Key commercial issues when negotiating a new official kit supplier agreement
Published 13 January 2017 By: Joe Tompkins
An official kit supplier agreement is one of the most valuable and multi-faceted commercial rights transactions that a rights holder will enter into as, in effect, it is a combination of three types of contract that can be complex enough of their own accord, namely:
- a high-value supplier agreement (in respect of the kit);
- an international merchandising agreement (in relation to associated sales revenues); and
- a major sponsorship agreement (addressing branding and advertising rights granted to the supplier).
This article looks at some of the key commercial issues which rights holders need to consider when negotiating a new official kit supplier deal and explores some contractual solutions. It will be particularly useful for rights holders’ commercial teams and in-house lawyers to use during negotiations. It is focused on the supply of kit and equipment for use by teams and does not seek to address issues specifically related to individual endorsement deals. Specifically it looks at:
- The scope of the agreement;
- High-performance vs fanwear;
- Design process;
- Manufacture, payment and delivery;
- Protecting the value of the deal; and
- Expiry and termination.
Scope of the agreement
A manufacturer is likely to demand to be the exclusive supplier of every item of apparel which the rights holder and its athletes use. This is an understandable starting point given the well-documented value that brands place on exclusivity, but, in practice, rights holders need to ensure that the manufacturer is not granted a level of exclusivity which restricts (or may restrict during the life of the contract) its sporting or commercial flexibility or which is beyond the scope of the rights available for grant by the rights holder.
For example, it is accepted market practice for exclusive official kit supplier contracts to permit footballers to wear boots manufactured by competitors and for cricketers to have individual bat and pads deals (as such items can have an effect on performance). However, negotiations in respect of items of a less technical or personal nature can often be hotly-contested. One such item tends to be baselayers – should these form part of the “team kit” or are they “personal products”, which the players, who are seeking to maximise their individual revenues, should be entitled to exploit by way of their own endorsement deals?
A rights holder can find itself caught in the middle of its players and its commercial partners when negotiating which products are excluded from the manufacturer’s exclusive rights. Along with dealing with any relationship issues caused by this, the rights holder must ensure that the agreed list of what is known as “excluded products” is aligned with any items which it cannot compel its players to wear under their relevant player contract (or commercial memorandum with the players’ union). Although it would be preferable for rights holders to simply include a “catch-all” clause, which provides that any products that are not expressly included within the manufacturer’s exclusive product list are, by default, “excluded”, it is unlikely that a manufacturer would accept this. This approach can leave somewhat of a grey area for new types of products that are developed during the term of the contract, as these products will neither be products which sit within the manufacturer’s scope of supply rights nor will they be listed as “excluded products”.
A high-profile illustration of the difficulties that can arise in this area was shown by the dispute between adidas, Canterbury and Puma in relation to Petr Cech’s wearing of his own personally-sourced Canterbury headguard following his return from a serious head injury in January 2007. Puma’s kit supplier deal with Cech’s national team, the Czech Republic, was reported not to expressly grant Puma exclusivity over the supply of headguards worn by Czech Republic players (it being an unusual piece of kit for a footballer to wear), but the contract did not expressly exclude headguards from the deal. adidas, as Chelsea’s kit supplier, also expected Cech to cover up the Canterbury logo on his headguard when playing for Chelsea, which was reported to contradict the agreement Cech had made with Canterbury. The ensuing uncertainty contributed to a public sponsorship tug-of-war which was not resolved until Cech entered into a personal endorsement deal with adidas in 2008.
High-performance vs. Fanwear
Another key initial issue relating to exclusivity relates to the inherent tension between the rights holder’s performance-related need for kit to be of the highest quality, particularly in sports such as cycling where the “marginal gains” culture and measurable impact of apparel upon performance leaves no room for compromise, with the commercial pressure to deliver affordable replica kit at price points which maximise retail sales.
There are a number of ways to deal with this tension; the approach taken by Team Sky and their 2016 kit supplier, Rapha, was to offer fans a “Pro” range, which was a reproduction of the high-performance technical kit worn by Chris Froome and the team during the successful Tour de France campaign, alongside a lower-priced “Replica” kit range, which features the team’s branding upon a more affordable product with a lower technical specification. In situations such as this, the kit supply contracts must contain well-drafted technical specifications that accurately reflect the differences between each “tier” of products.
