officer of the Foundation and as a director and secretary of DPE from the 1980s until his resignation in 2021. The District alleged that in 1990 Boyle used charitable funds from the Foundation to purchase a $345,000 house; Boyle lived in the house for 30 years, taking sole ownership of the property in 1998, and the Foundation never used the property for its nonprofit activities. In addition, in 2020 DPE donated a separate piece of real estate (“Alpha House”) to the Foundation, which sold the Alpha House in a seller-financed transaction without conducting due diligence. While the DPE membership voted to sell Alpha House, they did not vote to donate it to the Foundation.

The District contended that (1) Boyle unlawfully derived a private benefit from the Foundation; (2) the Foundation failed to fulfill its stated public purposes; (3) DPE divested its most valuable assets without approval of its members; (4) DPE’s governance failures violated the NCA; and (5) Boyle violated his fiduciary duties to both DPE and the Foundation.

The District of Columbia Superior Court held that the District was entitled to summary judgment on its claim for private inurement per D.C. Code § 29-404.40(a) on prohibited distributions where it was undisputed that the officer, Boyle, received a significant value at the Foundation’s expense, i.e., he used a property purchased in part by the Foundation’s funds as his personal home for nearly 30 years. For the District’s other claims—that the Foundation failed to pursue its nonprofit purpose; that DPE violated the NCA’s governance and recordkeeping requirements; and that Boyle breached his fiduciary duties to DPE—the court found that there were still questions of fact at issue, and thus denied summary judgment on those claims.

The District ultimately settled with the defendants. Under the terms of the settlement, Boyle must pay $100,000 in restitution to the Foundation, never again participate in governance of DPE or the Foundation, and abstain from serving as an officer or director of any other DC nonprofit for 10 years.

Superior Court Ruled Redeeming Appreciated Membership Fees Not an Illegal Contract under New Jersey Nonprofit Law
Breitman v. Atlantis Yacht Club, 304 A.3d 312 (App. Div. 2023)

Plaintiff Steven Breitman filed an action against the Atlantis Yacht Club, a nonprofit organization, to enforce the Club’s promise to redeem his membership fees. The Club refused to honor the agreement on the grounds that full payment would be an illegal contract that would jeopardize its nonprofit status under the New Jersey Nonprofit Corporation Act (NJNCA). The Superior Court of New Jersey, Appellate Division, affirmed that the arrangement was not an illegal contract.

According to the Club’s longstanding bylaws, withdrawing members were eligible to redeem the value of their membership fees, minus a $5,000 capital assessment, when a new member joined. When Breitman first joined the Club, he signed a Certificate of Interest (COI) and paid $7,500. When Breitman withdrew his membership in 2015, the Club’s membership fee had increased to $25,000. In 2020, a new member joined and the Club notified Breitman that it would pay him $20,000 in installments over three years. However, after paying the first installment, the Club was counseled to cease further payment because distributing a higher amount than the original membership fee was equivalent to distributing “income or profit” to a member. According to the Club, such payments would violate the NJNCA.

The NJNCA states that “no part of the income or profit of a corporation organized under this act shall be distributed to its members.” However, the Court held that membership fees and the COI are collateral and not a profit-making or income-generating instrument. Although the Club’s redemption payments were higher in value than Breitman’s initial membership fee, the agreement was not illegal under New Jersey law. The Club breached an enforceable agreement when it failed to pay Breitman the remaining redemption installments.

California Supreme Court Ruled Former Directors Retain Standing to Sue Nonprofit Corporations for Alleged Misconduct
Turner v. Victoria, 532 P.3d 1101 (Cal. 2023)

Debra Turner, former director of the Conrad Prebys Foundation, sued fellow directors Laurie Anne Victoria, Joseph Gronotte, Gregory Rogers and Anthony Cortes for alleged breaches of fiduciary duty and mismanagement. Turner filed suit while still a director but lost her position shortly after. The trial court dismissed Turner’s claims for lack of standing, and the Court of Appeal affirmed. The California Supreme Court granted review to resolve a conflict between appellate decisions on whether a director who loses their position after filing suit retains standing to maintain the action under Corporations Code sections 5142, 5233 and 5223.

The court examined the statutory language of sections 5142, 5233 and 5223, which allow directors of nonprofit public benefit corporations to “bring an action” but do not explicitly require maintaining director status throughout litigation. The court contrasted this with section 800 governing for-profit corporations, which specifies actions may be “instituted or maintained” by shareholders. The court found the nonprofit statutes’ text, historical context and purpose indicated the legislature did not intend to impose a continuous directorship requirement.

The court rejected arguments that the relator process provides an adequate alternative, noting the Attorney General’s resource constraints in overseeing charitable organizations. The court dismissed concerns about harassment, finding derivative actions provide safeguards. The court held that a director who brings suit under sections 5142, 5233 or 5223 does not lose standing if they subsequently lose their position. The court reversed the Court of Appeal’s judgment, allowing Turner’s suit to proceed. This ruling maintains broader access for directors to bring enforcement actions against nonprofit corporations and fellow directors for alleged misconduct.

New York Appellate Court Clarified Standing Requirements for Derivative and Individual Claims in Disputes Involving Not-for-Profit Corporations
Sikh F., Inc. v. Saluja, 227 A.D.3d 1024 (N.Y. App. Div. 2024)

Sikh Forum, Inc., a not-for-profit corporation operating a Sikh temple, sued Maan S. Saluja and others, alleging they held a sham meeting to elect themselves as the board of trustees. Saluja and other defendants became third-party plaintiffs, filing a complaint against Maninder Sethi and others as third-party defendants. The third-party complaint sought damages for breach of fiduciary duty, a judicial declaration regarding the disputed election, and injunctive relief to access certain books and records. Sethi and the third-party defendants moved to dismiss for lack of standing. The Supreme Court of Nassau County granted this motion. Saluja and the defendants/third-party plaintiffs appealed to the Appellate Division, Second Department.

The Appellate Division addressed the standing requirements for derivative actions under Not-for-Profit Corporation Law § 623(a). This statute requires representation of at least 5% of any class of members to bring a derivative action. The court found that Sethi and the third-party defendants established prima facie that Saluja and the defendants/third-party plaintiffs lacked standing to assert a derivative claim for breach of fiduciary duty. Saluja and the defendants/third-party plaintiffs failed to raise a question of fact in opposition. Consequently, the Appellate Division affirmed the dismissal of the derivative claim.

The Appellate Division modified the lower court’s order regarding the declaratory and injunctive relief claims. The court determined these were individual claims under Not-for-Profit Corporation Law §§ 618 and 621, for which Saluja and the defendants/third-party plaintiffs had standing. The Appellate Division exercised its discretion to convert the third-party action into a special proceeding under these statutes. The court cited the principle that actions brought in improper form may be deemed properly brought to avoid dismissal. The Appellate Division emphasized that on a motion to dismiss for lack of standing, the moving party bears the burden of establishing the plaintiff’s lack of standing as a matter of law, while the plaintiff need only raise a question of fact to defeat such a motion.

Texas Court Affirmed Denial of TCPA Motions in Nonprofit Board Member’s Removal Dispute
Perales v. Newman, 2023 WL 5615893 (Tex. App. 2023)

Kristin Newman, a member of Northeast Tarrant Little Miss Kickball, Inc. (“Kickball”), sued Kickball and several board members after her removal from the board, membership and coaching position. The defendants filed motions to dismiss under the Texas Citizens Participation Act (TCPA). The trial court allowed the motions to be overruled by operation of law. The defendants appealed, arguing the TCPA applied to Newman’s claims and that she lacked standing.

The Court of Appeals affirmed the denial of the TCPA motions. The court first addressed standing, finding Newman sufficiently alleged concrete, personalized injuries that could be redressed by a favorable decision. The court distinguished between standing and capacity, noting lack of capacity is not jurisdictional. On the TCPA’s applicability, the court analyzed each of Newman’s claims, including declaratory judgment, ultra vires acts, breach of fiduciary duty, negligence and civil conspiracy.

