Negotiating Olympic Sponsorship Agreements with the IOC and USOC: An Exercise in Early Negotiations and Coordination among Business Units
By Maurice M. Suh and Jennifer Cohen, of Gibson, Dunn & Crutcher LLP
A company’s decision to sponsor the Olympics cannot be separated from its decision to enter or maintain its presence on the international public stage. Sponsorship of the Olympics gives a sponsor exposure to different regions and markets. None of this comes cheap. While the cost of acquiring Olympic sponsorship rights continues to grow, new ambush marketing strategies, the prevalence of social media and emerging technologies, and the recent relaxation of Rule 40 by the IOC has made it increasingly difficult for sponsors to protect their Olympic sponsorship rights from competitors. Furthermore, the high cost of Olympic sponsorship rights means a dispute related to a sponsorship agreement could have major economic consequences for a sponsor that has invested millions of dollars to not only acquire the sponsorship rights, but also to implement an Olympic marketing strategy to take advantage of those rights. This article discusses important items for sponsors to consider when negotiating sponsorship agreements with the International Olympic Committee (the “IOC”), the U.S. Olympic Committee (the “USOC”), or other governing bodies in connection with the Olympic games.
Both the Legal and Business Teams Are Critical to the Negotiation
While negotiating a sponsorship arrangement with the IOC, it is important to thoroughly negotiate the preliminary term sheet, often referred to as the Basic Terms Agreement (“BTA”). The BTA sets forth a basic set of agreements the IOC and sponsor agree to incorporate into a comprehensive definitive agreement. The BTA may be supplemented by a joinder agreement with the USOC if the sponsor is also acquiring Olympic sponsorship rights in the United States. By failing to include the parties’ basic understanding of a term in the BTA, the sponsor may find it difficult to negotiate that term into the definitive agreement at a later point. Similarly, including unfavorable terms in the BTA can make it difficult for a sponsor to obtain a more favorable position in the definitive agreement. Therefore, it’s essential that both the business and legal teams are consulted in connection with the negotiation of the BTA, and that all critical issues are considered for inclusion in the BTA.
The reason for this concern is driven by the cycle of the Olympic sponsorships. Olympic sponsorships are on an eight-year, or quadrennial, cycle — including two summer games and two winter games. In many instances, before a sponsorship expires at the end of a quad, new sponsors are approached to sponsor the next quad. This approach, while often impacted by clauses that permit existing sponsors a right of first refusal, results in new sponsors entering into preliminary and sometimes rushed negotiations that result in the BTA.
Specifically, the involvement of the marketing team that has responsibility for developing and implementing the sponsor’s Olympic marketing strategy is necessary to ensure the BTA, and later, the definitive agreement, cover the sponsorship rights sufficient to permit the marketing team to carry out that strategy. The business team also plays an important role in defining the scope of the product category, which is the set of products or services for which the sponsor is granted exclusive marketing rights by the IOC.
In addition to the business team, the legal team plays an important role in negotiating the BTA by ensuring that the sponsorship rights are adequately protected. For example, although a sponsor may be granted product category exclusivity, the BTA should also set forth a basic agreement between the parties as to the IOC’s obligations to enforce such exclusivity. As ambush marketing continues to grow, without any obligations on behalf of the IOC to protect against ambush marketing, such product category exclusivity loses its value.
Similarly, an initial draft of the BTA may not include, and the business teams might not be concerned with, questions such as: under what circumstances will the parties indemnify each other for losses related to the agreement; does the sponsor have an option to renew the sponsorship arrangement for subsequent quadrennial, and if so, on what terms; in the event of a disagreement, will the parties be entitled to injunctive relief; what rights are each party granting to the other with respect to intellectual property and how must that intellectual property be protected. Having a lawyer at the table when negotiating the BTA can encourage discussion around these points at an early stage. This will provide the sponsor with more bargaining power during the definitive agreement negotiation, rather than introducing these items as new concepts at that time.
