By Mark Conrad*
(Shortly before the press time, it was announced that AT&T and NASCAR reached an agreement with AT&T that will allow the company to sponsor Jeff Burton’s car through the 2008 season but after that year, AT&T must leave the Cup Series as a sponsor.)
The 11th U.S. Circuit Court of Appeals handed NASCAR a major victory in a high-stakes case involving the exclusivity of its sponsorship agreement with Nextel/Sprint over a claim by a race car driver that the use of the logo of AT&T Mobility (formally known as a Cingular Wireless). The panel overturned a lower court’s injunction permitting the use of the AT&T Mobility logo on a car driven by racer Jeff Burton for the RCR team.
Unlike the district court judge Marvin Shoob, the 11th Circuit’s panel in AT&T Mobility, LLC, v. National Association for Stock Car Auto Racings, Inc. did not address the merits of AT&T’s claim – which involved the wording of an addendum to the NASCAR sponsorship agreement with Nextel/Sprint. Rather, the court focused on the lack of standing by AT&T to bring the claim. It concluded, somewhat surprisingly, that AT&T was not an intended third party beneficiary to the contract and could bring the case to court.
The facts of the case demonstrate the difficulty when an umbrella organization like NASCAR consummates broad sponsorship agreements that may conflict with the terms of agreements signed by its participants, the racing teams. In 2003, NASCAR and Nextel Communications (now Sprint/Nextel after it merged with Sprint) entered into the “Nextel Sponsorship Agreement,” which provided that beginning with the 2004 Season, Nextel Communications would become the Official Series Sponsor of the NASCAR Nextel Cup Series. The Nextel Sponsorship Agreement granted exclusivity to Sprint/Nextel as the “sole telecommunications company” sponsoring Cup Series races, and the firm paid dearly for this designation: about $700 million over a 10-year period.
This sponsorship agreement conflicted with an existing agreement between RCR and what is known as the “#31 Car,” driven by Burton. In 2001, AT&T and RJR signed a three-year agreement whereby the telecommunications carrier became the primary sponsor of RCR Car. It was renewed for another three year period (2005-07) and an exclusive right to negotiate a renewal beyond 2007. At the time of the agreement, the #31 Car featured the Cingular brand and logo as part of its paint scheme.
So RCR had a pre-existing sponsorship agreement with a direct competitor of Sprint Nextel and has the Cingular image pasted on its car. Aware of this, NASCAR suggested, and the parties incorporated into the Nextel Sponsorship Agreement, narrow exceptions to Sprint Nextel’s exclusivity, which included race teams that had pre-existing sponsorship agreements with Sprint Nextel’s competitors and which could be permitted to continue with those sponsorships according to certain terms and conditions. Cingular’s deal with RCR was part of this exception.
Specifically, the agreement covered “existing product licensing relationships” and allowed “the sponsor” to remain as long as the sponsor stayed with the same car and did not improve its position on the car. It did not, however, identify a particular sponsor. NASCAR claimed that it told Cingular and RCR that “third-parties” would not be allowed to join the sponsorship by buying Cingular, a point which Cingular and RCR disputed.
In late 2006, AT&T merged with BellSouth. The result was that Cingular, which was a joint venture between the two before the merger, was rebranded as “AT&T Mobility LLC.” AT&T’s name and logo replaced Cingular’s in its worldwide wireless activities.
In preparation for the 2007 Cup season, AT&T Mobility exercised its right in the sponsorship agreement with RCR to determine the name and logo on the 31 car, and submitted a new paint scheme featuring the AT&T name and logo to NASCAR, which rejected it. NASCAR claimed that it (and not RCR nor AT&T) held the right under the rules to make paint scheme decisions and that it was precluded by the exclusivity agreement with Nextel from allowing the AT&T name and logo, noting the alleged conversations between NASCAR and RCR that “new third parties” would not be allowed to join the sponsorship. In sum, NASCAR told RCR and AT&T Mobility that the grandfather agreement did not allow a company name change. AT&T Mobility sued, seeking a preliminary injunction. AT&T sued seeking a preliminary injunction and damages [check]
The trial court, in an opinion by federal judge Marvin Shoob, [AT&T Mobility v. NASCAR, 487 F. Supp. 2d 1370 (D. Ga., 2007) granted the injunction, concluding that there was a likelihood of success on the merits. The decision centered on the grandfather clause — whether the rebranding into AT&T is within the rights conferred to the race car team under that agreement. Noting that AT&T Mobility was not a party to the contract, it was an intended third party beneficiary because: (1) an addendum specifically names plaintiff and allows for “Cingular branding” on the headsets/helmets; (2) the promisor NASCAR made a promise to the promisee RCR to preserve and protect plaintiff’s sponsorship agreement notwithstanding the exclusivity granted to Sprint; and (3) the Addendum provisions allow the “agreement” and “sponsorship relationship” to continue and to be renewed. The “agreement” is between both RCR and plaintiff, and therefore, the only way the parties to the RCR Agreement could protect RCR from a sudden loss of sponsorship was to also protect the sponsor.