The court found the TCPA did not apply to Newman’s claims. It reasoned her allegations primarily involved actions and omissions by the defendants, not protected communications on matters of public concern. The court rejected arguments that Kickball’s operations were matters of public concern, finding the internal election disputes unlikely to interest the general public. For claims implying communications, like breach of fiduciary duty, the court found they did not involve a “common interest” protected by the TCPA, but rather the defendants’ narrow, selfish interests. Because the defendants failed to meet the TCPA’s threshold requirement of showing the statute applied, the burden never shifted to Newman to produce evidence supporting her claims. The Court of Appeals therefore affirmed the trial court’s denial of the defendants’ motions.

Texas Court Ruled on Nonprofit Control Dispute in Vaccine Choice Organization Leadership Conflict
Stickland v. Schlegel, 2023 WL 8112889 (Tex. App. 2023)

Plaintiffs Jonathan Stickland and Texans for Vaccine Choice (“Choice-C4”), a 501(c)(4) nonprofit, sued defendants Jackie Schlegel and Texans for Vaccine Freedom (“Freedom-C3”), a 501(c)(3) nonprofit, and Texans for Vaccine Choice Political Action Committee (“PAC”) over control of Choice-C4’s assets, confidential information and public communications after removing Schlegel as executive director and board member in November 2021. Schlegel, as a counterclaimant, sued Stickland for defamation. The trial court denied Stickland’s and the Schlegel defendants’ motions to dismiss under the Texas Citizens Participation Act (TCPA).

Choice-C4 alleged Schlegel breached nondisclosure and conflict of interest agreements and fiduciary duties by attempting to transfer funds from Choice-C4 to Freedom-C3 without authorization, continuing to speak on Choice-C4’s behalf, and using its intellectual property to rebrand the other entities. Choice-C4 sought declarations on trademark rights, PAC control and return of property. Schlegel claimed Stickland defamed her by stating she “stole money” from Choice-C4.

The court held Schlegel and Freedom-C3’s motion untimely based on their appearance at a November 2021 temporary restraining order hearing. It found Choice-C4’s claims against the PAC exempt from the TCPA as arising from misappropriation of trade secrets and corporate opportunities under Schlegel’s employee agreements. The court concluded Schlegel failed to establish a prima facie case that Stickland’s statement to a third party was false. Evidence showed the gist of his assertion was substantially true. The court affirmed the denial of the Schlegel defendants’ motion. It reversed the denial of Stickland’s motion. The court rendered judgment dismissing Schlegel’s claim. It remanded for a determination of fees, costs and sanctions under the TCPA, which provides that if the court orders dismissal of a legal action under the Act, the court shall award to the moving party court costs and reasonable attorney’s fees incurred in defending against the legal action.

Illinois Appellate Court Allowed Nonprofit’s Members to File Derivative Suit Seeking Removal of Directors
River Breeze, LLC v. Granholm, 224 N.E.3d 233 (Ill. App. Ct. 2022)

Plaintiff, River Breeze, LLC, sued on its own behalf and on behalf of Aurora Downtown, a nonprofit organization of which it is a member, defendants Aurora Downtown and its directors Kim Granholm and Gina Salamone. Plaintiffs sought removal of Granholm and Salamone under the Illinois General Not for Profit Corporation Act (“Act”). The trial court dismissed Counts I and II of the complaint on the basis that the Plaintiff lacked standing to bring those counts because section 108.35 did not permit the Plaintiff to bring a derivative claim on behalf of the members of Aurora Downtown. In addition, the trial court held that the Plaintiff had failed to plead that it held at least 10% of the outstanding votes of any class, “as required by” section 108.35 of the Act. The trial court also dismissed Count III because Aurora Downtown was not a “subsidiary body” of the City of Aurora and thus was not subject to the Illinois Freedom of Information Act.

The Appellate Court of Illinois found that the trial court erred in holding that plaintiffs were precluded from filing derivative action because derivative suits brought on behalf of a corporation to vindicate its rights are effectively suits by the corporation. Regarding the issue of whether the plaintiff had standing under the Act to seek the removal of Granholm and Salamone as directors of Aurora Downtown, the appellate court interpreted section 108.35(d) of the Act, specifically the phrase “by the corporation,” to unambiguously include derivative actions. Thus, the court held, the plain language of the statute permitted the filing of such actions either as derivative suits or by members on their own behalf, if the plaintiff members hold more than 10% of the votes. Thus, while the plaintiff could not sue to remove Granholm and Salamone on its own behalf because it did not hold 10% of the votes, it could file a derivative action to remove them. The court accordingly vacated the circuit court’s judgment and remanded the case.

TAXATION

Tax Court Denied 501(c)(4) Exemption to Accountable Care Organization
Mem’l Hermann Accountable Care Org. v. Comm’r, T.C. Memo 2023-62 (T.C. 2023)

Petitioner, an accountable care organization incorporated in Texas, sought a declaratory judgment that it was entitled to tax-exempt status. Petitioner exhausted all administrative remedies before filing suit. The court emphasized that to qualify as a tax-exempt organization described in section 501(c)(4), an entity must show that it is (1) a civic organization, (2) not organized for profit, and (3) operated exclusively for the promotion of social welfare.

The U.S. Tax Court found that Petitioner did not qualify for exemption from federal income tax under I.R.C. § 501 because its activities primarily benefited commercial payors and health care providers and therefore Petitioner had a substantial nonexempt purpose. The court explained that the non-Medicare Shared Savings Program (MSSP) activities in which Petitioner engaged primarily benefited commercial payors, rather than the public, and that it therefore operated in a manner similar to a for-profit business. Thus, Petitioner did not qualify for exemption from federal income tax under section 501(c)(4).

IRS Ruled That NIL Collectives Do Not Qualify as Tax-Exempt Organizations
I.R.S. Gen. Couns. Mem. AM 2023-004 (June 9, 2023)

The Internal Revenue Service (IRS) addressed whether developing paid name, image, and likeness (NIL) opportunities for collegiate student-athletes furthers an exempt purpose under section 501(c)(3) of the Internal Revenue Code. The IRS concluded that many NIL collectives do not qualify as tax-exempt organizations under section 501(c)(3) because they operate primarily to benefit the private interests of student-athletes.

The IRS cited several factors that showed that many organizations that develop paid NIL opportunities for student-athletes more than incidentally serve the private interests of the student-athletes. The IRS stated that NIL collectives’ payment of student transaction and compliance costs and provision of additional services, such as financial planning, tax assistance and legal advice, are not necessary to the promotion and marketing of charitable causes. Therefore, they cannot be considered qualitatively incidental to the accomplishment of the nonprofit NIL collective’s exempt purpose. Other factors cited by the IRS in concluding that the primary purpose of a nonprofit NIL collective is to compensate student-athletes include that donors are informed that most, if not all, of a contribution will be paid to student-athletes, that the public is informed that all athletes on a particular team or who play a particular position will earn a specified level of compensation, and that donors are permitted to select which athletic teams will benefit from a donation without an option to designate a charitable program that the donor wishes to support.

The memorandum provides that in reconsidering exemptions of collectives that already have it, it may be appropriate to grant relief under IRC Section 7805(b), which governs the retroactivity of regulations and provides that the U.S. Department of the Treasury can decide not to apply administrative actions retroactively.

Three private letter rulings that coincide with the IRS memorandum, released in 2024 (PLR 202428008, PLR 202416015 and PLR 202414007), denied tax-exempt status to NIL collectives. In each case, the IRS determined that the organizations’ activities primarily benefited student-athletes, who are not considered a charitable class, and thus failed to meet the operational test required for tax-exempt status.