An Olympic Sponsorship Agreement Does Not Guarantee Rights to Special Properties or in All Jurisdictions
With current sponsors of the IOC’s The Olympic Partner (“TOP”) program reportedly paying upwards of $200 million per quadrennial for worldwide Olympic sponsorship rights, sponsors are often surprised to learn that the sponsorship consideration does not guarantee the sponsor’s right to be associated with all Olympic-related events. For example, a sponsorship arrangement might include the right to use the Olympic marks for general corporate advertising purposes of the sponsor, but won’t necessarily grant the sponsor rights to specific Olympic-related events. Rather, the sponsorship of certain events or properties (referred to here as “special properties”) controlled by the IOC and/or USOC may require additional compensation. For example, sponsorship rights in connection with the pre-games torch relay or other pre-game events (such as athlete hometown pep rallies in the United States) may require additional consideration. Furthermore, rights to special properties may have a limited number of sponsorship opportunities, which may have already been promised to other sponsors. Therefore, Olympic sponsors should consider requesting rights to critical special properties controlled by the IOC and/or USOC early on in the negotiations.
Even if a sponsor declines to activate sponsorships for additional special properties, the sponsor may consider attempting to limit the IOC’s and/or USOC’s ability to sell those rights to a competitor. An understanding with the IOC and/or USOC regarding the special properties that are most important for the sponsor’s anticipated marketing strategy during the BTA negotiations will ensure the most crucial special properties are acquired. Leaving this discussion until the definitive agreement negotiations may weaken a sponsor’s bargaining power, or delay the discussion until it’s too late and the rights have already been granted to a third party. An up-front discussion around the expectation regarding special properties will also allow the sponsor to adequately budget for additional costs.
One other consideration to note is that the IOC cannot guarantee certain rights until such rights have been secured from the National Olympic Committees (“NOCs”), the organizations responsible for organizing participation in the Olympics by the various constituent countries. As a result, a sponsorship arrangement with the IOC will be subject to the IOC’s ability to obtain rights from the NOCs. If an NOC has a conflicting sponsorship obligation or declines to grant certain rights to the IOC for sale to sponsors, the sponsorship agreement will exempt the IOC from providing those rights to the sponsor, leading for the potential for competitive sponsors to advertise using the Olympic marks in certain countries. Sponsors may negotiate some level of reasonable or commercial minimum standard for the IOC to obtain all applicable rights from the NOC, but they cannot be outright guaranteed.
Consider Future Marketing Plans, Including Products and Services in Development
Sponsorships with the IOC and USOC are generally negotiated for each quadrennial period, and some sponsors enter into agreements that stretch over multiple quadrennium, typically renewing and/or renegotiating that agreement every eight years. Due to the potential long-term nature of an Olympic sponsorship agreements, the agreement should be negotiated while keeping in mind that the business may adjust its product or service offerings, and therefore, its marketing strategy may change over time. For example, the research and development team may be consulted in defining the scope of the product category to ensure products or services in development are covered by the language defining the exclusive category. When future plans are unknown or difficult to ascertain at the time of negotiations, sponsors could benefit by building flexibility into the language in the agreement.
If a sponsor intends upon entering into a long-term sponsorship agreement, that sponsor should recognize that key terms that are important to the sponsor should be negotiated in the first instance. Often, it is difficult to change the “playing field” of the sponsorship agreement once an agreement for an initial quadrennial period is struck.
Sponsorship agreements should also include flexible terms to account for changing conditions throughout the term of the agreement. For example, rather than locking itself into a longer-term agreement, the sponsor may negotiate some period of exclusivity to negotiate a renewal of the sponsorship agreement before the IOC and/or USOC can engage in negotiations with a competitor of the sponsor for future quadrennials. Another consideration is under what circumstances the sponsor and/or Olympic organization can terminate the agreement. If the Olympic organization is involved in scandal, such as the recent findings of sexual misconduct by USA Gymnastics doctor Larry Nasser, following which sponsors of USA Gymnastics were quick to distance themselves from the organization, the sponsor may no longer want to be associated with the governing body. A “morals” clause can help protect the sponsor against these types of situations, by permitting the sponsor to sue for breach or terminate the agreement in the event of some negative circumstance or publicity that tarnishes the reputation of the sponsor. However, morals clauses are typically reciprocal, and thus, the sponsor should be prepared to agree to a reciprocal clause in the event one is requested from the Olympic organization in its favor.
