Negotiating sponsorship deals using the moral high ground
Published 07 March 2013 By: Christopher Evans
What should sponsors do when a sports icon is hit by a scandal? Chris Evans explores how a sponsor of a team or a competition in such a circumstance can protect its investment.
Individuals who become sporting icons will of course benefit from the increased commercial opportunities to exploit their name and image. The sport, competitions and teams in which that individual has had their success will also benefit, through increased spectators and other commercial revenue. But what happens when that same individual, or group of individuals, is hit by a scandal – and how can a sponsor of a team or a competition protect its investment?
Many brands focus their sponsorship activity on a particular sport, such as Carling’s long standing association with football teams and competitions. Creating a strong association with a popular and successful sport, competition or team can be extremely valuable. On the flipside, a lack of diversity in a brand’s sponsorship portfolio can arguably lead to over-reliance on the success of a particular sport, competition or team, and that association can be both embarrassing and costly where the morality of the sponsored sport, or of a particular team or competition, is called into question. For example, Rabobank recently withdrew its cycling sponsorship deals after 17 years of heavy investment, citing a lack of confidence in the cleanliness and fairness of the sport.
Just like with an individual athlete, a whole sport, its competitions and/or teams are also susceptible to scandal, and sponsors will know that the usual maxim of ‘all publicity is good publicity’ does not stand true when their corporate branding is inextricably linked to a scandalised subject matter. Many major sports have been dominated by particular individuals in their prime – Tiger Woods was once almost synonymous with golf, and Lance Armstrong was the face of cycling for many years. Lionel Messi has dominated European and world football for a prolonged period and Usain Bolt remains the main draw at athletics events around the world. Such individuals have such a hold over their sports that a scandal involving even a key individual can have repercussions for the sport generally, not to mention the narrower categories of a competition or a team in which the individual plays.
It is fair to say that scandals, in various guises, have rocked the sporting world in recent years. Cycling is the most obvious example of a sport which has been afflicted by doping, but other sports are by no means immune. In the wake of the Renault Formula 1 crash controversy at the Singapore Grand Prix in 2008, ING and Mutua Madrileña (Renault’s major sponsors) ended their sponsorship deals with the team within a week of the FIA’s decision to charge Renault. More recently, Australian sport has been (and will continue to be) the subject of intense scrutiny as a result of the Australian Crime Commission’s damning report of widespread doping. As a result, Telstra is reported to be considering its future as the lead sponsor of the National Rugby League. Allegations of extensive match fixing in European football have also been published, calling into question the integrity of the world’s most popular sport, and examining the grip that organised crime has over those who play it. Operation Puerto, the Spanish police investigation into the operation of a major doping network run by Dr Fuentes, has also invited intense speculation over the use of doping in other sports, despite these currently being unproven.
So, what about those sponsors who wish to associate their brand with a sport, or a particular competition, or a particular team? Many would say that this is the nature of the beast – a sponsor must live with the rise and fall of a sport, much as an investor would do with his share portfolio. However, there are sensible precautions that a sponsor can take, or seek to take, before investing.
In individual sponsorship agreements, sponsors of athletes might protect themselves against the serious sporting offences of doping and match-fixing, and well advised sponsors will go further and protect against moral issues such as infidelity, alcoholism, gambling and other behaviour that does not reflect their brand values. But such mechanisms are not ordinarily seen in team, event or sport sponsorship agreements – perhaps for the obvious reason that the wider the sponsorship net is thrown, the less control can be exerted over all of those who are affected by that sponsorship. Unlike the sponsorship of an individual athlete, a sponsor cannot expect to exert the same degree of control over the behaviour of all of those involved in a sport or, more narrowly, a particular competition. However, a sponsor may (reasonably?) expect that a team will be able to control, or at least take responsibility for the behaviour of, those who manage, coach and play for it.
In light of recent events (and, indeed, rumours), the landscape is changing and we are increasingly seeing pressure placed on rights holders to assume responsibility for a wider category of individuals. With that in mind, what mechanisms can a sponsor employ to protect its investment in a sport, team or competition should a major scandal erupt? Indeed, to what extent (if any) can a sponsor protect itself against unproven rumours that circulate from time to time – which with today’s media, can prove almost as damaging as reported fact.
The first, and perhaps most obvious, protection is for the sponsor to undertake proper due diligence on the relevant sport, competition or team, to satisfy itself that the relevant potential sponsorship deal will not see it getting into bed with a disreputable counterparty. In other words, the sponsor should dig as deeply as possible to uncover as much information as it can so as to avoid associating itself with anybody who is likely to bring the sponsor’s name into disrepute. The level of risk should then, at the very least, be taken into account when negotiating or re-visiting commercial terms.