New York Court of Appeals Revoked Tax Exempt Status for Property Owned by a Nonprofit but Leased to a For-Profit Corporation
Brookdale Physicians’ Dialysis Assocs., Inc. v. Dep’t of Fin. of City of New York, 2024 WL 1199333 (N.Y. 2024)

The Department of Finance (DOF) for the State of New York challenged the annulment of its determination to revoke tax-exempt status for petitioners’ property. The petitioners are the Samuel and Bertha Schulman Institute for Nursing and Rehabilitation Fund (“Schulman”), a federally tax-exempt nonprofit corporation, and the Brookdale Physicians’ Dialysis Associates (“Brookdale”), a for-profit corporation. The Court of Appeals reversed and found that the property was not tax-exempt under New York Real Property Tax Law (RPTL).

Starting in 1995, Schulman leased to Brookdale portions of a building in New York City. Under the lease, Brookdale paid rent to Schulman and was responsible for any property taxes. From 2001 – 2013, the property was tax exempt. DOF retroactively revoked the tax-exempt status in 2013 on the sole ground that the space had been leased to a for-profit commercial entity. On a challenge to the New York Supreme Court, DOF’s determination was annulled on the grounds that Brookdale’s service is “reasonably incidental to or in furtherance of the exemption purpose.” DOF assessed taxes again for the 2014-15 tax year. Petitioners again challenged and the Supreme Court granted the petition. The Appellate Division affirmed, and DOF appealed.

The Court of Appeals reversed because the mandatory real property tax exemption is limited to property owned by not-for-profit corporations organized exclusively for charitable purposes and used exclusively for those purposes. Although Schulman is a not-for-profit corporation that owns the property, Brookdale is a for-profit corporation that had sole occupancy and used the building exclusively to perform its for-charge dialysis services. Petitioners argued that the property was being used to further Schulman’s charitable mission, but the Court stated that Schulman’s charitable purpose was to raise funds and manage assets, not provide direct health care services. Accepting petitioners’ interpretation here would render the tax-exemption limitations under RPTL “meaningless and useless.”

New York Appellate Court Upheld a Ruling That Limited Tax-Exempt Status for a Nonprofit’s Property
Sisters of the Presentation of the Blessed Virgin Mary. v. Van Wagenen, 223 A.D.3d 987 (N.Y. App. Div. 2024)

The Sisters of the Presentation of the Blessed Virgin Mary, a not-for-profit corporation, appealed a New York Supreme Court judgment denying tax-exempt status for portions of their previously tax-exempt property. The Supreme Court of New York, Appellate Division, upheld the ruling, granting only tax-exempt status for the portions of the property that served to further the Sisters’ exempted purpose and the areas incidental to that use.

In the Town of Guilderland, Albany, the Sisters own two parcels of land which had qualified for exemption from real property taxes for religious and educational purposes since the 1980s. One parcel contains a convent, while the other 42-acre property includes a school building, a mansion and a playground. Although the school closed in 2013, the Sisters continued to transport students to their property to make use of the playground. Besides the playground, parking lot, driveway and a nearby outbuilding containing related supplies, the remainder of the property is vacant and unused.

The Guilderland Assessor denied the Sisters’ application for property tax exemption for the 2018 and 2019 tax years. The Sisters filed a complaint to the Board of Assessment Review which declined to restore the properties’ tax-exempt status. The Supreme Court of New York reversed the denial for the parcel containing the convent, and the portions of the 42-acre parcel with the playground, the outbuilding, the parking lot and the driveway.

The Sisters argued that a partial tax exemption is inappropriate here because apportionment should be limited only to circumstances where a portion of the property is used for a pecuniary purpose. However, the Court rejected that argument and stated that a partial tax exemption is appropriate where an otherwise nonexempt portion of a property is not “reasonably incidental to the use of the property for its primary, exempted purpose.” The Appellate Division upheld the lower court’s ruling because the vacant and unused portions of the 42-acre property neither served to further the Sisters’ exempt purpose nor was it reasonably incidental to such use.

Ninth Circuit Affirmed Tax Court’s Dismissal of Suspended California Corporation’s Petition
XC Foundation v. Comm’r of Internal Revenue, 2024 WL 2843037 (9th Cir. 2024)

XC Foundation appealed the Tax Court’s dismissal of its petition seeking declaratory judgment that a final adverse determination letter revoking its tax-exempt status was erroneous. The Tax Court dismissed the petition for lack of jurisdiction because XC Foundation had been suspended under California law. The Ninth Circuit affirmed the Tax Court’s decision.

On February 26, 2008, the IRS issued a determination letter recognizing XC Foundation as tax-exempt. In 2020, the California Franchise Tax Board suspended XC Foundation’s corporate rights, powers and privileges pursuant to the California Revenue and Taxation Code. On March 2, 2021, the IRS issued a final adverse determination letter that revoked XC Foundation’s tax-exempt status retroactive to 2016. XC Foundation petitioned the Tax Court’s ruling, and the Commissioner filed a motion to dismiss for lack of jurisdiction. In Tax Court, a corporation’s capacity to engage in litigation is determined by the law under which the corporation is organized. Therefore, the Tax Court granted the Commissioner’s motion because a corporation suspended under California law lacks the power to prosecute or defend an action.

Although XC Foundation remained suspended when it filed its appeal to the Ninth Circuit, its corporate status was revived in August 2023. That reinstatement prompted the Ninth Circuit to recognize the appeal. The XC Foundation argued that the Tax Court’s ruling violated both the signing of IRS Form 872 as well as the Due Process Clause. Form 872 states that “signing this consent will not deprive the taxpayer(s) of any appeal rights to which they would otherwise be entitled.” However, Form 872 does not prevent the Tax Court from assessing whether it has jurisdiction in a matter. Here, the Tax Court properly applied its rules and, due to XC Foundation’s suspension, it lacked jurisdiction. Furthermore, there was no Due Process violation because determination letters are not binding.

CONTRACT

New York District Court Dismissed Class Action Suit Arising from CVS’s Fundraising Campaign
McCabe v. CVS Health Corp., 2023 WL 6385729 (E.D.N.Y. 2023)

The plaintiff donated money to the nonprofit American Diabetes Association (ADA) through a point-of-sale solicitation at a CVS pharmacy. According to the plaintiff, that solicitation was part of a fundraising campaign conducted pursuant to an agreement between the ADA and defendants CVS Health Corporation and CVS Pharmacy Inc. (collectively, “CVS”).

In a putative class-action lawsuit, the plaintiff contended that CVS committed common-law fraud, common-law breach of contract, and violations of consumer protection laws in soliciting customers for donations. The plaintiff argued that CVS’s promise to the ADA that it would make up any shortfall in its $10 million fundraising goal meant that donations by customers were gifts to CVS rather than gifts to the ADA. CVS moved to dismiss plaintiff’s claims, arguing that plaintiff did not allege any material misstatement or culpable omission and did not identify any contract that was breached.

The court dismissed the common-law fraud claim, finding that the plaintiff did not allege a material misstatement or culpable omission, and also that the plaintiff did not allege a cognizable injury. Further, a fraud-by-omission theory failed because the plaintiff did not adequately plead that CVS had a duty to disclose the terms of its agreement with the ADA in public solicitations.

The court also dismissed the breach of contract claim because the message provided to customers at checkout could be read to promise that donations would go to the ADA and could not plausibly be read to set out any other terms of a contract between CVS and its customers; the court found that the plaintiff did not plausibly allege that customers’ donations have been used in any other manner. Finally, the court found that the complaint failed to state any violation of New York law and the plaintiff did not have a cause of action under the common law or statutes of states other than New York, because his alleged injury arose only under New York or federal law.

The court therefore found that the plaintiff failed to plausibly allege violations of law and granted CVS’s motion to dismiss the case with prejudice.

