By Irwin A. Kishner, Esq., Matthew D. Pace, Esq., and Rick Torres, Esq.
The 2010-11 National Football League season concluded with a down-to-the-wire nail-biter between the Packers and Steelers that was of huge interest to millions of football fans nationwide, the league, its other teams and their players, and the league’s television, licensing and sponsorship partners.
Now, another down-to-the-wire nail-biter is underway — this one between the league and the National Football League Players Association (NFLPA), as the Collective Bargaining Agreement (CBA) expires March 3. The outcome of this negotiation is of huge interest to all the league’s stakeholders, including its corporate sponsors, broadcast partners and licensees. Who will win the struggle, and what forms that win might take, are unclear. What is clear is that labor unrest in professional sports creates issues for the sponsors, television partners and licensees, and that a work stoppage presents these stakeholders with a host of issues that require taking steps to plan and protect their interests.
At this writing, it is impossible to predict whether the players will strike, the owners will lock them out, or the two sides will agree on a new CBA in time for the 2011-12 season to be played as scheduled. If history, current public posturing and apparent level of acrimony are any guides, there is certainly a chance that this labor unrest will result in a delayed, interrupted or canceled season. The players struck for two months in 1982, with no games being played during that time, and again for a month in 1987, when the owners assembled teams of replacement players.
The primary area of controversy then, as now, is the percentage of revenues that flows to each side. The players currently receive nearly 60 percent of the league’s revenue and want to maintain the status quo, while also agitating for more transparency and complete disclosure of the franchises’ revenue and profit statements. The owners, meanwhile, claim the current revenue-sharing model is unsustainable and want to slash the percentage by between 15 and 20 percent. Exacerbating matters, these negotiations come against the backdrop of a generally soft economy, decreasing sponsorship revenues and increased costs. The NFLPA, however, points out that despite all the economic woes, the NFL seems to be growing in popularity and revenue and that a cut for the players is not justified.
So sponsors, television partners and licensees would be wise to hope for the best but assume the worst, that the owners and players will not be able to hash out their differences quickly enough for next season to start on time. Consider that:
* Sponsors have the unenviable task of deciding whether to invest and risk significant money to prepare creative and collateral marketing materials, advertisements and broadcast commercials in the usual time frame — six to nine months before launching them — or not prepare them and then be caught short if the season goes as scheduled. In other words, they must weigh whether it would be worse to lose out-of-pocket development dollars or lose opportunity. Those that have paid for naming rights or stadium signage may have paid good money to attach their names or corporate logos to stadiums that might sit empty next fall.
* In the aggregate, television partners have paid the NFL $4 billion for the rights to televise next season’s games, even if there are none. With Nielsen ratings in the teens and 20s, the NFL’s weekly viewership numbers consistently dwarf most those of other programming — professional sports and otherwise. That makes eyeball-hungry networks willing to assume the risk of a schedule stoppage because the broadcast rights — and resulting advertising revenue — are so valuable. Trying to slash a hole in the league’s safety net, the union sought to force the league to put that money into escrow — rather than have it in a war chest, to be distributed among franchises to help them meet expenses and debt service — in an attempt to weaken the league’s bargaining position. A court-appointed special master denied the request, however, giving the league access to the television money. The union may take an appeal to federal court.
* Licensees pay advances against royalties — large sums of money that may be at risk if there are no games and sales of licensed merchandise drop sharply. They use players’ names, likenesses and jersey numbers to sell their goods, and just like sponsors, licensees need significant lead time to manufacture and distribute the merchandise. A lockout would suspend trading and other player movement, so it would be risky for licensees to bank heavily on the presence of a certain player on a certain team.
What remedies, if any, are available to sponsors and licensees in the event of a work stoppage? Do they assume all the risk of playing the high-stakes game of doing business with the country’s most powerful professional sports league? Are they entitled to make-good payments or discounts if the games are not played as scheduled? Might they be successful in negotiating that issue with the league? The umbrella question is: How should sponsors and licensees proceed?
Clearly, they should monitor the progress of negotiations between the owners and the players’ association. They should take a hard, objective look at the importance of their sponsorships, naming rights deals and merchandising models, and engage in risk-reward calculations before deciding whether to proceed or pull back. They should review the contracts that govern their business dealings with the league, franchises or players’ union. They should approach the league to negotiate make-good agreements, keeping in mind that the rights-holder is by far the wealthiest and most popular of all professional sports leagues in the United States, and therefore is likely to negotiate from a position of strength and leverage, if at all.
At least as important is choosing legal counsel wisely. It is imperative, but hardly enough, for their attorneys to be sophisticated negotiators and litigators, or skilled at reading and interpreting contract language, including the ubiquitous force majeure clauses. They should insist that their attorneys be as adept at advising them on business issues as they are on pure legal issues — product and development deadlines and an understanding of the business model are at least as important as the ability to read and interpret contract language and develop damage models if litigation becomes necessary. Whatever successes licensees and sponsors achieve will come from the intersection of the law and business. In business, a pyrrhic victory — a pure legal win, but a pecuniary loss — is no victory at all.
Irwin A. Kishner is chair of the Sports and Entertainment Practice Group and the Corporate Department at New York-based Herrick, Feinstein LLP. Matthew D. Pace and Rick Torres are members of the practice group and the department.
