SUPPLEMENTARY INFORMATION:

Organizations authorized to mail at Nonprofit Standard Mail rates are entitled to mail at significantly lower rates than postal customers that use the commercial Standard Mail rates. In order to prevent the abuse of these privileges, there are certain eligibility restrictions on the use of the nonprofit rates. The oldest restriction is commonly known as the cooperative mail rule. This standard is set forth in the Postal Service's Domestic Mail Manual.

The cooperative mail rule is based upon the principle that the nonprofit rates were solely intended for the benefit of organizations authorized to mail at nonprofit rates, and not for entities that have not been authorized to mail at those rates. The nonprofit rates may not be used for matter sent for or on behalf of unauthorized organizations, nor may the rates be used for mailings supporting a cooperative enterprise between nonprofit and unauthorized organizations. The cooperative mail rule does not prevent a nonprofit organization from retaining an agent to help it prepare mailings or assist with a venture that will be supported by mailings sent at the nonprofit rates. Nevertheless, if the parties' relationship exceeds a principal-agent arrangement, eligibility for nonprofit rates may be impacted.

A number of federal courts have considered the cooperative mail rule. In each case, the validity of the rule and its application in the specific case have been upheld. This includes a recent case involving fundraising mailings produced pursuant to arrangements between a for-profit professional fundraising organization and its nonprofit clients.

Over the last several years, some nonprofit organizations have made the Postal Service aware of concerns that the application of the cooperative mail rule was having a serious effect on their ability to solicit donations and, in some cases, might threaten the existence of many nonprofit organizations, particularly given the current economic climate faced by many in the nonprofit sector. The organizations of most concern include those that, because they are new, of small size, or other reasons, have to seek the assistance of professional fundraising organizations in seeking donations, rather than conduct their fundraising campaigns in-house. In many cases, the arrangements between the professional fundraiser and the nonprofit are cooperative under the longstanding application of the cooperative mail rule. Indeed, the Postal Service understands that some states require contractual terms between nonprofits and some (but not all) types of professional fundraisers to contain elements that would cause the resultant fundraising mailings to violate the cooperative mail rule.

Although the Postal Service is sensitive to the plight of these nonprofit organizations, it has been reluctant to propose an administrative solution.

Traditionally, the expansion (or reduction) of eligibility to mail at nonprofit or other preferred rates has been a legislative function. By statute, the Postal Service is not permitted to discriminate between its customers, except where specifically authorized by law. Accordingly, it is not permitted to charge nonprofit rates to one customer while charging another the commercial rates for substantially similar material unless Congress has enacted laws directing that outcome. Moreover, since the postage on mail sent at the nonprofit rates does not bear the same share of postal overhead costs as mail sent at commercial rates, an expansion of nonprofit eligibility can transfer those overhead costs to other postal customers through higher rates. And finally, since there is a significant difference between the nonprofit and commercial rates, expansion of eligibility for the nonprofit rates can create a significant competitive advantage for the newly eligible nonprofit mailer, vis-à-vis those still mailing at the commercial rate.

Some members of the nonprofit industry also made the Postal Service aware of a separate concern that might arise if fundraising mailings were exempted from application of the cooperative mail rule. Specifically, they were concerned that, if the contractual terms between nonprofits and fundraisers were no longer a postal concern, some fundraisers might impose financial terms that could take advantage of unsophisticated nonprofits. At the same time, these parties warned that some fundraisers might seek to create nonprofit organizations of their own, for the purpose of enriching themselves off fundraising mailings rather than to benefit the public. These are, of course, serious issues. Nevertheless, they appear primarily to raise consumer protection, rather than postal, concerns. In the Postal Service's view, these social policy concerns are best addressed elsewhere, such as through federal legislation or the state officials who regulate the relationship between professional fundraisers and nonprofit organizations.

Bills to address concerns regarding application of the cooperative mail rule to fundraising mail were introduced last session in both houses of Congress. Although there appeared to be general agreement between Congressional members, the nonprofit sector, professional fundraisers, and the Postal Service concerning the utility of such legislation, issues regarding the precise wording and application of the legislation prevented its passage at that time. And, although a revised version of the bill has been proposed in the current session, the Postal Service also understands that, in view of the same questions as well as other pressing Congressional business, there is no guarantee that the legislation will be passed in the foreseeable future.

Accordingly, although it is reluctant to tread in an area historically addressed through legislation, the Postal Service has determined to propose a rule to eliminate the application of the cooperative mail rule on mailings by authorized nonprofit organizations seeking monetary donations. There appears to be bipartisan Congressional agreement that this is a worthwhile goal and that it can be accomplished most efficiently through administrative action. Additionally, representatives of the nonprofit community and the professional fundraisers that serve them appear to concur on the urgent need for this relief. It will help ensure that nonprofit organizations, particularly those who cannot implement fundraising campaigns in-house, can obtain the professional assistance needed to obtain the donations necessary to fund their vital programs. ( printed page 23939) It will also ensure that those parties do not unintentionally violate the laws of those states that regulate the financial arrangements between nonprofits and certain types of professional fundraisers.

We have several cautions regarding the breadth of this proposal. First, it only exempts fundraising mailings seeking monetary donations. Mailings that include solicitations for products or services, whether through sale, lease, or other arrangements, will not be exempt from application of the cooperative mail rule. If there is a cooperative arrangement involving such goods or services, the mailpiece will not be eligible for Nonprofit Standard mail rates. Exempting mailings advertising goods or services from application of the cooperative mail rule would create significant potential for abuse by commercial organizations and may also place small businesses and other for-profit organizations who sell similar goods and services at a significant competitive disadvantage.

Second, the only exemption is from application of the cooperative mail rule. The mailings affected will continue to be subject to all other applicable postal standards.

Third, the exemption only applies to nonprofit organizations authorized to mail at Nonprofit Standard Mail rates. Other organizations authorized to mail at those rates, currently voter registration officials and certain qualified political committees, will not be exempt from application of the cooperative mail rule on fundraising mail.

Fourth, the rule, if adopted, will be a change in postal policy rather than a clarification of existing standards. Accordingly, it would be prospective only, effective on the date of adoption. It will not provide the basis for a refund claim on mail previously entered and paid at the commercial rates nor will it provide a defense for any action, whether under the False Claims Act or otherwise, based on previous entry of ineligible material at the nonprofit rate.

Fifth, the proposed rule would not establish safeguards to address the concern that some professional fundraisers may seek to take advantage of unsophisticated clients. In our discussions with nonprofit representatives and Congressional representatives, no consensus was reached on an effective and administratively feasible method to accomplish this goal. However, this rulemaking does not prevent other interested federal or state agencies from regulating such practices. Moreover, it is also hoped that the nonprofit sector may undertake educational efforts to inform potential targets of such practices.

Finally, the Postal Service will be alert to the consequences of this new standard, should it be adopted. If it results in the types of abuses discussed here or any other unintended consequences, the Postal Service may revisit the exception and consider a further rulemaking or other appropriate administrative measures.

Although exempt from the notice and comment requirements of the Administrative Procedure Act [5 U.S.C. 553(b), (c)] regarding proposed rulemaking by 39 U.S.C 410(a), the Postal Service invites comments on the following proposed revisions to the Domestic Mail Manual, which is incorporated by reference in the Code of Federal Regulations. See 39 CFR 111.