By Alexander Chester, of Duane Morris
The dramatic collapse last fall of the cryptocurrency exchange FTX will also affect those teams, arenas and other sports companies that have naming rights and sponsorship agreements with FTX.
When a sponsorship partner undergoes a dramatic collapse like that suffered by FTX last week, sports teams that have partnered with the company for naming rights and other sponsorship agreements suffer losses on multiple fronts. First, of course, is the loss of the contractually guaranteed income that the team has taken for granted when budgeting for years to come. But beyond that is the reputational harm. Sports is about winning and losing, and no team wants to be associated with a loser.
When the energy company Enron collapsed in 2001, fewer than three years into a 30-year naming rights agreement with the Houston Astros for their home ballpark, the team had to negotiate with the bankrupt company to buy back the naming rights. This was adding insult to injury, as the Astros actually had to pay Enron just to disassociate themselves from Enron.
When we negotiate sponsorship agreements for teams today, we make sure to include a clause granting the team the right to terminate the agreement at any time in the event that the sponsor — in the team’s sole good faith discretion – “becomes involved in any controversy or scandal that has or may have a negative effect on the business, reputation or the public’s perception of” of the team or the associated league. In fact, today most of the major leagues will not grant their required approval to a team’s sponsorship agreement without such a clause. The Astros/Enron case is illustrative; a team should never have to buy back its sponsorship rights from a disreputable sponsorship partner.
But beyond protecting itself in its negotiated agreement with the sponsor, teams also have to be careful about who they choose as partners in the first place. Stadium/arena naming rights agreements tend to have terms of 20 years or longer. When choosing a partner that will last a generation, teams must not simply go with the highest bidder, but carefully consider the brand’s (and the industry’s) reputation and history, and the likelihood that the company will continue to be one with whom the team wants to be identified when the team’s present ownership has passed to the next generation.