California Appellate Court Affirmed That AMPAS Bylaws Serve as a Contract and Grant Right of First Refusal to Oscar Statuette
Juarez v. Ward, 88 Cal.App.5th 730 (Cal. Ct. App. 2023)

A judgment creditor, Maira Duarte Juarez, sought delivery of her debtor’s, David S. Ward’s, Academy Award statuette, commonly known as an Oscar, under the Enforcement of Judgments Law (EJL). The Academy of Motion Picture Arts and Sciences (AMPAS) intervened in the litigation, and the EJL allowed the trial court to determine whether AMPAS had a right to the Oscar that came to light in a debtor’s examination. The trial court found that Ward’s Oscar was subject to a provision under AMPAS’s bylaws providing AMPAS with a right of first refusal to the sale or disposal of the Oscar. Juarez appealed.

The Second Appellate District affirmed, holding that the trial court did not abuse its discretion by denying the creditor’s request for delivery of the Oscar and that it correctly found that AMPAS had the right of first refusal to purchase the Oscar for $10 pursuant to a written agreement with Ward, which was required under the AMPAS bylaws. The appellate court rejected Juarez’s contention that AMPAS’s right of first refusal is a presumptively void restraint on alienation, as there was substantial evidence to support the trial court’s conclusion that the restraint is reasonable. AMPAS has spent millions of dollars to promote the award and the statuette is one of a kind not to “be treated as an article of trade.” The appellate court noted that if the statuette was placed on sale, AMPAS and its members would be harmed by the diminution in value of all Oscars, the Academy Award Ceremony, and the prestige of the award in general. Moreover, the court held that bylaws of voluntary associations are binding contracts.

EMPLOYMENT AND DISCRIMINATION

D.C. Circuit Interpreted Nonprofit’s Severance Agreement to Allow Discrimination and Defamation Claims
Wright v. Eugene & Agnes E. Meyer Found., 68 F.4th 612 (D.C. Cir. 2023)

Plaintiff Dr. Terri Wright was terminated from her position as Vice President of Program and Community of the Eugene and Agnes E. Meyer Foundation. She claimed that her termination resulted from racial discrimination. Wright and the Foundation signed a severance agreement under which Wright agreed to release employment-related claims against the Foundation and its employees, and which contained a mutual non-disparagement clause. One month later, the CEO of the Foundation, Nicola Goren, allegedly told the CEO of another philanthropic organization that Wright was “toxic,” fostered a “negative climate” at the Foundation, and “had to be fired or two-thirds of the staff would leave.” Wright sued both Goren and the Foundation, claiming that these statements breached the severance agreement and were racially discriminatory and defamatory.

The district court dismissed Wright’s claims, finding that the non-disparagement clause obligated the Foundation only to direct its employees not to disparage Wright, leaving the Foundation and its officers and employees free to in fact disparage her. The district court also found that Goren’s statements were protected by the common interest privilege, as they were made in her capacity as the Chair of the Board of a separate nonprofit organization to the CEO of that organization.

The D.C. Circuit reversed that decision on appeal. The court found that the breach of contract claim was tenable because the severance agreement was ambiguous and reasonably capable of Wright’s interpretation. Second, the court found that the claim under Section 1981 (which protects the right to “make and enforce contracts” free from discrimination) was plausible. To plead a prima facie case of discrimination under the Section 1981 framework, Wright must prove that (1) she is a member of a protected class; (2) she suffered an adverse employment action; and (3) the unfavorable action gives rise to an inference of discrimination. The court found that Wright met the first two prongs as an African American terminated from employment. Wright plausibly alleged the third prong, as Wright received specific and detailed praise prior to her termination and there was evidence of a culture of racial inequity at the Foundation.

Third, the court considered the defamation claim and found that Goren’s statements were not protected under the common interest privilege. For the common interest privilege to apply, the statements must be made in good faith, on a subject in which the party communicating has an interest, to a person who has a corresponding interest. The court found the privilege inapplicable because Wright’s complaint plausibly established that Goren’s statements were made with malice, as they were made unprompted in response to backlash she received from Wright’s termination using language that could fairly be characterized as ad hominem and unprofessional. Finally, the court found that Goren’s statements were not opinions because they had an implicit factual basis.

Washington Court of Appeals Held That an ACLU Intern Performed Gratuitous Services and Was Not an “Employee”
Greenfield v. Dep’t of Lab. & Indus., 2023 WL 2187461 (Wash. Ct. App. 2023)

Petitioner Rhett Greenfield worked as an unpaid, part-time intern for the ACLU but subsequently complained that he was not paid during that time and that his internship did not lead to a full-time, paid position. Greenfield submitted a wage complaint to the Department of Labor & Industries (L&I), and the superior court affirmed L&I’s decision that the ACLU did not violate the Washington Minimum Wage Act (MWA) by not paying him. Greenfield challenged the superior court’s findings of fact, conclusions of law, and judgment that Greenfield was not an employee under the MWA.

On appeal, the Court of Appeals of Washington affirmed that Greenfield was not an employee under the MWA and found that the lower court’s ruling was proper because substantial evidence supported the finding that he provided gratuitous services to a nonprofit organization under Wash. Rev. Code § 49.46.010(3)(d).). Greenfield performed services as a volunteer for the ACLU without pay, promise of pay or promise of future employment. There was no employer-employee relationship, so the MWA did not apply. The Supreme Court of Washington denied review.

Membership Organization Lacked Article III Standing to Pursue a Preliminary Injunction Due to Failure to Identify Specific Injured Members by Name
Do No Harm v. Pfizer, Inc., 96 F.4th 106 (2d Cir. 2024)

Do No Harm, a nationwide membership organization, filed suit against Pfizer, Inc. alleging violations of the Civil Rights Act, Title VI, the Affordable Care Act, New York State Human Rights Laws, and New York City Human Rights Laws. Do No Harm asserted that Pfizer’s Fellowship program unlawfully discriminates against white and Asian American applicants, and sought a preliminary injunction to prevent Pfizer from selecting its 2023 Fellowship class. The District Court for the Southern District of New York held that Do No Harm lacked standing because it failed to identify any of its injured members by name, and, even if it had identified its members, Do No Harm failed to establish that its members suffered a cognizable injury. Do No Harm appealed, and the Second Circuit affirmed.

To establish associational standing, an association must identify members who have suffered the requisite harm. Do No Harm argued that it was not required to identify specific injured members by name. While the Court acknowledged that precedent did not directly address this issue, it held that naming injured members best aligns with the case law. The Second Circuit reached this conclusion, in part, because “it would be inconsistent to allow an association to rest its standing on anonymous member declarations when we would not allow those members, as individual parties, to proceed anonymously in their own right.” Once the Court determined that Do No Harm lacked standing, it dismissed Do No Harm’s claims without prejudice.

District Court Diverged from Prior Ruling and Allowed Nonprofit to Use Pseudonyms to Establish Standing
Students for Fair Admissions v. U.S. Mil. Acad. at W. Point, 2024 WL 36026 (S.D.N.Y. 2024)

Students for Fair Admissions (SFFA), a nonprofit organization, filed suit against the U.S. Military Academy at West Point and several government officials, alleging that West Point’s race-conscious admissions policy violates the Fifth Amendment’s Due Process Clause. SFFA sought a preliminary injunction to prohibit West Point from considering race in its admissions decisions. The U.S. District Court for the Southern District of New York denied SFFA’s motion for a preliminary injunction, finding that SFFA had not met its burden to show a clear likelihood of success on the merits or irreparable harm. SFFA initially appealed to the Second Circuit Court of Appeals, but subsequently withdrew the appeal on February 13, 2024.

The court ruled on SFFA’s organizational standing, allowing SFFA to establish standing using pseudonyms for its affected members. The court rejected the argument that SFFA needed to identify its members by name, holding that pseudonyms were sufficient to show that at least one member had suffered or would suffer harm. This aspect of the ruling contrasts with the Second Circuit’s decision in Do No Harm v. Pfizer, Inc., where the court held that naming injured members best aligns with the case law on associational standing.

