By Jay Fee and Raul Valero, of Nelson Mullins Riley & Scarborough LLP
Coronavirus or COVID-19 has become a household name. In COVID-19’s wake, the world is scrambling to deal with the outbreak on multiple fronts. Here in the United States, we are living under a national emergency as designated by the president, and multiple cities and states have also declared a state of emergency. As of the date and time of this writing, there have been over 400,000 reported cases around the world and over 60,000 reported cases in the United States.
COVID-19 presents serious health risks to our communities and has affected our schools, businesses, travel, and our recreational and entertainment pursuits. Federal and state governments and the healthcare community all agree that efforts to aggressively stem the spread of COVID-19 must include measures to ensure social distancing. The sports and entertainment industries have obliged. For example, in the United States, (i) the NBA suspended the regular season indefinitely; (ii) the NCAA canceled the annual Division I men’s and women’s basketball tournaments; (iii) the MLB canceled the reminder of spring training and pushed back the start of the regular season at least 2 weeks, (iv) the NHL season has been suspended; (v) the PGA canceled the remainder of the Players Championship and the following three weeks of competition and (vi) Augusta National has postponed the 2020 Masters.
As all the leagues and teams fully understand, these difficult choices impact not only their fans and players but also a vitally important revenue stream and valuable partnerships with their sponsors. For several sponsors, these sporting events and related sponsorships often contribute significantly to a company’s brand building strategy and overall marketing strategy. Once games and events are cancelled or postponed, a sponsor’s ability to execute carefully planned marketing and branding strategies is diminished. The benefits expected for paying significant six, seven and eight-figure sponsorship fees are placed in jeopardy. As a result, the Nelson Mullins Sports Law Group has received a number of inquiries from sponsors seeking advice and counsel relating to the effects of COVID-19 and attendant circumstances upon their sponsorship or naming rights agreements.
Force Majeure
Force Majeure clauses are very common in commercial agreements. Force Majeure means any objective circumstance that is unforeseeable, insurmountable, and unavoidable. A Force Majeure clause is a contract provision that under certain conditions, excuses a party’s performance due to circumstances beyond that party’s control. In short, this clause is raised as a defense to excuse a party’s obligation to perform.
Is the Coronavirus Covered under our Force Majeure Provision?
Answering this question depends on a case by case analysis. Using New York law as an example, the New York courts have held that, ordinarily, Force Majeure clauses must contemplate the specific event that is identified by one or both parties as having prevented performance. As a result, some Force Majeure clauses may be narrowly construed by the courts. However, that is typically not the end of the analysis. Some Force Majeure clauses may have expansive catch-all phrases that can arguably include an event such as COVID-19. It is worth noting that some courts have not given the most expansive meaning possible to these catch-all phrases, instead interpreting these provisions to include only the events that are the same general kind as those specifically mentioned within the Force Majeure provision. Each Force Majeure clause needs to be analyzed independently, together with the facts of each case (e.g., under what authority were games cancelled or postponed) and the law which governs the agreement.
Other Contractual Provisions
Sports events are being cancelled, postponed and rescheduled almost on a daily basis. Sponsorship agreements are often characterized by both parties as “partnerships” which establish valuable, long-term commercial relationships. It is not uncommon for both parties to seek to preserve these relationships during challenging times. Certainly, mutually agreed upon commercial solutions are usually preferred over litigation or arbitrations.
While Force Majeure provisions, given factual circumstances and applicable law, may offer sponsors limited protection, other contractual provisions such as “Games Not Played”, “Unavailable Benefits” and “Alternative Dispute Resolution” can provide sponsors with additional protection and options while preserving the commercial relationship between the parties. For example, an Unavailable Benefits provision typically addresses circumstances where particular sponsorship benefits are no longer available to a sponsor due to circumstances beyond the control of either party. These provisions usually obligate the parties to mutually agree upon substitute or replacement sponsorship benefits which are of substantially equivalent or greater value. Games Not Played contract provisions usually contemplate reasons why a full schedule of games is not played. In such case, the parties may agree to apply a pro-rata reduction formula to sponsorship fees payable under an agreement.
Conclusion
As COVID-19 continues to impact the sports world and as leagues work to establish contingency plans, we recommend sponsors seek advice of counsel as soon as practical in order to assess and understand all contractual rights and options. Informed discussions should be promptly pursued by sponsors to protect their interests under sponsorship agreements with professional sports leagues, teams and venues.
