Skyriver v. OCLC

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<p>Running Head: STRAYING FROM THE PATH</p> <p>1</p> <p>Straying From the Path: How OCLC Navigates its Purpose, Non-profit Rules, and Interlibrary Lending</p> <p>Claire DMura Erin McCaslin Kooyman Sola Whitehead University of Washington LIS 550: Assignment 3</p> <p>STRAYING FROM THE PATH</p> <p>2</p> <p>OCLC (Online Computer Library Center), a major nonprofit library organization, has been sued by SkyRiver and Innovative Interfaces, two library service companies, for anticompetitive practices and violating antitrust laws in four parts of OCLCs business services: bibliographic data, cataloging, interlibrary loans, and integrated library services. This legal action raises concerns about monopolistic practices by OCLC that could affect how OCLC continues to provide services to 72,000 libraries worldwide. First, we examine what constitutes a nonprofit organization. Looking at this argument from a legal perspective, we conclude that many of OCLCs actions are within the strict definition of nonprofit based on Ohio state law. However, looking at the federal antitrust laws, SkyRiver and Innovative seem to have some valid allegations in their case. To support this opinion we look at the history and necessity of interlibrary lending (ILL), and how OCLC provides this service to its member libraries. Because ILL cannot be separated easily from other essential library services, the lawsuit has raised concerns that OCLC is using coercive tactics, such as punitive pricing, to get member libraries to participate. In addition, we look at the organization of OCLC in reference to the case brought by SkyRiver and Innovative, and examine some of its actions that to public perception do not support its nonprofit status. We also look at how these actions are moving the nonprofit organization farther away from its published objectives and the needs of libraries today.</p> <p>To Be a Nonprofit The ins and outs of what it means to be a nonprofit are much more complicated than it initially sounds. Shouldnt it mean that an organization doesnt work to make a profit? To be a nonprofit does not necessarily mean that an organization must not generate funding greater than</p> <p>STRAYING FROM THE PATH</p> <p>3</p> <p>its expenses, rather the nonprofit designation dictates what must be done with any profits, and what cannot be done. Nonprofits are expected to devote any excess earnings to their nonprofit purposes (Hopkins, 2005, p. 6). Additionally, an organization being designated a nonprofit does not necessarily mean the organization is tax-exempt. Not all nonprofits are tax-exempt, although most tax-exempt organizations are nonprofits. An organization may lose its tax-exempt status and still be considered a nonprofit. The designations nonprofit and tax-exempt are typically determined by two different legal entities: state law determines nonprofit status, whereas federal tax law is the basis for tax-exempt status (Hopkins, 2005, p. 6). The first step for an organization in gaining nonprofit, tax-exempt status is to form a nonprofit corporation. The most important aspect of this process is the preparation of articles of incorporation, which outline an organizations primary purposes. These articles are submitted to the state in which the organization is seeking incorporation, usually in a form that is prescribed by that states law. The most crucial component of the articles of incorporation is the entitys purposes (OHare, 2005, p. 1). The purposes outlined in this document are the defining factor in whether or not an entity qualifies for both nonprofit status and tax-exemption. After the articles of incorporation are filed with the state, the state will return a document (usually a certificate or charter) that recognizes the nonprofit as a legal entity and the effective date of incorporation (OHare, 2005, p. 2). In Ohio, nonprofit corporation law is determined by Ohio Revised Code 1702, which defines a nonprofit corporation as, domestic or foreign corporation that is formed otherwise than for the pecuniary gain or profit of, and whose net earnings or any part of them is not distributable to, its members, directors, officers, or other private persons, except that the payment of reasonable compensation for services (Ohio, 2001).