Maryland District Court Granted Nonprofit Organization’s Motion to Dismiss All Claims Arising from Its COVID-19 Vaccination Policy
Menk v. MITRE Corp., 2024 WL 327087 (D. Md 2024); Menk v. Mitre Corp., 2024 WL 2257894 (D. Md 2024)

Former employees sued the MITRE Corporation, a nonprofit organization, alleging they were unlawfully terminated for refusing to comply with MITRE’s mandatory COVID-19 vaccination policy. The employees claimed that MITRE violated the First Amendment, due process, Title VII, the Americans with Disabilities Act (ADA), and the Religious Freedom Restoration Act (RFRA). The District Court for the District of Maryland granted MITRE’s motion to dismiss all claims.

On October 11, 2021, MITRE announced a mandatory vaccination policy for all employees subject to religious, disability and medical exemptions where applicable. Plaintiffs requested an exemption from the vaccine as a reasonable accommodation for their sincerely held religious beliefs. Five plaintiffs also requested exemption under the ADA. MITRE conducted telephone interviews and subsequently denied the plaintiffs’ requests without explanation or an appeals process. On November 22, 2021, MITRE terminated the plaintiffs who proceeded to file this action.

Plaintiffs’ Title VII claims failed because the complaint lacked specificity regarding the plaintiffs’ religious beliefs and how those beliefs formed the basis for their objection to the vaccine policy. Nor was there any retaliation by MITRE here because accommodation requests are not protected activities. Plaintiffs’ ADA claims failed because the complaint did not allege facts regarding any medical condition or disability that prevented them from being vaccinated, nor was there any impermissible medical examination or inquiry. Plaintiffs’ constitutional claims failed on the grounds that MITRE is not a state actor, employees have no fundamental constitutional right to refuse a vaccine, and the vaccination policy did not infringe on free speech rights and was rationally related to the legitimate government interests of preventing the spread of COVID-19. Finally, MITRE is outside the scope of RFRA because it is not a state actor.

Plaintiffs filed an amended complaint, but the District Court of Maryland denied the motion without prejudice because it failed to satisfy the pleading requirements set out in the Federal Rules of Civil Procedure.

Washington District Court Denied Nonprofit Organization’s Motion to Dismiss Discrimination Claims Arising from COVID-19 Vaccination Policy
Zimmerman v. PeaceHealth, 2023 WL 7413650 (W.D. Wash. 2023)

Fifty current and former employees of PeaceHealth, a Christian nonprofit health care organization, filed an action primarily alleging that PeaceHealth did not reasonably accommodate their religious objections to its COVID-19 vaccine policy in violation of Title VII and the Washington Law Against Discrimination (WLAD). The District Court for the Western District of Washington denied PeaceHealth’s motion to dismiss the discrimination claims, but granted the motion to dismiss plaintiffs’ claims for wage theft, arbitrary and capricious government action, and declaratory relief.

In August 2021, PeaceHealth instituted a vaccine policy that required all its caregiver employees to receive full vaccination against COVID-19 but allowed employees to submit requests for religious accommodations. Plaintiffs applied for religious accommodations, expressing a willingness to use personal protective equipment or transfer to non-caregiver roles. In response, PeaceHealth granted no accommodations other than allowing plaintiffs to exhaust their paid time off before placing them on indefinite unpaid administrative leave. Plaintiffs argued that, under both Title VII and the WLAD, indefinite unpaid leave was an adverse employment action and not a reasonable accommodation.

The Court held that the plaintiffs plausibly alleged facts to show that indefinite unpaid leave was an adverse employment action and not a reasonable accommodation. The Court pointed to the fact that the unpaid leave was indefinite, and the accommodation requests by plaintiffs were reasonable. Furthermore, PeaceHealth could not adequately prove that granting the requested accommodations would pose an undue hardship to other employees, patients or the general public. As a result, the Court denied PeaceHealth’s motion to dismiss the employment discrimination claims.

Second Circuit Affirmed Dismissal of Federal Discrimination Claims Against Nonprofit College; on Remand, District Court Dismissed State Law Claim Without Prejudice
Eisenhauer v. Culinary Inst. of Am., 84 F.4th 507 (2d. Cir. 2023); Eisenhauer v. Culinary Inst. of Am., 2024 WL 1833601 (S.D.N.Y. 2024)

Anita Eisenhauer filed suit against the Culinary Institute of America, a private, nonprofit college, alleging that she was a victim of pay discrimination in violation of the Equal Pay Act (EPA) and New York Labor Law. The District Court for the Southern District of New York granted summary judgment for the Culinary Institute on both claims concluding that, although Eisenhauer had established a prima facie case of sex-based pay discrimination, the Culinary Institute justified the pay disparity based on a sex-neutral compensation plan that was not shown to be a pretext for discrimination. On appeal, the Second Circuit affirmed the District Court’s grant of summary judgment on the EPA claim, but vacated and remanded the summary judgment finding for the discrimination claim under New York Labor Law.

Eisenhauer, a professor at the Culinary Institute, argued that, since 2017, she was paid a lower salary than a similarly situated male professor. However, the Culinary Institute pays its professors according to a sex-neutral compensation plan that requires fixed pay increases based on time, promotions and education level. The two professors had disparate starting salaries due to a gap in experience at the time of being hired, which led to the present salary difference.

The EPA prohibits pay discrimination on the basis of sex but provides four exceptions, including for “a differential based on any other factor other than sex.” The Court determined that the “factor other than sex” defense under the EPA does not require the factor to be job-related. Although Eisenhauer established a prima facie case, the Second Circuit held that the Culinary Institute’s compensation plan clearly fell within the EPAs “factor other than sex” affirmative defense.

New York Labor Law also prohibits sex-based pay discrimination and similarly includes an affirmative defense for a “bona fide factor other than sex.” Unlike the EPA, New York law requires defendants to prove that a pay disparity results from a differential based on a job-related factor. This standard is distinct from the EPA’s, yet the District Court applied the EPA standard to both claims. The Second Circuit vacated and remanded to the District Court. The District Court refused to exercise supplemental jurisdiction over the remaining state law claim and dismissed the action without prejudice.

COPYRIGHT

D.C. Circuit Upheld Fair Use of Copyrighted Standards and Denied Injunction for Unincorporated Standards
Am. Soc’y for Testing & Materials v. Public.Resource.Org, Inc., 82 F.4th 1262 (D.C. Cir. 2023)

Three standard-developing organizations—the American Society for Testing and Materials (ASTM), the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE), and the National Fire Protection Association (NFPA)—brought an action for copyright infringement against Public.Resource.Org, a nonprofit that disseminates legal and other materials. Public.Resource.Org posted copies of hundreds of incorporated standards on its website, including standards produced and copyrighted by the plaintiffs. Plaintiffs moved for summary judgment as to nine of the disputed standards. The district court granted the motion and enjoined Public.Resource.Org from posting these standards. The D.C. Circuit reversed and remanded. On remand, the district court found fair use as to the posting of standards incorporated into law and infringement as to the standards not so incorporated. Despite finding infringement as to the unincorporated standards, the court denied injunctive relief based on its finding that Public.Resource.Org intended to post only incorporated standards and thus would voluntarily take down unincorporated ones in response to an infringement determination. The plaintiffs appealed.

The D.C. Circuit ruled that the district court reasonably exercised its discretion in declining to award injunctive relief. The Court found that “the noncommercial dissemination of such standards, as incorporated by reference into law, constitutes fair use and thus cannot support liability for copyright infringement.” The D.C. Circuit determined that the three factors in determining fair use strongly supported the district court’s findings (i.e., the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; the nature of the copyrighted work; and the amount and substantiality of the portion used in relation to the copyrighted work as a whole), and the fourth (i.e., the effect of the use upon the potential market for or value of the copyrighted work) was equivocal.

Further, the D.C. Circuit found that the district court reasonably declined to enter an injunction, as Public.Resource.Org promptly removed from its website the 32 standards found not to have been incorporated into law. The Court therefore concluded that the plaintiffs gave no reason to think that Public.Resource.Org would post unincorporated standards again absent an injunction.