Where one kit supplier manufactures each “tier” of kit, a consistent approach can be applied both within the contract drafting and during the manufacturing process. However, it may not always be economically viable for a premium kit supplier also to provide the less-expensive tier of apparel. This is often the case for national governing bodies, who usually produce a “fan wear” range which bears only the national team’s logo or trademarks, with no visible sign of the kit manufacturer (or any other third party marks). These items are known as “second tier” or “unbranded” products and work as a compromise between (i) the manufacturer’s need for exclusivity and to retain its premium brand and (ii) the rights holder’s need to produce more affordable replica ranges in addition to the official manufacturer’s premium range.
Rights holders should negotiate a sufficiently wide list of these second tier products. For example, if a rights holder needs to bear the cost of production of thousands of t-shirts for use in a participation initiative, then having to spend an entire year’s budget on premium quality t-shirts produced by its high-profile manufacturer may be an extremely unattractive proposition (when there are a number of companies that provide low-cost unbranded clothing of a good quality). Of course, manufacturers may argue that this extra expense is off-set by the sums that the manufacturer is putting into the sport and that this is the trade-off for official kit supplier deals. If this is the case, an effective compromise may be to include a price-matching clause whereby if the official manufacturer is able to match (or be within a certain percentage) of a third party’s proposed price for the second tier products then they will be appointed. Ultimately this will be a point for commercial negotiation.
After identifying the product range, the next stage in the supply process where issues arise is often the design stage. Unlike some major supplier contracts, such as IT outsourcing where rights holders tend to rely on the supplier’s expertise, the kit design process is likely to be collaborative as the rights holder may have its own experienced in-house creative teams who will contribute. It would seem that the parties’ design aims are aligned, as it is in neither’s interest to produce poor quality apparel, but nevertheless the contractual negotiations around the kit design process can generate a number of issues, including:
- Which party is responsible if a good faith disagreement over the kit design causes a delay to delivery and causes extra costs to be incurred?
This is a particularly tricky issue as both parties can take reasonable positions (the manufacturer will argue that the rights holder should bear any costs associated with delays if it withholds approvals, whereas the rights holder will argue that it is perfectly entitled to withhold its approval if it, as the customer, is not satisfied with an element of the design). A practical solution to this issue is to ensure that the contract includes an agreed timetable for design, manufacture and delivery of the kit for the first contract year, which contemplates a number of rounds of design amendments and includes appropriate obligations on the parties to respond promptly to approval requests. However, even the best-laid timelines and most collaborative of partnerships can suffer from unforeseen delays and disagreements, and therefore parties will sometimes compromise by including a clause which can be triggered to escalate disputes to executive or director level in the event that the respective design teams are deadlocked.
- What happens if a change in regulations requires a change to be made to the kit design?
All kit supplier contracts should oblige the manufacturer to produce kit that complies with applicable competition regulations, including where such regulations are changed shortly ahead of a new season or where the rights holder participates in different competitions or forms of the sport. A rights holder may be expected to bear some or all of the cost of any changes if the regulations are changed during the manufacture cycle, but the obligation on the manufacturer to comply with applicable regulations should be non-negotiable, as any inability of a team to wear its kit in a competition may result in significant costs (not to mention being a PR disaster for the parties involved). It is also important that kit supply contracts are drafted in such a way that they countenance the application of different regulations on a season-by-season basis to deal with the effect of promotion, relegation or entry to a new competition (see Norwich City’s ability to sign a back-of-shirt sponsor for 2016/17 following their relegation from the FA Premier League, where such inventory is not available for sponsorship).
Rights holders should also ensure that their main kit sponsorship contracts do not unduly fetter any secondary kit branding opportunities which may arise in the future. An illustration of this is shown in recent reports that FA Premier League clubs will be able to sell shirt sleeve sponsorship with effect from next season, as this new additional revenue stream may not be immediately available to those clubs whose primary kit sponsor is designated as the club’s “exclusive kit sponsor”, rather than being termed as exclusive only in respect of the logo on the front of the shirt. This development highlights how rights holders should try to avoid locking themselves out of these types of opportunities by defining the kit sponsor’s inventory as narrowly as possible and carving-out any currently unexploited inventory which is subsequently made available by changes in regulations.