</p> <p>STRAYING FROM THE PATH</p> <p>4</p> <p>If a nonprofit, after being formally recognized by the state in which it is incorporated, would like to apply for tax-exemption it must go through further paperwork, namely Form 1023, with the Internal Revenue Service. The IRS considers several categories of tax exemption, which are designated by a code such as 501(c)(3). OCLC is a 501(c)(3) organization, as are most other tax-exempt nonprofits, which means it is organized and operated exclusively for broadly defined charitable, religious, educational, scientific or literary purposes (Hyatt, 2005, p. 11). If recognized, the IRS will provide the organization with a letter of determination. Nonprofit organizations are also usually exempt from state income taxes, and most states will automatically recognize exemption from state income tax once federal exemption has been recognized (Hyatt, 2005, p. 10). Some states, such as Ohio, have exemptions for other state and local taxes, such as property and sales taxes. These exemptions, however, do not come automatically, and usually have much narrower standards. It was this type of property tax exemption that was revoked from OCLC in 1984. As summed up by blogger Peter Murray, this case began in 1980 when OCLC applied for property tax exemption with the Ohio Tax Commissioner under RC 5709.12 and RC 5709.121 and was denied. OCLC filed an appeal asserting that, The commissioner erroneously held as a matter of law and fact that there is nothing unique in the nature of Appellant OCLCs services that would make it an unlikely service to be engaged in by private enterprise (Murray, 2010). The appeal was again denied, and OCLC took the case to the Ohio Supreme Court (Murray, 2010). The Ohio Supreme Court upheld all previous decisions on the grounds that, OCLC is neither a public college or academy or a public institution of learning, as those terms are employed under R.C. 5709.07, nor was the property found to be used exclusively for charitable</p> <p>STRAYING FROM THE PATH</p> <p>5</p> <p>purposes so as to entitle OCLC to an exemption under R.C. 5709.12 (OCLC v. Kinney, 1983). The court argued against OCLCs vicarious charitable exemption, and argued that the companys activities more closely resemble those of a publisher or database firm, not a library. In its opinion, the court states, OCLC essentially offers a product to charitable institutions, for a fee exceeding its cost, and, as the board concluded, is not itself a charitable organization (OCLC v. Kinney, 1983). This 1984 case shows how OCLC may walk a fine line as a nonprofit. While this case did, in fact successfully argue that OCLC did not meet the Ohio Tax Commissioners criteria for a charitable nonprofit as the law stood in 1984, OCLC has never been challenged on such in the eyes of the Ohio Secretary of State or the IRS. However, the arguments made in these proceedings are still compelling and worth noting. OCLC was not long without its statutory property tax exemption, however. In 1985, the Ohio State Legislature introduced a new section to the Ohio Revised Code that defined a narrow qualification that would allow OCLC to retain the property tax exemption. This code, R.C. 5709.72, allows property tax exemption for library technology development, specifically a nonprofit corporation that is exempt from federal income taxes under the provisions of section 501(c)(3) and the owners primary purposes are conducting research and development in library technology and providing computerized or automated services to public, charitable or educational libraries (Ohio, 1985). Clay Holtzman, the nonprofit business reporter at the Puget Sound Business Journal said it is not uncommon for state government to modify laws for their major employers, since the benefit of keeping the employer is greater than the taxes they would earn from them (personal communication, December 3, 2010). It may be fuzzy ethics, but it isnt illegal.</p> <p>STRAYING FROM THE PATH</p> <p>6</p> <p>In the current lawsuit, SkyRiver and Innovative Interfaces make charges against OCLCs nonprofit status, but in reality this could be outside of the scope of this case, and serves more as a reflection of OCLCs character. A citizen cannot sue to revoke the nonprofit status of an organization directly, but can file a complaint about abuse of the nonprofit to the appropriate agency, be it state or federal. Challenges to a nonprofit's status usually go through an official process with the IRS, in which the nonprofit organization is scrutinized through both compliance checks and examinations (IRS 2010a). These are administered through the Exempt Organizations (EO) function, which is part of the IRSs Tax Exempt and Government Entities (TE/GE) Operating Division. The examination process is essentially an IRS audit that looks at an organizations records, may also interview third parties, and has the power to modify an entitys exempt status based on its findings. A compliance check is less stringent and only reviews whether an organization is adhering to record keeping and information reporting requirements or whether an organizations activities are consistent with its stated tax-exempt purpose. A compliance check can be turned into an examination if the IRS agent finds closer scrutiny to be necessary (IRS, 2008). A nonprofit, tax-exempt organization can jeopardize its status if it, ceases to be operated exclusively for exempt purposes (IRS, 2010b). Some of the activities that will get a charity in trouble include: private inurement, excessive lobbying and operating for the primary purpose of conducting a trade or business that is not related to its exempt purpose (IRS 2010b). According to OCLCs articles of incorporation, the companys primary