AT&T argued, and the court agreed, that the interpretation of the grandfather clause was not limited to the Cingular name and logo, since it referred to “the sponsor.” Since just the name, not the sponsoring company changed, AT&T Mobility is within the purview and by not permitting the logo change, AT&T would lose brand value and would confuse the fans it wished to sell to. In so ruling, the court rejected NASCAR’s argument that the clause gave it more discretion.
Like Judge Shoob, I did not read the grandfather clauses as preventing a renaming and rebranding. In hindsight, NASCAR should have negotiated a more limited agreement with greater specifics. The fact that it only referred to a “sponsor” and not a particular company was a major factor.
The 11th Circuit did not see it this way. The panel, in a unanimous opinion by Judge Fay, reversed, on the ground that AT&T Mobility did not have standing to sue because it was not an intended third party beneficiary of the 2005 agreement or the addendum. Applying Georgia law (as agreed to by the parties), the panel ruled that although a third party beneficiary need not be specifically named in the contract, the parties’ intention (meaning NASCAR and RCR) to benefit the third party “must be evident from the face of the contract.” Utilizing a more a narrow interpretation than the trial court, the appeals panel stated: “The RCR Agreement clearly did not require RCR to renew its sponsorship with Cingular. In fact, under the RCR Agreement, RCR was free to seek the sponsorship of any company not included within the narrow universe of Sprint Nextel Competitors. . . The Addendum to the RCR Agreement was intended to protect RCR from the potential harm caused by a sudden loss of sponsorship due to Sprint Nextel’s exclusivity. Any benefit to Cingular (now AT&T Mobility) resulting from NASCAR’s commitment to grant RCR the option to continue and renew its sponsorship agreement was merely incidental to NASCAR’s intended purpose of preserving RCR’s choice of sponsorship.”
The court added, “we are unable to see how the parties could have intended these sponsorship guidelines to produce anything more than an incidental benefit to Cingular (now AT&T Mobility). Further, we are unable to conclude that in executing the RCR Agreement NASCAR promised to render any performance to Cingular. . . The mere fact that RCR has opted to exercise its right to retain Cingular as its sponsor does not convert that option into a “legally protected right” for Cingular or AT&T Mobility under NASCAR’s agreement with RCR.”
To my mind, Georgia’s law on third party beneficiaries does not vary much with other states, but even if it is more limited, I think that Judge Shoob’s reasoning is more compelling. There was an existing contract between the predecessor company of AT&T Mobility and RCR, there was a strong circumstance it would be extended and the grandfather clause was drafted with such a contract in mind. It was made to protect the existing deal that RCR had with Cingular. It was clear that Cingular knew about the grandfather agreement. Cingular and then AT&T Mobility relied on it in their rebranding. To interpret an “option” in such a manner, is to trivialize a sponsorship agreement between a top-level company and a well-known racing team.
At press time, AT&T has gone back to the district court to seek an injunction on the grounds of promissory estoppel and there is no word about any appeal of this phase of the case. Additionally, there is a $100 million counterclaim by NASCAR against AT&T Mobility, which still is scheduled to go to trial. And the AT&T logo is likely to come off Car #31.
In addition to being a good law school case on the scope of contract interpretation and third party beneficiaries, one other points stands out. RCR was not a party to the case. That fact may speak volumes about the power of NASCAR and the difficulties of any of the stock car race teams to take it on.
*Mark Conrad is Associate Professor, Legal and Ethical Studies, for the Schools of Business at Fordham University