Supreme Court Ruled on Transformative Fair Use, Affecting Nonprofit Licensing Practices
Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, 143 S. Ct. 1258 (2023)

The Andy Warhol Foundation for the Visual Arts, Inc. (AWF) licenses the copyrighted works of Andy Warhol. In 2016, AWF licensed Warhol’s Orange Prince, an unpublished, silkscreen artwork of a photograph taken by Lynn Goldsmith, to Condé Nast. Goldsmith received no payment or credit for AWF’s license to Condé Nast and objected to Orange Prince after it appeared on the cover of a commemorative issue of a Condé Nast magazine. AWF brought a declaratory judgment action, and Goldsmith counterclaimed for infringement. The district court found for AWF on fair use grounds, the U.S. Court of Appeals for the Second Circuit reversed, and the Supreme Court—faced with the narrow question of whether the first fair use factor, the purpose and character of use, favored Goldsmith or AWF—affirmed the Second Circuit’s ruling.

The Supreme Court ruled that the “purpose and character” of AWF’s use of Goldsmith’s photograph in commercially licensing Orange Prince to Condé Nast does not favor AWF’s fair use defense to copyright infringement. The purpose and character of Warhol’s Orange Prince was similar to Goldsmith’s, as both works were licensed for use in popular magazines.

The Court also rejected AWF’s argument that Orange Prince was “transformative,” which would weigh in favor of the first fair use factor, because the use on the magazine conveyed a different meaning or message than Goldsmith’s photograph. The Court reasoned that while a secondary work’s meaning is relevant it does not automatically amount to fair use. Even though Orange Prince adds new expression to Goldsmith’s photograph, in the context of the challenged use, the first fair use factor was found to favor Goldsmith.

DATA PRIVACY

California District Court Dismissed Claims Alleging Nonprofit’s Improper Sharing of Video Viewing Data
Markels v. AARP, 689 F.Supp.3d 722 (N.D. Cal. 2023)

Members Jan Markels and Allen Ziman initiated a putative class action against AARP, a nonprofit organization assisting retired persons, in the U.S. District Court for the Northern District of California. The plaintiffs alleged violations of the Video Privacy Protection Act (VPPA), California’s Unfair Competition Law (UCL), Rhode Island’s Deceptive Trade Practices Act (DTPA), and unjust enrichment under California law. Markels and Ziman claimed AARP shared data about videos the plaintiffs watched on AARP’s website with Meta (Facebook) through the Meta Pixel tool. AARP moved to dismiss for failure to state a claim.

The court granted AARP’s motion to dismiss the VPPA claim. The plaintiffs failed to adequately allege their status as consumers under the Act, with the court noting the need for a nexus between the plaintiffs, AARP, and the video content provided. The court allowed leave to amend if the plaintiffs could show they exchanged something of value for the video content. Additionally, the court found the plaintiffs did not sufficiently allege AARP’s status as a video tape service provider under the VPPA, as the allegations did not indicate video content provision was a substantial purpose of AARP.

The court dismissed the UCL claim due to lack of standing, as the plaintiffs failed to allege economic harm. Markels and Ziman did not state the videos were for subscribers only, undermining their claim of diminished subscription value. The court rejected the argument that sharing personal information constituted economic harm, citing precedent that mere disclosure of personal data does not constitute a loss of money or property. The DTPA claim was dismissed as the plaintiffs failed to allege any ascertainable economic harm resulting from AARP’s practices. The unjust enrichment claim was dismissed because AARP’s privacy policy informed users AARP might share user information for advertising. The court granted leave to amend on all claims, allowing the plaintiffs to address the identified deficiencies in their allegations.

PUBLIC RECORDS

Ohio Supreme Court Ruled Nonprofit Foundation Functionally Equivalent to Public Office Under Public Records Act
State ex rel. Harm Reduction Ohio v. OneOhio Recovery Found., 225 N.E.3d 918 (Ohio 2023)

Petitioner Harm Reduction Ohio (HRO), a statewide nonprofit organization focused on preventing overdose deaths, sent a public records request to the OneOhio Recovery Foundation seeking documents prepared for certain meetings. When the Foundation did not respond, HRO filed an action seeking a writ of mandamus.

Ohio and several local governments are engaged in litigation against pharmaceutical supply chain participants that are alleged to be liable for contributing to the opioid epidemic. The Foundation was created under a memorandum of understanding (MOU) between the governor, attorney general and local governments participating in the litigation. The MOU provided that the Foundation would receive 55% of settlement funds won in the lawsuits and distribute the funds to organizations that can best use the funds to alleviate the effects of the opioid crisis.

The principal issue was whether the Foundation is a “public office” under the Ohio Public Records Act, which defines “public office” to include “any state agency, public institution, political subdivision, or other organized body, office, agency, institution, or entity established by the laws of this state for the exercise of any function of government.” The Foundation contended that it was a “private, not-for-profit entity,” and not a public office subject to the Public Records Act.

The Supreme Court of Ohio found that the petitioner’s request for a writ of mandamus ordering respondent to provide documents under Ohio’s Public Records Act was proper because respondent, an Ohio nonprofit corporation, was the functional equivalent of a public office under the functional-equivalency test. The test requires the court to analyze all pertinent factors, including (1) whether the entity performs a governmental function, (2) the level of government funding, (3) the extent of government involvement or regulation, and (4) whether the entity was created by the government or to avoid the requirements of the Public Records Act.

The court found that all of the factors supported the HRO’s position, except for perhaps the level of government funding (as the court was unable to determine whether the Foundation’s level of government funding was a “significant” percentage of its total revenue). The Foundation’s true function is a historically governmental one, as the state and local governments delegated to the Foundation the task of spending public money. Under the MOU and the Foundation’s bylaws, the state and local governments are to be heavily involved in the Foundation’s operation. The court therefore denied HRO’s requests for statutory damages and attorney fees.

Supreme Court of New Jersey Held That Association of County Prosecutors Is Not a Public Agency Subject to Public Records Requests
ACLU of N.J. v. Cnty Prosecutors Ass’n of N.J., 257 N.J. 87 (2024)

The American Civil Liberties Union of New Jersey (ACLU) filed an action to compel the County Prosecutors Association of New Jersey (CPANJ) to produce requested documents. CPANJ is a nonprofit association whose members are the 21 county prosecutors of New Jersey. On July 19, 2019, the ACLU served a records request on CPANJ’s president under the New Jersey Open Public Records Act (OPRA) and the common law right of access. CPANJ denied the request on the grounds that it is a private association, not a public agency, and that its records do not constitute public records. The trial court granted CPANJ’s motion to dismiss, and the Appellate Division affirmed the trial court’s judgment. The Supreme Court of New Jersey upheld the lower courts’ decisions holding that CPANJ is neither a public agency subject to the (OPRA), nor a public entity subject to the common law right of access.

OPRA only applies to public agencies which are defined as “political subdivisions of the State” and bodies sharing a basic connection to those subdivisions. The ACLU argued that CPANJ falls within the definition of a public agency because it is an instrumentality of the county prosecutors. County prosecutors, according to the ACLU, are “state actors” that together comprise a “combination of political subdivisions.” The Court rejected this interpretation both because there was no evidence that the counties created CPANJ or controlled its operation, and because prosecutors do not meet the definition of “political subdivision” under OPRA. Finally, CPANJ itself does not have any constitutional or statutory powers. Instead, it is an organization in which county prosecutors are members rather than the alter ego of the prosecutors themselves. Because CPANJ is not a public agency, ACLU’s claim under OPRA failed.

The ACLU also sought the documents from CPANJ under the common law right of access. Under the common law, “[t]he status of the party from whom documents are requested is a threshold issue.” The Court determined that, because CPANJ is not a public entity, it is not subject to the common law right of access. Therefore, the Court did not reach the question as to whether CPANJ’s documents are public records and dismissed the ACLU’s claim under common law.

