Sponsorships contracts: morality, reverse morality and integrity

Published 15 November 2013 By: Angus Bujalski

Group of Swimmers

Much legal ink has been spent on articles analysing the extent to which contractual protection for sponsors and partners may be given in the event of misbehaviour, or worse, of athletes or teams. The truth is that sponsors’ willingness to terminate agreements for behaviour of athletes is rare.

Indeed, the fact that there are spikes of comment and analysis on this demonstrates that there are comparatively few instances of such rights being exercised, as the majority of examples cited tend to be a small number of high profile individual athletes.

It may now be, however, that a common precedent cited is Energy Australia’s decision to terminate its multimillion dollar partnership with Swimming Australia, which was reported to account for almost half of Swimming Australia’s sponsorship revenue.1 This termination of an agreement with a governing body marks an interesting departure, but the background to this termination demonstrates that sponsors approach these sort of mechanisms a different way when it comes to teams and governing bodies compared to individual athletes.

 

Morality clauses and their uses

There may be many reasons for the relative lack of examples of sponsors exercising rights to terminate agreements: today’s scandal may be tomorrow’s chip wrapper, or in the grand scheme of things the likely damage to a brand from the act of an athlete may be comparatively small. More often than not, it is also because the interests of team and sponsor are often aligned in mitigating any fall-out from the event in question, particularly where a sponsor has already invested heavily in an athlete or team. While one may cite the sponsors who did abandon Tiger Woods following his marital infidelities, such as Gilette, it is notable that his most high profile sponsor, Nike, did not. The fact that Lance Armstrong is often held up as an example of a sponsor terminating an arrangement with an athlete is itself an indication that the bar for such termination is often set extremely high (or low, depending on how one looks at it). This may be seen on a rather wider scale in team sports. If every sponsor terminated their agreements with clubs or governing bodies on the basis of undesirable actions of sportspeople under their control, or even their jurisdiction, there would be precious few sponsorship relationships left. It is also a reflection that contractual relationships are (thankfully) largely not managed by lawyers; a general conclusion worth drawing is that examples of any sort of termination of these agreements for breach or any other sort of mechanism are rare. 

With this in mind, provisions around on-going co-operation and collaboration to mitigate any damage are of more use than a straightforward “do something bad and we terminate” provision. In the context of a healthy rights holder/sponsor relationship, this sort of action will be undertaken as a matter of course, but it may be that contractual protection for this is the most useful mechanism for both parties. This sort of mechanism is more likely to be used, and may focus the minds of those involved.

 

Morality and management

In topics such as this, it is inevitable that broader conclusions will be extrapolated from individual, isolated examples, and even in those examples not all the information will be publicly available or perfectly understood. Nevertheless we may take two recent examples of Australian governing bodies as instructive. As mentioned previously, Energy Australia terminated a very high profile partnership partly on the basis of actions of Swimming Australia’s athletes, but also seemingly partly, or even predominantly, on the basis of actions of its President. Looking at it this way, it the action of senior management of an organisation which can have a larger impact on the public perception of a team or governing body that the action of an individual athlete. This can be compared with the furore surrounding David Warner’s punch on Joe Root following the England v Australia Champions Trophy match in June 2013. Cricket Australia took swift, decisive and transparent action against Warner, including suspension, and Warner apologised publicly in the media. In this case there was no suggestion in the press that Cricket Australia may lose any of its sponsors over the incident. A stance of demonstrating personal values, while important in any sport, is particularly important in sports such as cricket and rugby which are attractive to sponsors for the very reason that these sports are underpinned by the spirit of integrity and fair play. Whereas Cricket Australia proactively managed this situation, Swimming Australia have been seen as unable to manage, and take or apportion responsibility for, a number of incidents. As such, it is the organisation as a whole, rather than purely the athletes who represent it, which falls short of the expectations of its sponsors.2

This last point is important. Morality clauses in their truest sense may be more defensible in the case of individual athletes as they are, or should be, better able to control their own actions, whereas the direct ability to a team or governing body to control its athletes is less straightforward; to the extent that such mechanisms are needed by sponsors of clubs or governing bodies, it is far more appropriate that they relate less to individual athletes and more to the organisation as a whole.

