Nonprofit Cemeteries and the Funeral Rule
by Robert M. Fells, Esq., general counsel
Some time ago, a "Washington Report" column in this magazine noted that Federal Trade Commission (FTC) staff had said that tax exempt, nonprofit cemeteries would not be covered under the Funeral Rule even if the rule were expanded to include other sellers. That report stirred some controversy on Internet message boards and elsewhere. Somebody even circulated a rumor that this writer had been admonished by FTC staff for claiming that nonprofit cemeteries would be exempt from the Funeral Rule. Of course, nothing of the kind ever occurred and we stand by our earlier report.
Yet a variety of interested parties are urging the FTC, under the ongoing Funeral Rule review proceedings, to expand the rule to all sellers in the industry including nonprofit and religious cemeteries. So for this issue's column only, we depart from our traditional objective viewpoint to subjectively examine some of the factual and legal realities of covering nonprofit cemeteries under the Funeral Rule.
A Brief History of the Funeral Rule
To understand where we are today, we need to look back at the history and development of the Funeral Rule. The rule was the product of what might be called the "go-go" years at the FTC. This era occurred in the early to mid 1970s when it appeared to some observers that the commission had all but declared war on American businesses. A number of trade regulations were proposed and many enacted, including the Funeral Rule. FTC staff reports from that time clearly indicated that funeral homes were the focus of the rule although staff were well aware that other entities, including cemeteries, competed with funeral homes in the sale of some items such as outer burial containers. FTC staff determined that the most serious consumer abuses involved funeral homes and therefore geared the rule to these entities.
This historical fact is important today because, during the current Funeral Rule review proceedings, some groups are claiming that cemeteries and other sellers were omitted from the rule's coverage due to a "mistake," or an "oversight," or more suspiciously, a "loophole." The facts indicate otherwise. The Funeral Rule went into effect in 1984, although the first enforcement efforts did not occur until about 1987. Through the years FTC staff have published a number of different guidelines and booklets to help funeral homes comply with Rule requirements.
Funeral Rule Requirements
The requirements of the Funeral Rule seem almost like common sense practices that any legitimate business would follow on its own. The rule requires funeral homes to break out package plans to allow consumers to pick and choose only the items and services they want. Because the package plans are "unbundled," each of the goods or services must be separately priced or itemized. That requirement led to the need for a GPL, or General Price List, and separate price lists for caskets and outer burial containers. The price lists must be given to anybody who inquires in person at the funeral home. Prices must also be given over the phone on request. The rule lists 16 goods and services that must appear on the price list if the funeral home sells any of them.
The rule also prohibits the misrepresentation of legal or cemetery requirements, such as claiming that embalming is a legal requirement if it's not or claiming that a cemetery requires an outer burial container if it doesn't. Please understand that I am simplifying the rule's requirements for purposes of this column, so don't rely on my thumbnail description for compliance purposes. By now, you're probably asking yourself, "What's so bad about requiring sellers to give out price lists?" Of course, nothing is wrong with it and most sellers in any type of business will be happy to give consumers their prices without mandates from the government. The problem is that the Funeral Rule is not merely a recommended business practice. If that were the case, the ICFA would sign on the dotted line today as an endorser of its principles. In fact, we have incorporated the concepts of the rule into the ICFA Code of Ethics.
The problem with the Funeral Rule is that violations -- and I don't mean a total refusal to comply but technical infractions and paperwork violations -- are punishable by civil fines of $11,000 per violation (increased to $12,000 effective November 20). That's quite a bite from Uncle Sam, especially when you realize that most funeral homes are small, family-owned businesses.
To be fair, the FTC staff has worked hard to provide plain-language, user friendly compliance guides to help funeral homes avoid fines. For example, a recently published FTC compliance manual is available that is easy-to-read and provided free of charge. The problem is that the manual is about 46 pages long. Should it really take 46 pages to tell somebody how to give out a price list? Perhaps now you can understand some of the ICFA's concerns over expanding the Funeral Rule.
