By Brian Yates, Associate, Jeffer, Mangels, Butler & Mitchell LLP
Celebrity endorsements are a multi-billion dollar industry and especially prominent in the world of sports. Apparel and equipment manufacturers spend hundreds of millions of dollars each year securing prized endorsements from top athletes. These deals vary greatly in size and scope depending on the prominence of the athlete, ranging from deals worth more than $100 million to smaller deals providing athletes with nothing more than free equipment. This article discusses some of the most common issues and pitfalls to keep in mind before, during and after entering into an endorsement relationship with an athlete or other celebrity.
1. Hope for the Best While Preparing for the Worst
A freshly-inked endorsement deal is like a new marriage. Everyone is smiling and the future looks bright for both the athlete and the company. Like marriages, many athlete endorsement deals lead to long, happy and mutually rewarding relationships for the parties involved. Unfortunately, that is not always the case. Athletes can succumb to injuries and ineffectiveness, dramatically reducing their value as endorsers. Athletes can also find themselves embroiled in scandals, from "on-field" issues such as the use of performance enhancing drugs, to tabloid material such as drunken melees in strip clubs. Recognizing and accounting for the risk of such events is a key part of valuing any endorsement deal. Some deals include termination provisions that can be triggered if the athlete is rendered unable to compete for a significant period of time for any reason. If that is not an option, the sponsor may also want to consider taking out insurance for injury, death, or even scandal.
2. Sign Up That Kid!
Another preliminary consideration is the athlete's age. It is the general rule in every state that a contract entered into with a minor under 18 years of age may be voided at the minor's option at any time up to and including the minor's 18th birthday. In other words, an equipment manufacturer who signs up a 15 year-old phenom to a $5 million endorsement deal will be legally bound by the agreement, but the athlete can simply rip up the contract and walk away six months later if a better offer comes along. A handful of states, including California, New York and Florida, have enacted statutes allowing companies entering into contracts with athletes or entertainers under 18 years old to get those agreements approved and confirmed by a court and made binding. The exact provisions of those laws vary by state and depend on the location of the sponsor and the athlete. Judges have also been known to impose their own requirements to secure approval in some cases.
3. The "Morals" Clause
With the rise of the 24-hour news cycle and tabloid websites such as TMZ, the risk of bad behavior being spotted and broadcast for the world to see is greater than ever. Further complicating matters is the fact that offenses that may seem minor for some athletes are major scandals for others, depending on the sport, public persona and visibility of the athlete. To allow the sponsor flexibility to react to unexpected situations and protect its investment, every endorsement deal should contain a "morals" clause. The exact terms of these clauses vary, but in general they provide the sponsor with the option of suspending or terminating the endorsement agreement if the athlete engages in any conduct affecting the image or goodwill of the athlete or sponsor.
4. The Devil is in the Details
As lawyers, it is our job to sweat the small stuff, and that is no different in athlete endorsement deals. Be as specific as possible in laying out the respective duties of the athlete and the sponsor. If the athlete is expected to use the sponsor's products or wear the sponsor's logo, specify when and how the products must be used or the logo displayed, including the size and placement of the logo. If the athlete will be making personal appearances, specify the number of appearances, the time commitment required, any geographic restrictions and travel details. Clearly defining the athlete's responsibilities is crucial to avoid future disagreements and protect the sponsor's rights to terminate the agreement if the relationship goes south for any reason. As a general rule of thumb, the agreement should contain the who, what, when, where, why and how of each obligation.
5. Be Wary of Competing Endorsements
The more popular the athlete, the more likely he or she is in demand for endorsement deals with other companies. Anticipating potential conflicts before they arise can save everyone involved a lot of grief. If the athlete has pre-existing sponsorship deals with other companies that will continue beyond the effective date of the new agreement, specify those deals in the agreement. The endorsement agreement should also specifically prohibit the athlete from entering into sponsorship agreements with direct competitors during the term of the agreement, and if possible the athlete should agree to seek the sponsor's approval before entering into any other endorsement deal.
6. Protect Your Intellectual Property Rights
Sponsors should also seek to protect ownership rights in their intellectual property. A well-crafted endorsement deal should contain not only the basic recital that the sponsor retains ownership of all trademarks and related rights, including those that may evolve from the relationship with the athlete, but should also go a step further and address potential copyright issues before they arise. Some athletes may contribute to the creative process, whether putting together traditional television, print and radio advertisements or creating promotional videos for websites such as YouTube. The sponsor's endorsement deal should ensure that all such content is owned by the sponsor by stating that the athlete's contributions are deemed to be either a "work made for hire" under the Copyright Act or assigned to the sponsor in perpetuity.
7. Be Aware of Spillover From Athlete-Agent Disputes
Another issue to anticipate and deal with in the endorsement agreement is the potential breakdown of the relationship between the athlete and his or her agent. When athletes fire their agents (or vice-versa), issues often arise related to paying commissions due on agreements with teams and sponsors. To minimize the impact of such issues on the sponsor, the athlete agreement should contain language specifying where payments and notices are to be sent, and who must consent to any change in addresses and payees. Recognizing and acknowledging the potential for such issues up front can help sponsors avoid being caught in the middle of a messy athlete-agent breakup later.
8. Sports Can Be Dangerous
Virtually all sports present some risk of injury to the athlete. The potential impact of an injury on the sponsor is two-fold. First, a serious injury may impair the athlete's ability to perform at the expected level and in the process negatively impact the value of the athlete's endorsement, an issue discussed in more detail above. Second, if the athlete is performing a risky activity pursuant to the terms of a sponsorship agreement, the sponsor may be exposed to liability for injuries the athlete suffers if the endorsement deal does not contain the proper disclaimers. To protect the sponsor from liability for an athlete's injury, an endorsement agreement should contain language specifying that the athlete understands the risk of performing or competing and absolves the sponsor from liability for any injury sustained as a result of the athlete's decision to compete.
9. Breaking Up Is Hard to Do
Perhaps no provision of the athlete endorsement agreement is more important than the termination provision. A well-drafted termination provision provides both the athlete and the sponsor with as much certainty as possible regarding the circumstances under which the agreement may be terminated, whether due to non-renewal or breach. Key points to keep in mind include notice requirements (either for extensions/options or breach); opportunity to cure (including any breaches which will be deemed incurable); what happens in case of the sponsor's insolvency; what happens if the athlete is injured, suspended, or caught up in scandal either on or off the field which damages the value of the brand; and what happens to payment obligations after either side gives notice of termination.
10. Laches and Estoppel Are Not Just For Law School Exams
If an endorsement agreement is terminated for cause, be aware that the old law school doctrines of laches and estoppel may come into play. A sponsor who has looked the other way for years while an athlete fails to comply with his or her obligations to display the sponsor's logo, make public appearances or compete in required events may not be able to do a sudden about-face and cite such breaches as grounds for termination, regardless of what the agreement provides. Sponsors should be aware of this issue throughout the term of the endorsement relationship, and be vigilant about identifying potential breaches and working with the athlete to correct them. While this should be done with sensitivity to the sponsor's relationship with the athlete, it is an important step in preserving the sponsors rights should the need to terminate the agreement arise.