 

Specificity of sport

The literature on the specificity of sport probably accounts for several large forests by now, but in this case it is worth querying how specific this sort of clause is to sport. As with many commercial aspects of sports law, comparators for, if not the origins of, these sorts of clauses can be found in the entertainment sector. With morality clauses, the genesis of often ascribed to Universal Studios’ insertion of morality clauses in their actors’ employment contract following the Fatty Arbuckle debacle.3 As Universal Studios’ press statement of 1921 read: “As a direct result of the Arbuckle case in San Francisco, Stanchfield & Levy, attorneys for the Universal Film Manufacturing Company, have drawn up a protective clause . . . to [be] inserted in all existing and future actors', actresses', and directors' contracts with the company.4

More generally, though, having some form of moral overlay to commercial agreements is by no means specific to the sports and entertainment industries. Anyone who has been confronted by a supply of goods or services agreement from a large corporate will be aware that an obligation to have, and abide by, anti-bribery provisions are commonplace. Similarly, obligations not to use child labour or to contain ethical sourcing provisions are commonplace. Clearly much of this may be driven by legislation, but it nevertheless demonstrates that supposedly moral questions are finding their way into shaping contractual relationships.

 

Nature of reverse morality clauses

Whilst the nature and use of morality clauses are often subject to legal discussion, an aspect infrequently covered in that discussion is the so-called reverse morality clause, under which a rights holder would seek redress following actions by a sponsor. As with conventional morality clauses, the blunt instrument of termination is often not the most helpful and instances of termination are rare. Even at the height of the banking crisis few rights holders were queuing up to terminate their agreements with large financial institutions; after all, we still have the Barclays Premier League and the RBS 6 Nations among many others. Another example from the US is illustrative of this reaction. There was widespread negative public reaction and criticism from politicians in the US to Citigroup’s $400 million naming rights agreement for the New York Mets’ stadium, after Citigroup received tens of billions of dollars in public funds to bail it out. The Mets’ attitude was wholly different: Jeff Wilpon, the Mets’ Chief Operating Officer was quoted as saying: “We're proud to be partners with Citi.  They've received some money to help them through tough times. But if they do a good job of marketing, and we can help them bring eyeballs to help sell their brand, they're going to come out of this and pay back the public.5 This sort of analysis is a polar opposite from any indication that the Mets would even consider the bailout of Citigroup being something necessitating an end to their relationship. 

It may be thought that actions of a sponsor would have comparatively little impact on a rights holder, but there are some occasions where a rights holder may be tarnished by association. As sponsorship deals become increasingly sophisticated, and the integration of sponsor and rights holder becomes ever greater, there is arguably greater scope for mechanisms around morality and reverse morality to be more useful and used. Whereas a relationship which is little more than a badging exercise may mean that actions of one party may have comparatively little impact on the reputation of the other, as we can see from two high profile examples, stadium or tournament naming rights can be linked so inextricably to a team or tournament that any mention of that team or tournament would immediately refer to a disgraced sponsor. In America the birth of the reverse morality clause in a sporting context is often seen in the Houston Astros’ need to disassociate itself from its deal which gave the soon-to-be disgraced Enron naming rights over its stadium.6 One of the more high profile examples in recent years this side of the Atlantic was the ill-fated Stanford Series cricket tournament which terminated following Allen Stanford’s flight following his indictment on a range of corruption charges. It is not known whether a termination followed a strict termination mechanism or whether the England and Wales Cricket Board used other contractual remedies, but this case highlights the occasional need for a rights holder to exit where undoubted reputational damage would be caused through continuing the relationship. In such extreme cases, a right of termination is effectively the only solution for a rights holder. Such examples are, thankfully, very rare. 