LIABILITY

California Appeals Court Held That Federal Applications for Tax-Exempt Status Are Protected Activities in Step One of Anti-SLAPP Analysis
Li v. Jin, 83 Cal.App.5th 481 (Cal. Ct. App. 2022)

Petitioner Fuzu Li was listed as a director of the Xi’an Jiaotong University Alumni Association of Northern California on a form submitted to the IRS by Jigang Jin, the Association’s vice-president. Jin did not file this form with any board of directors approval or any consent from Fuzu Li himself. The IRS approved tax-exemption status for the Association, but Jin did not report this approval to the Association’s members. At a meeting later the following year, Fuzu Li learned that Jin had listed him as a director and expressed concern to other members. Jin subsequently filed a complaint against Fuzu Li, alleging defamation and false light. Fuzu Li filed a cross-complaint against Jin and Yaning Li, the Association’s president, later amended, for: (1) breach of charitable trust; (2) constructive fraud; (3) fraud and intentional deceit, (4) civil conspiracy, (5) commercial misappropriation of likeness under Civil Code section 3344; (6) common law misappropriation of likeness, and (7) negligent infliction of emotional distress. Jin and Yaning Li each filed a special motion to strike the first amended cross-complaint pursuant to the California anti-SLAPP statute, which allows defendants to request early judicial screening of legal claims targeting free speech or petitioning activities.

The statute defines four categories of protected activity: (1) any written or oral statement or writing made before a legislative, executive or judicial proceeding, or any other official proceeding authorized by law, (2) any written or oral statement or writing made in connection with an issue under consideration or review by a legislative, executive or judicial body, or any other official proceeding authorized by law, (3) any written or oral statement or writing made in a place open to the public or a public forum in connection with an issue of public interest, or (4) any other conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right of free speech in connection with a public issue or an issue of public interest. The California Supreme Court has articulated a two-step procedure for litigation of an anti-SLAPP motion: (1) The moving defendant bears the burden of establishing that the challenged allegations or claims arise from protected activity in which the defendant has engaged, and (2) for each claim that does arise from protected activity, the plaintiff must show the claim has at least “minimal merit.”

The trial court found that Jin failed to meet his burden in the first step of the anti-SLAPP analysis and thus denied his motion. On appeal, the Court of Appeals of California found that Association’s federal application for tax-exempt status qualified as protected activity for anti-SLAPP purposes because the determination process was not a purely ministerial act but was an official proceeding involving the exercise of deliberative judgment. The appellate court thus remanded the case and ordered the trial court to proceed to the second step of the anti-SLAPP analysis.

New York Appellate Court Ruled That Qualified Privilege Applies to Defamatory Statements Made by Nonprofit’s Member
Joo Tae Yoo, et al. v. Choi, 210 A.D.3d 1062 (N.Y. App. Div. 2022)

The plaintiff, the Korean-American Advisory Council for Law Enforcement, Inc., a 501(c)(3) nonprofit corporation established for the purpose of acting as a liaison between the Korean-American community and the New York City Police Department, and the co-plaintiff Joo Tae Yoo, the Council’s chairman, alleged that Thomas Choi made defamatory statements against them. Choi, a member of the Council, made the statements in a password-controlled, members-only chat group. The Supreme Court of Queens County denied the defendant’s motion for summary judgment. He then appealed.

The New York Appellate Division held that the defendant had established his prima facie entitlement to judgment as matter of law because he showed that his alleged statements were subject to a qualified privilege, which applies where a statement “is fairly made by a person in the discharge of some public or private duty, legal or moral, or in the conduct of his own affairs, in a matter where his [or her] interest is concerned.” Here, the statements at issue were made in a password-controlled, members-only chat group and involved the management of a members’ organization, and such circumstances fall within the scope of the qualified privilege. The plaintiffs could not defeat the qualified privilege because they did not show either common-law malice or actual malice.

Alaska Supreme Court Ruled That Nonprofit’s Volunteer Is Not Liable for Negligence
Sulzbach v. City & Borough of Sitka, 517 P.3d 7 (Alaska 2022)

Plaintiff Sandy Sulzbach sued the City and Borough of Sitka for injuries she sustained when a lantern decoration fell on top of her in an event facility owned by the City. The Alaska Day Organization (ADO), a nonprofit entity, was using the event facility for a celebration. One of ADO’s volunteers, John Ferrick, allegedly negligently attached the lantern, which subsequently fell and injured Sulzbach. Sulzbach brought a negligence action against the City, and the City brought a third-party complaint against Ferrick. Neither Sulzbach nor the City nor Ferrick brought a claim against the ADO.

The parties sought summary judgment, and the trial court concluded that, under federal law, the volunteer could not be held financially responsible for the accident and that the City could not be held vicariously liable for the volunteer’s actions. The remaining negligence issues were decided at a jury trial; the jury determined that the volunteer and the City had not been negligent and therefore the City was not liable for the accident.

Sulzbach appealed, and the Supreme Court of Alaska held that the City was not liable for the alleged negligence of the volunteer because there was no master-servant relationship between the volunteer and the city. Because the city neither meaningfully controlled the volunteer’s work nor accepted his services, it could not be held liable for his negligence. The court did not directly address whether the nonprofit, as opposed to the city, could be liable for the negligence of the volunteer. In his defense, the volunteer at the trial court had cited the federal Volunteer Protection Act of 1997. See 42 U.S.C. § 14503(a) (“Except as provided ... , no volunteer of a nonprofit organization ... shall be liable for harm caused by an act or omission of the volunteer on behalf of the organization [in given conditions] ... .”).

Appellate Court Found No Specific Personal Jurisdiction Over National Nonprofit in Sexual Abuse Case
E.T. v. Boys & Girls Club, 311 A.3d 529 (N.J. Super. Ct. App. Div. 2024)

In a consolidated appeal, plaintiffs, former members of the Boys & Girls Club of Hudson County (“Hudson County BGC”), sued the Boys & Girls Clubs of America (BGCA) and Hudson County BGC for sexual abuse allegedly committed by Arthur Freudenberg, a counselor at Hudson County BGC, between 1978 and 1982. BGCA, a federally chartered nonprofit based in Georgia, moved to dismiss for lack of personal jurisdiction. The Superior Court of New Jersey, Law Division, denied BGCA’s motion, finding specific personal jurisdiction. BGCA appealed to the Appellate Division, challenging the lower court’s factual findings regarding BGCA’s control over Hudson County BGC, Freudenberg’s employment status, and BGCA’s marketing and services in New Jersey.

Plaintiffs claimed BGCA was liable for Freudenberg’s abuse under the Child Sex Abuse Act and theories of negligence. Plaintiffs alleged BGCA failed to properly hire, supervise and protect against Freudenberg’s conduct. They argued Hudson County BGC was under BGCA’s supervision and control. The trial court found BGCA purposefully availed itself of New Jersey through its relationship with Hudson County BGC, citing BGCA’s provision of support services, branding and collection of dues. The court analogized the case to Ford Motor Co. v. Montana Eighth Judicial District Court, where Ford was subject to jurisdiction in states where it systematically conducted business.

The Appellate Division reversed, finding no substantial credible evidence supporting specific personal jurisdiction over BGCA. The court emphasized that BGCA lacked control over Hudson County BGC’s hiring, training and supervision of employees. BGCA’s constitution explicitly granted local governing bodies control over their operations, including hiring and management of staff. The court distinguished the case from J.A./G.G. Doe 70 v. Diocese of Metuchen, where a Virginia diocese retained control over a priest it sent to New Jersey. The Appellate Division concluded BGCA did not purposefully avail itself of New Jersey regarding Freudenberg’s employment and could not reasonably expect to be sued there for his conduct. While acknowledging the legislature’s intent to allow sexual abuse victims to seek relief, the court held due process restrictions limit jurisdiction over out-of-state entities allegedly liable for abuse.