Funeral Providers Covered by the Rule
Even something as basic as who is covered under the Funeral Rule is not so simple. Although the admitted focus of the rule was funeral homes, the rule was written about 20 years ago, long before the trend of government plain-language documents became fashionable. As a result, the drafters of the Funeral Rule developed a convoluted definition to describe who is covered under the rule. Instead of simply stating that the Funeral Rule covers funeral homes, sometimes known as mortuaries, the staff coined a term that no one had ever heard of before. The term was "funeral provider" and it came with a three-part definition to explain what it meant.
Let's take the explanation of "funeral provider" directly out of the 46-page plain language FTC compliance manual. You are a funeral provider if you sell or offer to sell both funeral goods and funeral services to the public. That begs two questions: First, what are funeral goods? Second, what are funeral services?
Funeral goods are defined as all products sold directly to the public in connection with funeral services. Funeral services are defined as 1) Services used to care for and prepare bodies for burial, cremation, or other final disposition; and 2) services used to arrange, supervise, or conduct the funeral ceremony or final disposition of human remains. The FTC manual carefully explains that you are a funeral provider under the Funeral Rule only if you sell funeral goods and both types of funeral services.
All of this is a long-winded way of saying that the Funeral Rule applies to funeral homes, sometimes known as mortuaries. However, some other types of entities ended up under the rule because of the convoluted definition. For example, crematories that deal directly with the public and sell urns satisfy the definition of funeral provider. Likewise, cemeteries that are operated as part of a funeral home-cemetery combined operation would come under the Rule, at least to the extent of the 16 goods and services listed in the Funeral Rule. The list excludes cemetery items such as lots, crypts, markers and monuments, and grave opening/closing services.
Expanding the Funeral Rule to Cemeteries
This definition of funeral provider also explains why stand-alone cemeteries do not come under the Funeral Rule currently -- because they don't sell both funeral goods and funeral services, which include preparing the remains. However, in the ongoing Funeral Rule review proceedings, consumer groups and most industry trade associations are urging the FTC to expand the scope of the rule to include all sellers including cemeteries. The calls for rule expansion from consumer advocacy organizations such as AARP should not be surprising. Sadly, these groups never met a law or a proposed law they didn't like. Their philosophy seems to be that if one law is good, three laws must be three times as good. It is interesting to speculate that if just once, AARP said, "You know, we think this proposal imposes too many burdens on businesses for the limited benefits that consumers receive, so we're not in favor of it," a whole new era of cooperation would be launched.
More distressing are the funeral trade groups that are urging rule expansion. If you were to ask these groups if they favored the expansion of federal regulation of the death care industry, they would quickly answer no. I believe there is a consensus that the regulation of our industry is more effectively and efficiently handled at the state and local levels. However, when you ask these same industry associations if they favor expanding the Funeral Rule, they will say yes, apparently not realizing that they are supporting the expansion of federal regulation. It's really the same question, but few see the big picture.
As the proverbial lone voice in the wilderness, the ICFA opposes the expansion of the Funeral Rule. Critics claim that the ICFA is against giving consumers price information, but that's a red herring argument. In fact, the ICFA requires price information to be given to consumers as a condition of membership through our Code of Ethics. The real issue is the liability, the tens of thousands of dollars in fines levied against small businesses for technical violations. The concept behind the Funeral Rule is a good one, but it shouldn't be enforced with a sledgehammer.
The ICFA's opposition to Rule expansion is based upon the FTC's own procedures. According to the FTC, a trade regulation such as the Funeral Rule is presumed to be legally valid in its present form. In order to amend the rule, three factors must be proved. First, there must be substantial evidence that consumers are suffering harm from sellers not under the Funeral Rule. Second, the harm must be prevalent and widespread. Third, the harm would be remedied by the Funeral Rule. Throughout the Funeral Rule review, which began in May 1999, the ICFA believes that there has been no showing that consumers are suffering widespread harm from cemeteries that would be remedied if cemeteries were covered under the rule.
Nonprofit Cemeteries Under the Rule
However, the Funeral Rule review is ongoing and the calls for expansion have not been limited to for-profit cemeteries but extend to nonprofit cemeteries in general, and Catholic cemeteries in particular. So the key question today is: Can the FTC regulate nonprofit and religious cemeteries under the Funeral Rule? The quick answer is no, but that could change over time. Here are the safeguards and the reasons why they could change.