established purposes are: ...to maintain and operate a computerized library network and to promote the evolution of library use, of libraries themselves, and of librarianship, and to provide processes and products for the benefit of library users and libraries, including such objectives as</p> <p>STRAYING FROM THE PATH</p> <p>7</p> <p>increasing availability of library resources to individual library patrons and reducing the rate of rise of library per-unit costs, all for the fundamental public purpose of furthering ease of access to and use of the ever-expanding body of worldwide scientific, literary and educational knowledge and information. (OCLC, 2008) In order to show that OCLC is not living up to its legal nonprofit qualifications, a substantial portion of their operations would have to be shown to not further these purposes. This is not to say that a company cannot have any operations that fall outside of their primary purpose. These activities should be kept to minimum, and an organization must pay taxes on any income incurred as a result of these activities (Hopkins, 2005, p. 147). This is called the Unrelated Business Income Tax, and OCLC does pay it. Potentially more troubling to OCLCs tax-exempt status is a developing body of law derived from the courts called the commerciality doctrine. According to nonprofit lawyer and blogger Ellis Carter, under the commerciality doctrine, one of the factors that can indicate a commercial manner is the existence of for-profit competitors (2009). Carter states, It is not enough to price goods or services below the competition. To operate in a noncommercial manner, exempt organizations must provide services at substantially below cost, preferably to charitable recipients, and should not advertise in a commercial manner or operate in a manner that indicates a purpose of maximizing profits (2009). However, some legal experts criticize the commerciality doctrine for being too illdefined. Historically, it grew out of loose language in court opinions, which in turn seem to have reflected judges personal views as to what the law ought to be (rather than what it is) (Kelley, 2004, p. 2477). Kelley explains the commerciality doctrine to his law students by comparing it to the bludger from the game of quidditch in the Harry Potter books. This</p> <p>STRAYING FROM THE PATH</p> <p>8</p> <p>bludger is a hard ball that catches the players off-guard, knocking them off their broomsticks. Kelley says the commerciality doctrine works this way, inconsistently impacting some nonprofits and not others (2004, p. 2476). At this stage in the lawsuit, it is unclear if OCLC could be hit by the bludger of the commerciality doctrine. Challenges are most often brought to the IRS through outside channels, which are then analyzed by the IRS itself. Anyone in the public may file a complaint with the IRS against an organization using Form 13909, Tax-Exempt Organization Complaint (Referral) Form (IRS 2008). Additionally, IRS agents review an organizations 990 forms, similar to how taxpayers personal income taxes are analyzed, and may begin an examination based on the professional analysis. The IRS also reviews media reports and receives complaints from Congress regarding compliance, and any of these may initiate a closer look (IRS, 2010a). It is entirely possible (but still speculation) that attention drawn to OCLC from a broadly publicized antitrust case could result in review by the IRS. In recent years there seems to be growing confusion over what a nonprofit is and how one should function. Nonprofit organizations have become more savvy in business, and some would argue necessarily so, as costs of operation have gone up, while public funding has not. According to an article in the New York Times, an increasing number of states are revoking charities property tax exemptions, and organizations such as hospitals and private universities are under fire for their large cash reserves and high profits (Strom, 2008). The idea behind tax exemptions is that the organizations provide a public service or substantially reduce the burdens of government, the article states, yet as these organizations look more and more like traditional businesses, cash-strapped governments are wanting to regain what they see as lost revenue (Strom, 2008).</p> <p>STRAYING FROM THE PATH</p> <p>9</p> <p>Allegations of Antitrust violations When looking at antitrust litigation, the first consideration of the court is that antitrust laws protect competition, not individual competitors (Steren, 2005, p. 89). The only protection afforded to individual competitors is when the elimination of that competitor will harm competition in the market. Allegations of antitrust practices are analyzed by several methods in the courts. The first and most definitive method is the per se method of analysis. If a practice, usually an anticompetitive agreement, is found to be a per se violation of antitrust law, there is no need to prove any actual injury to competition. Rather, the simple existence of the...</p>