Lance Armstrong: a sporting fraud? What level of cheating will constitute fraud?

Published 28 November 2012 By: Arun Chauhan, Ben Griffin

The cycling world has been turned on its head with the recent developments surrounding Lance Armstrong and the allegations that he cheated his way to his sporting and financial success. During his reign as Tour de France champion, Armstrong was a sporting superstar, with some of the top brands in sport clamouring to be associated with him. However, with the recent publication of a report labelling him a 'serial cheat' and alleging that he systematically used performance enhancing drugs, the question of whether he deceived sponsors and employers for financial gain has come to the fore.

Indeed there are now claims being considered against Armstrong from sponsors SCA Promotions and Nike, after the global sports brand dropped Armstrong on the basis of "seemingly insurmountable evidence that he participated in doping and misled Nike for more than a decade".  SCA has requested that $7.5m paid in bonuses to Armstrong be returned and he has also been asked to return his prize money following his success at the Tour de France.

Implied term in a contract to not cheat?

Numerous terms are implied within contracts. An employment relationship is a good example, where it is implied that the employee will act in the best interests of the employer and that they will serve their employer with good faith. That example applies equally when considering fraud. If an employee was found to have lied about their qualifications in order to obtain employment that is largely accepted as an act of deception and he or she is may be subject to dismissal.  This scenario could also lead to an employer bringing a claim for loss against the employee on grounds of fraudulent misrepresentation.

What about the situation with investors? Let’s say an organisation or individual wishes to invest in shares of a company that ,has performed well. However, if the positive future forecasted performance of the company is in fact based on false information, which the vendors know, or ought to know, then the investor may also have a claim in fraudulent misrepresentation.  The investor has ultimately made a representation that the information in relation to future performance is true and  the investor relied on those facts to acquire shares which soon plummet in value when the true position is becomes clear.

So, what if this ‘true position related to Armstrong? The employer was his team and the investors were his sponsors, looking for a return on their investment?

Let us consider what they expected, or were entitled to expect, from the contract. Simply put, that was association with the Armstrong brand. He represented himself to be a clean sportsman. He represented that achieved his success through hard work, determination and without taking short cuts. These are qualities any sponsor would want to be associated with. It was taken for granted that he had not broken the rules to achieve his success and build his reputation. It was almost certainly implied that he was clean and not taking performance enhancing drugs. 

A technical argument does present itself.  Can an implied representation be treated as a representation relied upon before entering into a contract? This issue was considered by the English courts when looking at future representations.  For example, in the context of advertising, in Spice Girls Ltd v Aprilia World Service BV [2002], it was held that the Spice Girls had made an implied representation that when they continued with arrangements to publicise the defendant's products, they knew that one member of the group was intending to leave the group, which would prevent the contract being carried out as intended by the parties.

This premise of whether misleading employers and sponsors about performance enhancing drugs, or cheating to achieve success, has not been tested in the English Courts in the context of fraud. On closer examination, the uncertainty of where the line may be drawn may reveals why.

What level of cheating will constitute fraud?

Putting it bluntly, acting dishonestly to achieve commercial gain directly or indirectly is an act of fraud.  Think of match-fixing in football. Clearly this would be considered an act of fraud.  Also, think Ben Johnson in the 1988 Seoul Olympics. With Armstrong, the same trite principle must apply. These scenarios are however at the extreme end of unacceptable conduct in those sports. For example, what about a player diving in a football match? He dives and wins a penalty, which leads to his team winning the game. It is a cup match so his team is through to the next round, which in turn means greater prize money, further television coverage and perhaps player bonuses.   Would the sponsors of the victorious team concern themselves  that their brand may have been damaged by these acts of cheating? Probably not. The reasons are both technical and commercial.   

The technical argument is that the implied representation made by the sports club or sportsperson, which a potential sponsor relies upon, that an individual or sports club are not engaged in cheating, is made before the contract is entered into. An injured party can only seek damages for fraudulent misrepresentation if it can demonstrate that those false representations were made pre-contract. The injured party must also show that the defendant knew, or ought to have known, (or was reckless with truth) that the representations were false and that the sponsor relied on those representations, suffering loss as a consequence. Diving in a football match has little to do with the formation of the contract. It is an act  that took place post contract inception and if the sponsor decided to terminate on this basis it could face a damages claim for unlawful termination. 

The commercial argument relates to brand value. Focussing again on Armstrong, the brands associated with him during his prolonged period of dominance will no doubt have benefited from his profile as an elite athlete at the time. It is also doubtful whether the brands have truly been tarnished by association, as it could be argued that only the keenest of cycling fans can remember the bike he rode or who sponsored the kit he wore on Alpe d’Huez in the 2004 edition of the Tour, or indeed, in any other race. As a result, it may be difficult to demonstrate damage to the brand overall or to prove a loss.

Looking at circumstances surrounding more recent sponsors, each case will turn on its own facts.  However in the case of Armstrong, there does appear to be an argument that a claim in fraud exists. Injured parties, such as sponsors, will therefore need to give careful consideration as to the cost of pursuing such an action and also bringing their brand into focus, when simply moving on might be the more sensible commercial decision.

Could there be a defence?

Readers of this article may ask what would happen if Armstrong had inserted in his contracts with sponsors an entire agreement clause that stated that representations not recorded in the contract could not be relied upon. Putting it bluntly, such an argument would fail. A party cannot exclude liability for fraudulent representations made in advance of parties entering to a contract. 

The crux of such a defence would be either that the sportsperson did not cheat or that they somehow had not implied they were clean and not cheating. Where this leaves us is thus:  if a court could be persuaded that the implied term that the sportsperson did not cheat was accepted as a term of a contract, subject to there being a case made out on the balance of probabilities that the sportsperson did cheat before the contract was entered into in order to achieve success, a claim in fraud would be arguable and damages would be awarded. 

The future for Armstrong

Armstrong has denied that he ever doped, and yet he chose not to contest USADA’s claims. If the allegations contained in the USADA report are true, Armstrong has caused damage to the sport and quite possibly the brands he worked alongside. However, perhaps the biggest act of fraud is as against his supporters and fans., but they have no cause of action against him.

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Author

Arun Chauhan

Arun Chauhan

Arun heads up the fraud and risk team at Cobbetts LLP, and specialises in commercial litigation arising out of complex corporate fraud disputes. He deals with a broad range of fraud investigation and litigation, with particular focus on fraudulent misrepresentation claims.

Arun chairs regional meetings for the Fraud Advisory Panel and is a member of the Midlands Fraud Forum.

Ben Griffin

Ben Griffin

Ben is a Solicitor in Dispute Resolution (commercial litigation) at Cobbetts' Birmingham office. 

He works on general commercial disputes acting for both claimant and defendant. He also works as part of Cobbetts' Fraud and Risk Services Team, with a particular emphasis on fraud in the public sector.

As a former journalist, he also has expertise in defamation.