Coordinate Sponsorship with Other Sports-Related Governing Bodies
Sponsors should consider whether to coordinate negotiations of an IOC and/or USOC sponsorship with similar sponsorships with the International Paralympic Committee or National Governing Bodies. In particular, the negotiations should ideally occur concurrently so that the sponsor can ensure complimentary rights are obtained from each party. Note that each governing body has a different set of standards, third-party sponsors, and customs it uses to negotiate sponsorship agreements and therefore it may not be feasible to acquire parallel rights in each agreement. For example, the United States National Governing Bodies (“NGBs”) are free to enter into their own sponsorship arrangements, and may have already granted certain sponsorship rights to a sponsor’s competitor. The NGBs are not necessarily coordinating their negotiations with the USOC, so the sponsor should clearly communicate with the NGB to ensure they understand the sponsor’s objectives, rather than relying on the existing relationship with the USOC to do so. Furthermore, if the sponsorship rights differ among the agreements, the legal team should work closely with the business team to ensure the differences are understood, and still permit an efficient and effective roll-out of the sponsor’s Olympics marketing strategy.
Protecting Against the Unexpected
Given the recent allegations of corruption in connection with Olympic host cities and the potential for political and economic affairs to influence the media’s coverage of the Olympics, sponsors should consider how to minimize such risks to the extent they could impact the marketing value of the Olympics.
Leading up to and following the 2016 Summer Olympics in Brazil, allegations of corruption in connection with preparations for the Olympics were widespread, including alleged schemes to bribe voters into granting the Olympics to Rio, and claims that disadvantaged families were subjected to forced evictions in order to make way for Olympic-related development projects granted to private real estate companies with ties to government officials. Such alleged corruption may distract media attention to the political and/or economic strife or other scandals facing host countries, rather than the magnificence and stature of the Olympics that sponsors aim to associate with their brand. Other scandals, such as the government-funded Russian doping scheme leading up to the 2016 Rio Summer Olympics, can cast a negative light on the sponsor.
Similarly, the risk of boycotts, while unlikely, is not unheard of. President Jimmy Carter famously led a boycott of the Moscow Summer Olympics in 1980, which was later reciprocated by the Soviet Union’s boycott of the 1984 Summer Olympics in Los Angeles. These are not the only instances of nations calling for, or following through with a boycott of the Olympics. Most recently, human rights activists called for boycotts of the Olympic games in Sochi due to Russia’s treatment of gay, lesbian, bisexual and transgender individuals.
While some of these risks are inherent to sponsorship of events involving political and economic influence, steps may be taken in the sponsorship agreement to mitigate such risks. For example, providing a process for determining what happens in the event the Olympics are cancelled or partially disrupted (whether due to acts of terrorism, protests, safety concerns, boycotts, or other unexpected events) can provide some form of certainty as to the potential risk of these events. In order to do so, the Olympic sponsorship agreement should specify under what circumstances the sponsor will be entitled to a refund or reduction in royalties. The parties could also mandate a certain process for negotiating a reduction in royalties based on principles of equity or good-faith cooperation, rather than a set value in the agreement.
As mentioned previously, the sponsorship agreement may also contain a “morals” clause, giving the sponsor a right to claim a material breach or other remedies in the event the IOC or USOC becomes involved in a scandal that could tarnish the reputation of the sponsor. Outlining a process for addressing these potential interruptions or circumstances can provide a sponsor with some level or recourse or certainty that would otherwise be unavailable if left unaddressed.
Summary
A TOP Olympic sponsorship agreement can provide unprecedented exposure on a global scale. This level of exposure and commercial goodwill comes at a significant price. Numerous steps need to be taken to preserve this significant capital expenditure, and to ensure that the sponsor receives the benefit of the bargain equal to the dedicated commitment that it makes.