The FTC's jurisdiction is defined by the FTC Act, a 1914 law that provides for the regulation of any corporation or association, among other entities, organized "to carry on business for its own profit or that of its members." This definition would appear to exclude tax-exempt, nonprofit cemeteries, but a number of federal court rulings have made it clear that the FTC Act's definition does not refer to a business' tax status. For example, a recent U.S. Supreme Court decision in California Dental Association v. FTC found that a nonprofit trade association came under FTC jurisdiction because it contributed to the profit of its members, which were for-profit companies.
However, the Supreme Court in California Dental did not decide whether a nonprofit organization that had no ties to for-profit entities could be subject to FTC regulation. Instead, the high court went out of its way to leave the door open to that scenario. Specifically, the court stated, "We do not, and indeed, on the facts here, could not, decide today whether the commission has jurisdiction over nonprofit organizations that do not confer profit on for-profit members but do, for example, show annual income surpluses, engage in significant commerce, or compete in relevant markets with for-profit players. We therefore do not foreclose the possibility that various paradigms of profit might fall within the ambit of the FTC Act." In other words, stay tuned for further developments.
Congress and Nonprofit Organizations
Congress passed the FTC Act, and Congress can amend it. For many years, lawmakers on Capitol Hill have received complaints from various types of for-profit businesses that nonprofit organizations, because they pay no taxes, are unfairly competing with them. Even the U.S. Small Business Administration has recommended the revocation of tax exemptions for nonprofit organizations that compete with for-profits. This issue has been evolving for years and is further fueled by the unending search for new sources of tax revenue.
With respect to cemeteries, a certain amount of lobbying has already taken place urging members of Congress to enact legislation that would require the FTC to expand the Funeral Rule to all cemeteries, including nonprofits. Although the congressional leadership seems content to allow the FTC to do its job and make its own determinations, this scenario could change in the future.
Constitutional Guarantees for Nonprofit Religious Cemeteries
Another line of defense to specifically protect religious types of nonprofit cemeteries from FTC regulation is provided by the First Amendment to the U.S. Constitution -- in particular, the freedom of religion from government intrusion and the separation of church and state. However, is the constitutional argument really an impregnable line of defense or is it more like the Maginot Line? World War II history fans will know that the Maginot Line was France's so-called impregnable line of defense against an invasion by the German army. It turned out that the Germans didn't need to storm the Maginot Line in order to invade France; they simply went around it.
Could Congress, the courts or the FTC itself subject religious cemeteries to federal regulation without violating the constitutional guarantees of the First Amendment, by turning it into a sort of a legalistic Maginot Line? Nobody can say for certain, but there are some straws in the wind. For example, a few years ago a New York state court held that because the Catholic Church does not require Catholics to be buried in a Catholic cemetery, the selling of burial spaces by Catholic cemeteries should be considered a business and not a religious activity. This type of thinking could have consequences for all religious cemeteries.
It is important to note that the New York opinion was not a final adjudication and does not settle this issue by any means. However, the point is that even the First Amendment may not necessarily insulate the activities of religious cemeteries from government regulation by the FTC or other agencies.
The Future of the Funeral Rule Review
At this point in time, the FTC staff is expected to issue a report on the Funeral Rule review proceedings based on public comments submitted to the commission last summer and also on a public workshop conference held at the FTC in Washington, D.C., last November. The staff report may contain a series of recommendations for future proceedings, including the possible announcement of an Advance Notice of Proposed Rulemaking. If this occurred, the FTC staff would propose a number of amendments to the rule, which may include expansion to other sellers not covered, and would solicit public comments on the proposals. It is also possible that the report could recommend keeping the Funeral Rule in its present form without amendment. It is also possible, theoretically at least, that FTC staff could recommend repealing the Funeral Rule.
Whatever occurs next, the review process is not expected to be concluded for another two years or more. Unless the rule is repealed, yet another review proceeding will be initiated in a few years, perhaps before the end of the decade. Therefore, an active and sustained form of involvement is required by any organization and its members concerned with the growth of the Funeral Rule. Unfortunately, like most federal regulations and programs, the natural momentum of the Funeral Rule is geared toward expansion in one sense or another.
In closing, perhaps we should recall former President Ronald Reagan's observation when he said, "A government program is the nearest thing we'll ever see to eternal life on earth."