By Warren Phelops, K&L Gates LLP
(This article was republished from the report Sports Sponsorship & the Law
With permission of the publisher (IMR Publications).For more information on how to obtain the report, visit www.imrpublications.com)
Introduction
A sponsor’s primary motivation behind sponsorship and endorsement deals is to associate its brand with a popular or successful personality, team or event to derive commercial benefit from that association. This can be particularly successful when the sponsor has backed a winner. However, particularly in the case of individual endorsements, the chance of bountiful rewards must be set against the high risk of non-performance of the individual both on and off the pitch.
When that happens, sponsors can be left in the rather embarrassing position of having to manage a crisis and sometimes distancing their brands as far as possible from the negative publicity. Whether they are successful in doing so can depend as much on their contractual rights, as on the skill of their PR team.
In recent years, we have seen a variety of stars hit the headlines for all the wrong reasons. Some, such as Tiger Woods and the former England captain John Terry have seen their private lives drip-fed to the public on the front pages of national newspapers. Others, such as Thierry Henry, have suffered not so much for their extra-curricular activities, but rather for a perceived lack of sportsmanship. Likewise, drugs scandals, recreational or otherwise, can make it difficult for a relationship to survive.
So in one sense a sponsorship contract could be viewed akin to a “pre-nuptial” agreement. At the start everyone knows that while the upside is potentially huge, deep down a relationship breakdown might happen in the future. During the honeymoon period at the start of the relationship such events and doomsday scenarios are not always at the forefront of the parties’ minds or something they wish to discuss. However, a bit of planning and preparation for the “what if” worst case scenarios could ultimately make the difference between handling such situations well, and a sense of panic in which hasty decisions are made and relationships fail.
Given the significant sums of money at stake, and the high visibility of any moral or other failings by the athletes or clubs involved, the majority of sponsorship contracts will include some provisions designed to protect the reputation at risk of the parties. So-called “morality clauses” generally provide that neither party will do anything which harms the other’s reputation, and often outlines what the consequences should be if they do.
Do your homework
When choosing which individual to sponsor, brand fit and cost will be high on the agenda. Part of this will involve a risk assessment of potential adverse publicity or poor performance.
This will include an understanding of the background and personality of the sponsor’s chosen personality or team. For an individual, this may extend to his or her close family, business associates and friends.
(Mis)behaviour
Having an overall understanding of the anticipated benefits, costs and risks of the sponsorship at the outset is imperative to ensure not only that a sponsor can enter the arrangement with its eyes open, but also that the contract reflects those expectations.
The relevant contractual provisions dealing with behavioural risks – so-called “morality” clauses – should cover:
• The types of behaviour that will damage the brand
• The persons associated with the individual whose behaviour could damage the brand
• That action must be taken when such behaviour by such persons materialises
• By whom it can be taken
(i) What behaviour is problematic?
Common behavioural issues in endorsement arrangements focus on first, sporting integrity – principally unsporting conduct, cheating, corruption and doping offences and second, ‘clean living’ of the individual, especially closely linked to a sponsor’s products.
Car manufacturers, for example, will be particularly embarrassed by an individual being banned from driving, alcohol sponsors with inappropriate drunken behaviour, and so on.
Likewise, the athlete, club or event should consider what they can reasonably agree to, what events may be beyond their control, and even whether there is any similar comfort that they require from the sponsor to protect his, her or its “brand”.
A recent example is the sponsorship campaigns by banks financially rescued by British taxpayers. The banks were criticised in the press for continuing with their sponsorship of events such as rugby’s Six Nations Championship, whilst being bailed out and, therefore, perceptively sponsoring at the taxpayers’ expense.
One key issue is determining when a morality clause is triggered. It can be easy to identify triggers which are clearly stated in the contract and which can be judged objectively, such as getting arrested or banned from competition. On the other hand, behaviour which might be considered to be morally dubious, yet not illegal, or which is alleged, but unproven can be a bit of a grey area. This is particularly so where the contract simply states that such behaviour must cause damage to reputation before it comes within the scope of the clause. This demonstrates the difficulty of non-specific wording, or leaving the determination of whether it is triggered to the opinion of a particular party or providing that the clause is triggered only where the reputational damage is material.
