A charity’s deal to pay its founder nearly $2-million over 20 years for the right to continue using the organization’s name and logo points out how valuable and tricky trademarks can be — and why nonprofits should pay attention to legal issues involving them.
At issue is a case involving Girls on the Run International, which made the arrangement with its creator, Molly Barker, when she was getting ready to leave the fitness group, which now operates in 47 states and Canada. Though the organization’s approach is unusual, it carries a broad lesson, experts say: Nonprofits, like businesses, should own and protect their intellectual property from the start.
“Sometimes in the growth from a small business or a nonprofit to a big business or big nonprofit, trademark issues get overlooked, and that’s a mistake,” says Erik Pelton, an intellectual-property lawyer in Virginia. Often when a single person starts a charity, he says, it is to be expected that “maybe you’re not thinking again about ownership until things get bigger.”
But at that point, he says, figuring out how to value a trademark, who created that value, and whether and how much someone should be compensated for it can be thorny and complex.
Squabbles over trademarks and brands, never limited to for-profit businesses, have roiled the charity world in recent years as competition for donations has grown, particularly on the Internet.
Groups like Susan G. Komen and Doctors Without Borders regularly police the use of their well-known names and logos to strengthen their identity and avoid confusing donors or being mistakenly linked to unaffiliated charities.
Last fall, the ALS Association applied to the U.S. Patent and Trademark Office to secure rights to the phrase “ice bucket challenge,” but rescinded its application after facing criticism that the move would be unfair to other nonprofits using that or similar terms for their own fundraising campaigns.
Founded as a Business
Less typical are trademark matters that bubble up from within an organization itself. Such was the case with Girls on the Run, when Ms. Barker, its high-profile founder, was getting ready to leave the organization, which teaches athletics and self-esteem to young girls.
Ms. Barker, who started Girls on the Run as a for-profit business in 1996, owned the rights to the organization’s name and logo.
Usually, legal experts say, nonprofit officials surrender such rights to the charity so the Internal Revenue Service will approve the group’s tax-exempt status. But in 2000, the IRS granted charity status to Girls on the Run, which had disclosed in its application that Ms. Barker’s business, Girls on the Run Inc., “will sell merchandise related to the running program” run by the new nonprofit.
At the time the nonprofit was established, Girls on the Run, started in Charlotte, N.C., was operating in 12 states and had served a total of 1,330 girls.
According to a written statement from the group, the charity began as a “grassroots” operation, and in 2002 the governing board arranged a licensing agreement with Ms. Barker to provide a royalty for the use of the intellectual property she owned “as an innovative way to round out her compensation.”
Over the next 10 years, Girls on the Run expanded across the U.S. and Canada.
“As a result of this extraordinary growth,” the written statement said, “the total royalty payments were also increasing significantly.”
Rising Costs
Girls on the Run would not disclose information about the payments, but according to its Forms 990, the group paid royalties — presumably to Ms. Barker under the 2002 agreement — of about $73,000 in 2011 and $78,000 in 2012.
With royalty costs on the rise, the statement said that the organization decided its “long-term financial health” would be improved if the charity bought the trademarks outright from Ms. Barker.
According to a note in the organization’s audited statement for the financial year ending June 2014, Girls on the Run “acquired various trademarks from its founder” in 2013 for a payment of roughly $600,000 to be made over five years and an obligation to pay 6 percent of the gross revenue earned from membership and affiliate fees for 20 years. The organization confirmed the terms of the deal.
In today’s dollars, the estimated value of the payments to Ms. Barker through 2033 would be $1.93-million, according to the note. It appears, however, that the total could be more or less, depending on the size of the annual revenue on which the 6 percent royalty is based. In 2013 and 2014, those fees came to about $1-million a year.
CEO Compensation
The deal raises some questions among charity and legal experts. Among them:
- Given that nonprofits tend to shy away from making compensation payments to executives tied to revenue or performance, why did Girls on the Run do that through the royalty arrangements?
- How did the organization handle the legal and tax implications of making the transaction with its founder, who was listed as a trustee as late as 2012 and thus could be considered a charity insider subject to rules prohibiting sweetheart deals?
- Is Girls on the Run paying Ms. Barker too much, assuming that the value of the trademarks grew along with the organization and, seemingly, through the use of its resources?
In its written statement, Girls on the Run said that “an outside firm was hired to determine the estimated fair value of the license,” and that its board approved the deal after seeking its own legal advice.
The group declined to elaborate or to comment on the other issues raised by legal experts.
The statement hinted at how valuable Girls on the Run considered the intellectual property it bought in 2013: “The board did not consider changing the name as an option as we had built strong brand loyalty by this point in time with over three-quarters of a million families impacted by our program.”
For Daniel Borochoff, a nonprofit watchdog, it’s that kind of success that makes Girls on the Run a good cautionary tale.
“Make sure you own your trademarks, your logo, your brand,” he says. “Make sure you understand their value.”