Rights holders should also seek to place their own obligations on their kit sponsors to comply and co-operate with the kit design process. In particular, the rights holder should require the kit sponsor: (i) not to change its logo on a shorter notice period than that which the rights holder is required to give its kit supplier; (ii) to bear any costs incurred by the rights holder if the kit sponsor does not provide its logo or other materials by the kit design timetable deadlines; and (iii) to co-operate with the manufacturer throughout the design process. It would be unusual for a kit sponsor to have approval rights over the kit design itself, but it is not uncommon for a soft “consultation” clause to be included in the kit sponsor’s favour (or for the kit sponsor to be involved on an informal basis), in addition to an approval right over the appearance of its logo.
- Product development
Although it can be easy to dismiss each new “ground-breaking” or “cutting-edge” kit launch as hyperbole, the reality is that, in some sports in particular, new kit designs can create a genuine competitive advantage over the rights holder’s rivals (see Team GB’s renowned Rio 2016 cycling suits, or Speedo’s LZR Racer swimsuit, which was eventually banned as a result of its contribution to success).
In circumstances such as these, it will be critical to a rights holder to ensure that the manufacturer is restricted from using new designs and technology which the rights holder has created or contributed to for the benefit of competitors. This can be achieved through exclusivity provisions that prevent the manufacturer from exploiting knowhow generated in connection with a right holder’s kit, but a well-advised rights holder will also want to exploit the design itself in the future and should seek an assignment by the manufacturer of all IP rights in the kit designs and any preparatory works (this is often by way of a pre-agreed template deed of assignment which is negotiated alongside the kit supply contract). The extent to which a manufacturer is prepared to do this will be heavily negotiated and will, to a large extent, depend on the nature of the product development, as the level of technical input which a cycling, swimming or athletics team will put into its bespoke kit design process is likely to be incomparable to certain other sports where a new kit design does not involve much more than changing the branding that is applied to the manufacturer’s standard product.
Some powerful rights holders, particularly in sports where there are relatively few top teams, may seek to restrict the manufacturer from supplying its competitors with similar kit throughout the term of its kit supplier deal (as an example, the All Blacks’ Rugby World Cup 2015 jersey was developed by adidas using technology and materials which were developed exclusively for the All Blacks). However, this is not a common occurrence and it is more likely that rights holder will instead include clauses designed to oblige the manufacturer to take practical steps to reduce the risk of know-how being leaked to competitors that the manufacturer also supplies (such as Chinese walls being implemented between separate groups of the manufacturer’s employees who work on each competing rights holder’s account). In sports where technical knowhow is particularly sensitive, our experience is that the rights holder may consider requesting the right to inspect development facilities and to remove manufacturer employees from working on its account where it has reasonable grounds to do so.
Manufacture, payment and delivery
This article does not seek to explore the many standard protections which any customer in any industry should include when entering into a supply of goods and services contract (including warranties as to the quality of goods, manufacturer’s supply chain and compliance with laws), although these are no less applicable to kit supply contracts. However, some specific points to consider on kit supply deals include:
- the manufacturer’s basic payment obligations under a kit supplier contract will generally be structured as regular cash instalments along with an annual allowance of kit to be provided on a value-in-kind basis. Rights holders should request to “roll-over” any unused annual product allowance into the following year and, on the other hand, should agree discounted prices for products which it orders in excess of the annual product allowance. Issues such as delivery and storage locations and costs will, to a certain extent, be driven by the complexity of the delivery process and volumes of products, but rights holders’ opening positions should be that the manufacturers should bear the cost of delivery and storage and should deliver to any country where the kit is required.
- provisions around delivery and acceptance are significant in the context of a kit supply deal, particularly the ability for rights holders to source replacement products from a third party in the event that the manufacturer does not provide the kit on time or it is defective. A manufacturer will likely resist this on the grounds that it would cut across the exclusivity afforded to it, but rights holders should insist that if the manufacturer fails to meet its primary contractual obligation (i.e. providing the team with kit to perform in), then it is wholly unreasonable for the rights holder not to be able to source replacement kit on short notice from elsewhere (and for the manufacturer to indemnify the rights holder in relation to the costs). A potential compromise position might be for the rights holder to be entitled to source unbranded replacement kit, but as a minimum the rights holder must have contractual protections which allow it to fulfil its sporting obligations even if its supplier fails to meet its fundamental obligation. Issues relating to termination for breach are discussed later in this article.