What if there are allegations, denied by the sponsored athlete, but which nevertheless keep them in the papers for the wrong reasons? Should the athlete be in a worse position for admitting to any indiscretions, rather than choosing to deny them? If so, this could actually give the player an extra incentive to deny the allegations, which may, in turn, have the opposite effect by creating even greater media interest.
At what point should allegations actually trigger penalties under the sponsorship contract? Even if allegations later turn out to be false, or the athlete is cleared in court, is it already the case that the damage to the reputation has been done? Is it fair that the athlete or sponsor suffers in these circumstances?
(ii) Who should be caught?
Regarding individual sponsorships, misbehaviour by the athlete, which might damage the sponsor’s brand will be caught, but should the restrictions extend to their family or others too? Many celebrities’ partners are often the subject of intense media coverage, so could easily embarrass a celebrity’s sponsor by being photographed using a rival brand. This occurred a while back when Jamie Oliver, the celebrity chef, who has an agreement with Sainsbury [a UK supermarket chain], found his wife photographed outside Waitrose [a rival supermarket chain], carrying Waitrose shopping bags.
Many top international stars choose to conduct their sponsorship and endorsement deals through personal service companies (usually for tax purposes) rather than in an individual capacity. Where this happens, it will be vitally important to ensure that the clause provides that the individual, not his or her personal service company, is covered by the morality provisions.
Where teams and events are concerned, the question of morality and reputation are more difficult to pin down. Poor team performance is not normally a reputation, but a value issue dealt with by bonuses or rebates.
However, exclusion from competitions, match fixing allegations, or similar high profile transgressions which affect the entire club do affect reputation. Of greater complexity is adverse publicity attaching to one or more members of a team or participants in an event. This is really a question of fact and degree.
Often when a player’s infidelity is reported at length in the press it is accompanied by a photograph of him or her in their team kit, with sponsor’s logo featuring prominently on it.
Any extension of morality clauses in a team sponsorship context to individual team members’ behaviour must properly reflect when the team, through the behaviour of its members, has brought the reputation of the sponsor into disrepute.
There are some reputation issues, which are not normally covered in a morality clause, but in other contractual provisions. For example, change of control provisions often enable either the sponsor or sponsored to extricate themselves from the arrangement if a new owner of the other party proves to be unacceptable. The interaction of a change of control and reputation or morality clauses can both deal with objectionable change of ownership at the outset and change of ownership, whilst not objectionable immediately, becoming so over time as the new owner’s plans and policies are implemented.
(iii) and (iv) What if a reputational risk materialises?
If the trigger events materialise, what enforcement mechanisms and consequences should follow? The possible remedies are generally as one versed in commercial contracts might expect. They include termination of the contract, damages payable to the terminating party, return of sponsorship fee and bonuses already paid, withholding or reduction of future payments, PR and media activation programmes, discussed below.
However, an alternative approach may be to structure the payment of fees and bonuses to incentivise and reward an athlete for good, rather than be penalised for bad behaviour with withholdings or rebates, should performance criteria not be met. This places more control in the hands of the sponsor, shifting the burden onto the athlete to demonstrate entitlement to payments.
When exercising remedy rights under the morality clause, care will need to be taken that rights in respect of a breach are not inadvertently waived. Should action not be taken quickly, or not taken in response to an earlier similar indiscretion, then it might be reasonable to assume such inaction results from the behaviour not affecting brand reputation or otherwise impacting on the non-defaulting party.
In any event, crisis and media management will be key, and sponsors will want a right to undertake a damage limitation exercise, which the sponsored should be obliged to co-operate with, even if ultimately the sponsor decides it is best not to exercise the right. It might be the influence of the sponsors, and even their reassurances about the future of the relationship, which brings about a quick and, possibly, pre-emptory response to the allegations.
Conclusion
In conclusion, there are a number of ways in which the fundamental issue of
morality and reputation risk can be addressed in sponsorship and endorsement contracts. The key is to understand and discuss the objectives and concerns at the outset, supported by due diligence. If the conclusions are reflected in carefully considered contractual provisions, then the parties will be clear as to the behaviour, which will damage the parties’ reputations and the consequences should it occur.
Warren Phelops is Head of the International Sports Law practice at K&L Gates LLP, London