POLITICAL LAW

Minnesota District Court Enjoined Enforcement of an Unconstitutional Law Designed to Restrict Foreign Influence in Elections
Minn. Chamber of Com. v. Choi, 2023 WL 8803357 (D. Minn. 2023)

Plaintiff Minnesota Chamber of Commerce, a nonprofit membership organization representing Minnesota businesses, sought to enjoin enforcement of certain provisions of the Minnesota Fair Campaign Practices Act (MFCPA) on the grounds that they violate the First Amendment. The District Court for the District of Minnesota granted the injunction.

The MFCPA prohibited “foreign-influenced corporations” from making political contributions and independent expenditures in Minnesota elections. Under the statute, a company had foreign influence if even a single foreign investor controlled as much as 1% of the company’s ownership interest or participated directly or indirectly in the company’s decision-making.

The Chamber of Commerce argued that the statute burdens political speech without being narrowly tailored to serve a compelling interest. The Court acknowledged that Minnesota’s stated interest of preventing foreign influence in its election is compelling but held that the statute as written was not narrowly tailored to achieve that interest. The statute was overinclusive in that it reaches corporations with only a 1% foreign interest, underinclusive in its disregard of non-corporate entities, and not the least restrictive means to accomplish the stated interest.

D.C. District Court Compelled Nonprofit to Comply with Discovery in Campaign Finance Matter
Campaign Legal Center v. Iowa Values, 691 F.Supp.3d 94 (D.D.C. 2023); Campaign Legal Center v. Iowa Values, 2024 WL 81278 (D.D.C. 2024)

Campaign Legal Center (CLC), a government watchdog group, filed a citizen suit against Iowa Values, a nonprofit organization, under the Federal Elections Campaign Act (FECA) seeking adjudication of alleged campaign finance violations. After the District Court for the District of Columbia denied both of Iowa Values’ motions for summary judgment, the CLC filed a renewed motion to compel discovery. Iowa Values moved for certification of interlocutory appeal and cross-moved for a protective order. The Court denied Iowa Values’ motions and compelled Iowa Values to produce relevant items and information responsive to CLC’s discovery requests.

In 2019, CLC filed an administrative complaint to the Federal Elections Commission (FEC) alleging that Iowa Values violated the FECA by failing to register as a political action committee and report certain expenditures. After the FEC failed to respond, the Court granted default judgment to CLC and authorized it to file a citizen suit. Iowa Values moved to dismiss, the motion was denied, and the case proceeded to discovery. During discovery, the parties learned that the FEC had in fact voted to close the file on CLC’s complaint. After learning about the FEC’s votes, Iowa Values moved to dismiss for mootness and lack of subject matter jurisdiction. The Court dismissed these claims because, although the FEC had acted on the administrative complaint, the action was not a final adjudication, nor did it take place before the deadline by which the FEC must act before a complainant may file a citizen suit.

Following the above decision, Iowa Values moved for interlocutory appeal. The motion was denied because such appeals are generally disfavored, and Iowa Values did not show that the controlling questions of law presented “substantial grounds for difference of opinion” among reasonable jurists. Iowa Values’ motion for a protective order was denied because it had failed to raise them in CLC’s initial motion to compel discovery, and its cross-motion violated local rules of civil procedure. The Court then rejected Iowa Values’ remaining argument that documents created after 2019 should be categorically prohibited from discovery because such materials are not necessarily irrelevant or beyond the scope of discovery.

Tenth Circuit Affirmed That Wyoming Campaign Finance Disclosure Law Is Unconstitutional as Applied to a Nonprofit Advocacy Group
Wyoming Gun Owners v. Gray, 83 F.4th 1224 (10th Cir. 2023)

Plaintiff Wyoming Gun Owners (WyGO), a nonprofit gun rights advocacy group, challenged a Wyoming campaign finance regulatory scheme on the grounds that it was void for vagueness and unconstitutional. The Tenth Circuit upheld the Wyoming District Court’s ruling that the law, as applied to WyGO, was not narrowly tailored, and that a provision was void for vagueness.

Wyoming implemented a campaign finance scheme that requires organizations that spend over $1,000 on an “electioneering communication” to notify the state and disclose the donors whose contributions made the communication possible. The disclosure requirements under the Wyoming statute apply to expenditures and contributions which “relate to” an independent expenditure or electioneering communication. The Tenth Circuit upheld the District Court’s decision that the phrase “relate to” is impermissibly vague and authorizes arbitrary enforcement.

WyGO also argued that the disclosure requirements were unconstitutional. The Tenth Circuit agreed that the disclosure regime is substantially related to anticorruption and informational interests. However, WyGO is a small organization. It has limited bookkeeping capacity and is funded almost entirely by small-dollar donations. Because of its circumstances, when WyGO funds an electioneering communication, it has no way of knowing which donor’s contributions should be disclosed. The Court held that, as applied to WyGO, the statute is not narrowly tailored because WyGO had no way of complying without overdisclosing.

FIDUCIARY DUTY

Indiana Court Affirmed Personal Liability of Nonprofit Director for Misappropriation of Assets
Stark v. State, 204 N.E.3d 957 (Ind. Ct. App. 2023)

Timothy Stark, pro se, appealed the trial court’s judgment against him in an action brought by the State of Indiana against Wildlife in Need and Wildlife in Deed, Inc. (WIN), Stark, and Melisa Lane. Stark was the director of WIN, and Lane, his then-wife, was the secretary and treasurer. Stark had WIN pay his personal credit card bills and commingled WIN’s assets with his own, including by attempting to start a private zoo in Oklahoma using the animals owned by WIN. The trial court found that Stark was personally liable for the misappropriation of WIN assets.

The appellate court held that the trial court’s conclusion that Stark, the nonprofit’s director, was personally liable for funds and assets misappropriated from the nonprofit was not clearly erroneous because the director routinely used WIN to pay his personal obligations, took assets and commingled assets with his own. The trial court established this liability under three theories: (1) Stark breached his fiduciary duties to a nonprofit corporation and was liable under Indiana Code Section 23-17-13-1; (2) Stark breached his fiduciary duties to a nonprofit corporation by making unlawful distributions to himself in violation of Indiana Code Section 23-17-13-4; and (3) piercing of the corporate veil was appropriate under the circumstances. The Court of Appeals of Indiana found that none of these theories was clearly erroneous and thus affirmed the trial court’s ruling.

North Carolina Court Rejected Conversion Claims for Nonpayment of Loans to Nonprofit and Held That Nonprofit Officers Do Not Owe Fiduciary Duties to Members
Kumar v. Patel, 2024 WL 849419 (N.C. Super. 2024)

Plaintiff Sahil Kumar sued Priyanka Patel and Empower Tomorrow, Inc. for conversion and breach of fiduciary duty due to the nonpayment of loans made by Kumar and the use of Kumar’s eBay account. The North Carolina Superior Court granted defendants’ motion to dismiss.

In 2019, Kumar and Patel co-founded Empower Tomorrow, Inc., a nonprofit corporation with its principal place of business in Raleigh, North Carolina. Between 2019 and 2023, Kumar alleged that he loaned roughly $500,000 under an agreement that it would be repaid once Empower Tomorrow became self-sufficient and started to earn revenue from the sale of its own inventory. At all relevant times, Kumar was a member of Empower Tomorrow, but he resigned as an officer in June 2023.

Plaintiff claims that defendants wrongfully took and converted the loans, the purchased inventory, and the eBay account. Under North Carolina law, conversion only applies to tangible property. The Court held that neither the nonpayment of a loan, nor the use of an eBay account can qualify as the basis for a conversion claim. Furthermore, any inventory purchased with the loaned funds would lawfully be the property of Empower Tomorrow. The Court also dismissed Kumar’s claim that Patel breached her fiduciary duty to him. First, members of a nonprofit corporation do not owe fiduciary duties to other members. As an officer, Patel owed a duty to Empower Tomorrow, but she did not owe any duty to Kumar. Kumar argued that there was a de facto fiduciary relationship, but the Court disagreed. The Court did not find any of the elements of control typically associated with a de facto fiduciary relationship.

(The authors would like to thank Jason D. Atwood, Alexis Hill and Ema Klugman for their assistance in preparing this review.)

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