Protecting the value
Traditionally, a driver for a manufacturer entering into a particular kit supply deal will be to recoup some of its investment by way of retail sales. Some manufacturers may also use their kit supply rights as a way of increasing their bargaining power with distributors, as items such as the shirts of the world’s biggest football clubs are part of a small number of products with truly global appeal and therefore open opportunities for manufacturers to “add-on” its other products alongside contracts for these shirts (although as brands such as Nike increase their focus on their direct-to-consumer channels we may see a decrease in the significance of kit supply rights as leverage).
However, one of the idiosyncrasies of kit deals is that sometimes manufacturers enter into them with no intention of generating a direct profit or financial benefit from the deal itself, but rather as a marketing tool to promote the manufacturer’s brand and products by way of association with a well-known rights holder.
In addition, brands such as Under Armour have recently been moving towards deals which focus on data as a driver – with actual kit branding itself seeming to be secondary to the associated data access and digital marketing opportunities. This data can be utilised as manufacturers move into new “connected fitness” training and timing apps and look to use traditional high-profile kit supply partnerships to both promote those new apps and to work with elite rights holders to develop and improve them.
The common thread for rights holders in any of these situations is to identify where the parties attribute the value in the deal and to draft appropriate contractual protections. Some examples of points to consider in different situations include:
- where access to customer and/or athlete data is important to the manufacturer: robust data processing obligations must be placed on the manufacturer (this article does not seek to address these in detail but, as a bare minimum, a UK rights holder will need to ensure the contract complies with the requirements for data controllers under the data protection principles of the Data Protection Act 1998). Aside from drafting contractual obligations, before any access to specific data is promised to a manufacturer (or any other third party), the rights holder must identify, in practice, what data it holds and whether it can fairly and lawfully transfer that data (and, if so, to whom, for what purposes and to which jurisdictions). In global or regional agreements, the rights holder may want to work with local counsel to identify any specific restrictions in particular territories, especially where a manufacturer’s proposed use(s) of the data will vary in accordance with regional commercial interests. Data management continues to present rights holders with issues as their data collection and CRM practices evolve rapidly and, although many of these issues are beyond the scope of this article, the negotiation of a new kit deal can present an ideal opportunity for rights holders to carry out an internal audit of their procedures and identify how best to exploit their data commercially.
- where the manufacturer intends to make significant profits from retail: is the rights holder obtaining a good financial deal through mechanisms such as revenue-sharing? Whilst price-fixing legislation precludes UK rights holders and manufacturers from colluding to set minimum prices, the rights holder should ensure that it always has the contractual right to purchase replica kit at the lowest available price for sale in its own channels
- where brand awareness is a focus: the manufacturer’s commitment to marketing the retail products can be a contentious issue. This can be a point which is overlooked during contract negotiations, as the parties focus is on their exciting new partnership, but kit contracts tend to be at least four years in duration and as the deal approaches expiry it is not uncommon for manufacturers to shift their focus to other commercial partners (particularly where the manufacturer has signed higher-profile entities and/or is aware that the rights holder will not be renewing the deal). In the worst case, the manufacturer may even make a strategic decision to exit a particular sport (as seen recently with Nike’s and adidas’s exits from golf club manufacturing) and decide to gradually wind down their efforts in that area, which can leave rights holders shorn of substantive marketing support and resources from one of their key partners.
Manufacturers may argue that the focus of their business is their prerogative and will usually resist attempts by rights holders to restrict any reduction in marketing commitment. If a rights holder has its own sophisticated official retail outlet network then this may be less of an issue, but for rights holders whose replica kit royalties are a significant proportion of their revenues it is particularly important to keep the manufacturer fully engaged in the partnership throughout its term. Even if royalties from sales in third party outlets are less material to the rights holder, it is unlikely any rights holder will want to see their branded kit in a heavily discounted section of a retail outlet.
Contractual protections to address this can include: variable royalty rates above certain volume thresholds; undertakings to maximise the retail territories and channels in which the replica kit is sold; annual marketing budget commitments from the manufacturer; regular joint marketing meetings; oversight of marketing plans; and manufacturer commitments not to materially reduce the volumes of retail products distributed in the market.
Expiry and termination
An important but unwelcome role for the lawyer advising on any new kit deal is to focus minds on the end of the deal. This can be a difficult conversation for two parties embarking on a new partnership, but kit deals are cyclical by their nature and it is important that rights holders do not tie their hands unnecessarily in relation to their next kit deal (which, following the trajectory of kit deal values generally, is likely to be of an increased value).
