The Seventh Circuit Court of Appeals has reversed a Wisconsin District Court decision and held that the Wisconsin fair-dealership law prevents the Girl Scouts of America from forcing the “reorganization” of local chapters over the objection of one of them.  (Girl Scouts of Manitou Council v. Girl Scouts of the United States of America, No. 10-1986, 5/31/11.)

As part of a national reorganization effort to shrink the number of local councils from about 300 to about 100, the national Girl Scouts had sought to “realign” the boundaries of councils in Wisconsin. After lengthy negotiations, the Manitou Council was slated to be dissolved and its territory split between several surviving councils.  Manitou sued to stop the change.

The trial court agreed that the action would violate the state’s franchise law because it would constitute a “constructive termination” of the Council’s rights. But it held that to apply the statute would adversely affect the national’s freedom of expression.  Relying on the Supreme Court’s decision in the Boy Scouts case of 2000, the trial court said the franchise law would be a “direct affront” to the Scouts’ efforts to organize itself “in a means it judges most effective in proclaiming its expressive message.” (See Nonprofit Issues®, 4/16/10.)

The Court of Appeals, in an opinion written by Judge Richard Posner, one of the most colorful conservative jurists in the nation, essentially mocked the constitutional argument.  The Court agreed that the state could not require the national organization to promote different values in Wisconsin, but said “it does not follow that the First Amendment exempts the Girl Scouts from state laws of general applicability that have only a remote, hypothetical impact on the organization’s message.”

“The original stated reasons for reducing the number of local councils were to improve the marketing of Girl Scout cookies, exploit economies of scale, and do more effective fundraising — all by increasing each surviving council’s resources.  But in this appeal, the national organization emphasizes instead a goal of increasing the racial and ethnic diversity of the Girl Scouts,” the Court wrote.

“The First Amendment was barely hinted at in the first appeal of this case, and was just a small part of the national organization’s argument in the district court, but when it became the district court’s sole ground for ruling in its favor the national organization embraced it eagerly.  Yet this ground for overriding the fair-dealership law cannot be taken seriously in the absence of any evidence of a connection between realignment of the councils and promotion of diversity — and none was presented.”

The national argued that the fair-dealing law was inapplicable to nonprofits because it was based on “commercial” activities.  But the Court said that “nonprofit enterprises frequently do engage in ‘commercial’ or ‘business’ activities, and certainly the Girl Scouts do.  Proceeds of the sale of Girl Scout cookies are the major source of Manitou’s income. The local councils sell other merchandise as well. Sales of merchandise account for almost a fifth of the national organization’s income, and most of the rest comes from membership fees and thus depends on the success of the local councils in recruiting members; that in turn depends on the council’s revenues and thus gives the national organization an indirect stake in the cookie sales…. From a commercial standpoint the Girl Scouts are not readily distinguishable from Dunkin’ Donuts.”

The Court went on to say: “No gulf separates the profit from the nonprofit sectors of the American economy. There are nonprofit hospitals and for-profit hospitals, nonprofit colleges and for-profit colleges, and, as we have just noted, nonprofit sellers of food and for-profit sellers of food.  When profit and nonprofit entities compete, they are driven by competition to become similar to each other. The commercial activity of nonprofits has grown substantially in recent decades, fueled by an increasing focus on revenue maximizing by the boards of these organizations, and this growth has stimulated increased competition both among nonprofit enterprises and with for-profit ones.”

The Court recognized that nonprofits could not distribute profits, but said “that does not seem to alter the incentives of the people who run such organizations much, if one may judge from the many scandals involving nonprofit colleges and universities, which seem to compete for students, faculties, research grants, and alumni gifts with a zeal comparable to that of their for-profit counterparts.”

The Court said that the fair-dealing law was intended to prevent abuses, and it declined to read an exemption for nonprofit enterprise into the Wisconsin law.

YOU NEED TO KNOW

Although the sale of Girl Scout cookies can be significant for local councils, the several weeks of effort hardly make the Girl Scouts serious competitors to Dunkin’ Donuts. Nevertheless, Judge Posner undoubtedly expresses a growing public perception that there isn’t much difference these days between nonprofit and for-profit activities in a lot of spheres. There are a whole lot of areas where the for-profit world doesn’t venture — homeless shelters, food pantries and most youth development organizations, for example — but where substantial governmental or other funding exists — healthcare and education, for example — for-profits have made serious inroads in what was previously the almost exclusive realm of nonprofit enterprise. 

Despite the language of the opinion, the ultimate holding is likely to be trouble for national organizations that try to impose changes on their local chapters. Depending on state law, there may be a whole new area of defense available to the local units.