The shortcomings of the due diligence process will be that it will simply not be practical, or indeed possible, to gather all information that a party may want access to. This is particularly true for long term sponsorship deals. Even looking just one or two years into the future, a party seeking sponsorship will be unlikely to know which individuals will be key to the success of a particular sport, event or team, and will be less likely still if asked to look further into the future.
Once due diligence has been undertaken and a sponsor is satisfied that the endorsement of a particular team, league or event is low risk (or, indeed, worth the risk), what contractual protection can the sponsor look to include in its agreement with the relevant rights holder?
Representations and warranties
Representations and warranties from the team, league or competition that it has disclosed all incidents that it is aware of that would bring it or the wider sport into disrepute. The intention behind such representations and warranties is not only to give the sponsor a remedy if they prove to be inaccurate or untrue, but also to encourage any such matters to be disclosed up front so that the sponsor goes into the relationship with its eyes fully open.
Specific provisions dealing with the effect of doping violations, criminal offences etc. either by relevant individuals or on a more systemic level. There are various degrees of behaviour to consider here – for example, it would be difficult to argue that a top Premier League star found being found guilty of even a serious crime ought to justify a sponsor being able to invoke rights under any of the Premier League’s sponsorship deals, but that same act may allow sponsors to exercise certain rights under the player’s club’s sponsorship deals (and would almost certainly allow the personal sponsors of the player to exercise rights). And what if an entire team in the Premier League was found guilty of doping violations? What if social media becomes awash with rumours of widespread match-fixing, but no charges are brought? Clearly, there is no right or wrong answer to how these questions will be dealt with contractually, and what rights they may give rise to, but history would suggest that they are worthy of consideration.
A catch all “morality” clause may even be relevant. The basic contract law premise of certainty of terms provides that vague or ambiguous terms will not be enforceable – expressions such as “bad” or “immoral” behaviour or, even worse, “moral turpitude” should be avoided. And, of course, one person’s view of morality will almost certainly differ from another’s, particularly in the global market in which sport and sponsors increasingly operate. A sponsor will therefore want to ensure that the morality clause is (i) enforceable and (ii) effective in all instances in which the sponsor considers its reputation to have been damaged by the relevant behaviour. As with provisions dealing with doping violations and criminal offences, various examples demonstrate the difficulties of such a clause. Should the sponsors of a football team have any rights if the team’s manager is found to be having an extra-marital affair? What if a number of players on the same team are found to have serious gambling addictions, or have visited prostitutes? Given the difficulties associated with these questions, a sponsor will often wish to avoid extensive lists of what it deems to be immoral behaviour, and instead tie a morality clause to whether the commercial value of the team has been substantially reduced by the acts or omissions of a named list of parties, applied using a mixed subjective and objective test e.g. “in the reasonable opinion of the Sponsor”. The extent to which this is acceptable to the party being sponsored will depend, to some extent, on the degree of control that it can exert over the relevant individuals.
Turning to remedies, morality clauses must be both precise and comprehensive and must provide a sponsor with flexibility when it comes to how they wish to deal with incidents. Many high profile individuals who have been at the centre of a scandal have had some sponsors stick by them, whilst others have chosen to rely on rights to extricate themselves from the sponsor relationship. To preserve flexibility, a sponsor may therefore look to give itself an array of remedies in the event of “immoral” behaviour.
A right of termination will of course usually be required, but also a right of suspension and a right to withhold certain future payments (staggered payments are generally a good idea in sponsorship agreements), fines and/or an indemnity for wasted costs. Pursuing a claim in damages is less common as it can be difficult to quantify loss, the chances of recovery can be low and the risk of adverse publicity is high. Sponsors will also often look to mitigate any potential loss by way of a clause requiring the rights holder to co-operate with it in managing any scandal. An obligation may also be imposed that requires the rights holder to inform the sponsor of any material incident that may constitute a breach of the morality clause as soon as possible. In this way, the sponsor gains a degree of control over how and when a story is released to the media. A sponsor may also seek to include a right for the reimbursement of any bonuses that have been paid in respect of performances, where cheating has helped to achieve those bonuses.
Sponsors are now more aware than ever of the risks of associating their brand with particular competitions or teams, or indeed a particular sport more generally. There is an increasing recognition that the weaknesses and errors of judgment of individuals will impact on the reputation of the wider sport in which they operate (particularly when proven to be endemic). On the breaking of a scandal the cost to those directly involved may be high, but the cost to unsuspecting and ill-prepared sponsors may be greater still.
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Chris is an Associate in the Commercial team at Charles Russell and is a member of the Sports Group. Chris advises on all commercial issues relevant to the sports industry, with particular experience in merchandising, licensing and sponsorship agreements.