 

Protection for integrity issues

The examples of Enron and Allen Stanford may be extreme and fall neatly within what may accurately be described in a reverse morality clause. There are, however, other occasions of less obvious immorality and instances which may require a re-evaluation of the relationship between rights holder and sponsor. Many rights holders, and indeed individual athletes, have sponsorship arrangements with betting operators and supplement manufacturers, both industries which have caused integrity concerns within sport in recent years. A close sponsor relationship with a publicly criticised bank may cause relatively indirect damage to a rights holder. A close relationship with a sponsor which is surrounded by integrity questions may cause very different, and more direct, issues for a rights holder.  This may not even relate to deliberate conduct of a sponsor. Accidental inclusion of banned substances within a sponsor’s commercial product, or accidental implication in a betting scandal may mean that a sponsor’s position vis-à-vis a governing body or team is untenable.   This will be particularly true in the case of governing bodies. Needless to say, should any action by the partner be deliberate, it would be vital for the rights holder, particularly the governing body, to be able to publicly terminate any relationship with that sponsor.

Needless to say, the best protection is effective due diligence into the potential sponsor. In the UK, for example, a supplement manufacturer who is fully signed up to the Informed Sport programme and who can demonstrate a strong track record in testing will clearly present less of a risk. Nevertheless, given the damage any issues around integrity can do to a sport, it will be vital for the rights holder to have adequate contractual protection. While it will be in the interests of both parties that the situation is handled well and mitigated, where this may differ from an act by a rights holder is that the interests of the parties will be more likely to be disaligned. It may well be that for a sponsor, continued relationship with rights holders, particularly governing bodies, will be an integral part of rehabilitation, for the rights holder the need to reinforce the integrity of the sport, even to the point of forgoing revenue from a sponsor, could be paramount.  

Luckily, this assertion has yet to be tested fully, and it may be that no such termination is needed. Clearly a number of the avenues which apply to standard morality mechanisms will apply in this case, such mechanisms around press releases and collaboration on mitigation either generally or specifically. An important consideration, true also for morality clauses but vital for this sort of reverse morality clause in an integrity scenario, is to bear in mind the rights holder’s regulatory obligations. For an athlete or a club there may well be significant regulatory consequences, particularly where they or their players are directly implicated. Of potentially greater concern would be the situation where the rights holder is a governing body. When investigating integrity issues, a governing body cannot be beholden to the interests of a sponsor. Ultimately any governing body’s position relies on its responsibility to apply its rules and regulations fairly and independently. Overly managed responses taking into account the interests of a sponsor will call into question the rigour of a governing body’s actions, even if they are taken properly, but worse still would be for a sponsor to become involved in any disciplinary process, either through the governing body having an obligation to share information, or an obligation to mitigate the damage to the sponsor to fetter the governing body’s investigation and disciplinary processes. It is vital that not only is this adequately covered in any sponsorship agreement, but that this is well understood by the commercial and communication teams of sponsor and governing body.

 

Conclusions

The relationship of each athlete, club or governing body to its sponsors will be different. It is difficult to draw too many specific conclusions from isolated examples where many different factors are in play. Nevertheless there are helpful conclusions to draw from recent events. Both in relation to actions of rights holder and sponsor, a more nuanced approach is needed than the blunt stick of a straight termination right, though it may be that this right is needed in addition. While incidents of rights holders seeking to terminate sponsorship agreements due to actions of sponsors are very rare, for increasingly integrated partnerships, it may be that on occasion this is a necessary right. For rights holders, particularly governing bodies, there is the additional overlay needed where their sponsors are in areas of risk around integrity. This may include some level of morality, but these bodies need to remember that the future of their sports depend on the integrity of all parties.

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Author

Angus Bujalski

Angus Bujalski

Angus is the Head of Legal at the Rugby Football Union. He is responsible for supporting the RFU's commercial programme, including sponsorship, licensing, broadcasting and events. Day-to-day work includes negotiating high value partnership agreements, and arrangements with stakeholders inside and outside rugby.

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