Published 1/1/2011
Maureen Leahy

Facing up to legal issues

What orthopaedic society executive directors need to know

Is your local orthopaedic society properly structured to protect volunteers? Do board members understand their fiduciary responsibilities? Could educational and advocacy activities inadvertently result in legal problems?

These questions and more were among those addressed during the 2010 AAOS-sponsored Executive Directors’ Institute, a training and networking program for the executive directors of state orthopaedic societies. According to Paula Goedert, Esq., who discussed these and other legal issues that apply to nonprofit organizations, state orthopaedic societies must be especially careful in their structure/organization, their fiduciary responsibilities, their legislative and lobbying activities, their education efforts, and their antitrust activities.

“Maintaining corporate status for the society helps protect members,” Ms. Goedert said. “Without it, members in most states are personally liable for the debts and obligations of the unincorporated association.”

Unfortunately, a society’s corporate status may not be current for several reasons, Ms. Goedert said. She encouraged executive directors to visit their secretary of state’s Web site to make sure the society’s corporate status is active.

Volunteer protection statutes and insurance provide additional layers of protection to members. Volunteer protection statutes generally prohibit damages against a volunteer leader of a nonprofit corporation unless that individual has engaged in willful misconduct or gross negligence. “If the society is incorporated in a state with a good volunteer protection statute, members will have a second shell of protection,” Ms. Goedert said. “But the society should still maintain general liability and directors and officers insurance.”

Although corporate status, volunteer protection statutes, and liability insurance should be sufficient to protect any paid staff or volunteer leader acting in good faith, some societies also provide members with indemnification protection, to compensate them in the event of a loss. She urged societies with indemnification clauses to examine them closely because, in her opinion, most are drafted too broadly.

“If your society has such a clause, take a look at it and urge the leadership to include some flexibility that allows the board to determine, at its sole discretion, whether any given situation deserves indemnification,” she advised the audience.

Fiduciary obligations
In addition, boards of directors must still understand and follow their fiduciary obligations, adhering to the “prudent person” standard when dealing with the organization’s assets. In other words, board members must invest the organization’s assets as prudently as they would their own assets.

“The most important asset that boards of directors are charged with protecting is the good name and good will of the organization,” Ms. Goedert said. “They must ask themselves, ‘Am I doing something that will protect the good name and good will of the organization, or will that name and good will be damaged if all the facts come out?’ That is the litmus test for every single decision.”

Boards must also protect the organization’s human assets. “It is their job to protect both staff and volunteers,” Ms. Goedert said. “It’s also their job to make sure that the volunteers feel valued, respected, and well-used as members of the organization.”

Both the Internal Revenue Service (IRS) and Congress are concerned about conflicts of interest, said Ms. Goedert. Organizations that do not have a conflict of interest policy are at risk for audit.

“If board members have conflicts—personal or financial interests that prevent them from putting the best interests of the organization first—they must disclose the conflicts and stay out of the decision-making process,” she said.

Directors must also remember that no information remains confidential forever. “If you are counting on confidentiality to protect the organization, think again,” she said. “It is the staff who must remind the board of this.”

Tax exemption
The whole landscape for what is taxable and what is nontaxable for nonprofit organizations has changed recently. “Outside auditors are now subject to stricter rules in presenting your tax position, and as a result, you must be more careful in the tax positions you take,” Ms. Goedert said.

Many nonprofit organizations are also accepting corporate sponsorship revenue, but may not understand the tax rules governing these sponsorships, she said. Although executive directors don’t need to be tax experts, they do need to be aware of the tax implications and ensure that the individuals putting together corporate sponsorship benefits packages know the tax rules.

Executive directors must also be aware of the organization’s lobbying and political activity limits. “As charitable and educational organizations, 501(c)(3) organizations are allowed limited lobbying, but no political activity,” Ms. Goedert said. “A 501(c)(3) organization that does any amount of lobbying should file a 501(h) election with the IRS. The 501(h) election includes an expenditure test that tells exactly how much money the organization can spend on lobbying. Societies that don’t file that election may be subject to the discretion of the IRS auditor and risk losing their tax-exempt status.”

On the other hand, 501(c)(6) organizations are allowed unlimited lobbying, but must disclose the percentage of member dues that are attributed to lobbying. That percentage of dues is nondeductible, according to Ms. Goedert. Even 501(c)(6) organizations have limitations, however. Money spent on political activity—support for or opposition to a candidate for political office—may be subject to an excise tax equal to 35 percent of the political expenditure. “That is why nonprofit organizations have political action committees (PACs). PACs are not subject to the excise tax,” she said.

Copyright infringement
“Almost all of copyright law can be summarized in one sentence: Everything belongs to its creator,” Ms. Goedert said. “It is crucial, therefore, that nonprofit executives be very clear with their members about the implications of borrowing or taking other people’s work without permission.”

Although the fair-use exception allows nonprofit organizations to copy limited noncommercial excerpts from a longer work, Ms. Goedert recommends that organizations follow “the rule of 3s”: Take no more than three paragraphs—with quotes and attribution—from a longer piece of work, such as a journal article or book chapter, and no more than three sentences—with quotes and attribution—from a shorter piece of work like a newspaper article.

Attribution alone, however, does not solve the problem. “Associations are still being sued even though the work is in quotes and attributed,” Ms. Goedert said. “You have to get permission to use material from the creator or from whomever has the assigned copyright unless you are certain the fair use exemption applies.”

Antitrust laws
An area of antitrust law that nonprofits often overlook, and for which there are criminal and civil penalties, is conspiracies to restrain trade, said Ms. Goedert. Whenever competitors get together—even at professional association meetings—discussions of sensitive topics such as pricing or practice patterns could be construed as criminal conduct.

“Societies need to prohibit any behavior that violates antitrust law as part of their policies—and to review these sections regularly,”she said.

Maureen Leahy is assistant managing editor for AAOS Now. She can be reached at leahy@aaos.org