In relation to expiry, rights holders should try to ensure that the kit contract:
- does not include an automatic renewal clause. Major kit manufacturers’ renewal clauses and “matching rights” will be extremely aggressive, and rights holders should prepare themselves for intense negotiations on this point. The evolution and growth of kit deals in the last ten years alone (see Chelsea’s recent £900m deal with Nike, which outweighs even Manchester United’s record-breaking adidas deal) demonstrates the importance rights holders should place on being free to go to the market for each deal and they should take a firm approach to this point;
- entitles them to conduct negotiations with replacement suppliers sufficiently in advance from the end of the deal in order to allow for the lead-in time which the replacement manufacturer will require. It is not unreasonable for a rights holder to want to negotiate with potential replacements 24 months from expiry (in contrast to a sponsorship deal, where a rights holder might expect to go to market six to 12 months before expiry of the incumbent sponsor);
- allows the rights holder to announce the replacement deal prior to expiry of the existing deal. The timing of such announcement should be carefully considered as it traditionally heralds a dramatic decline in the incumbent’s retail sales, which is not beneficial for rights holders that receive a royalty; and
- contains adequate provisions relating to the sell-off of replica products at the expiry of the term. Manufacturers will generally accept that their predecessor’s products will be in the market for the first three to six months of their deals and this is an important clause to include in the contract. Rights holders should also look to manage this situation by including clauses which try and “cleanse” the market for the new manufacture, for example by restricting the incumbent manufacturer’s production volumes in the final months of the contract and seeking to reduce or remove commission payable on post-term replica sales.
Kit supply deals are genuine partnerships where the parties’ interests are aligned and, although there are often ups and downs, it is unusual to see a rights holder terminate for breach. A significant reason for this is that the cost and logistical impact upon the rights holder of a mid-season termination with immediate effect would be significant as distribution networks would disrupted and if any additional kit was required then the rights holder would need to find a new supplier or produce the kit in-house, which most rights holders would not be capable of doing on short notice.
The possibility that a manufacturer might consider there to be a reduced threat of termination for breach by the rights holder (in comparison to a standard supply of services contract) should encourage rights holders to consider including alternative contractual protections to discourage (or deal with) breach by the manufacturer, such as:
- indemnities for costs incurred by the rights holder in sourcing replacements for undelivered or defective products;
- annual performance review and break clauses. In our experience, annual performance reviews and associated break clauses tend to be requested by commercial partners who wish to assess the perceived value of their rights (often by reference to an end-of-season valuation report prepared by the rights holder’s commercial team or a third party) and resisted by rights holders. However, a mutual break clause could be useful for a rights holder with a strong bargaining position who may wish to terminate its kit supply deal at a future time or for a reason which is convenient. A good example of this was shown by Chelsea’s decision to pay to terminate their adidas contract in May 2016, which allowed them to enter into a more lucrative deal with Nike; and
- where the rights holder does terminate due to the supplier’s breach, the rights holder should ensure that the manufacturer is obliged to immediately cease the sale of the replica products and may also wish to include a contractual right that allows the rights holder to purchase any leftover stock at a significant discount (so that the rights holder can sell these on directly or through third parties). Manufacturers will stock significant amounts of replica kit and shifting the burden of this cost on to the manufacturer would make termination a more palatable option for rights holders (and therefore a more credible threat for manufacturers).
The continued growth in value and complexity of the most high-profile kit supply agreements shows little sign of slowing down. Whilst this article highlights some general issues to consider when negotiating and drafting these contracts, the diversity of the sports industry and variety of applicable national and international law and practice governing the performance of kit supply, marketing and distribution obligations means there is no “one size fits all” approach. Every rights holder should therefore give careful consideration to its own unique requirements before entering into and negotiating one of its most valuable and complex contracts.
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- Tags: Commercial | Contract | Cricket | Cycling | Data | Football | Rugby | Sponsorship | Swimming | United Kingdom (UK)
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Joe Tompkins: Senior Associate, Onside Law
Joe is a senior associate at onside law who specialises in commercial law in the sports sector. His particular focus is advising rights holders on contractual matters relating to the exploitation of their commercial and media rights, high-value sponsorship agreements and the delivery of international sporting events. He acts on a wide range of commercial matters for international federations, national governing bodies, clubs, individuals and agencies, including World Rugby, the ECB, Saracens, Team Sky and a Premier League football club.