What it takes to sponsor Liverpool Football Club (why New Balance failed to match Nike’s offer)

Published 26 November 2019 By: Tomás Nolan

What it takes to sponsor Liverpool Football Club (why New Balance failed to match Nike’s offer)

The ending of a relationship is always difficult for those involved. All the more so when one participant has a vision of a bright future only to find their partner swept away by a richer, more attractive rival. Spare a thought then for New Balance who, following a bitter and acrimonious High Court battle over matching rights, must watch on as Liverpool F.C. move on with Nike.

The High Court decision of Mr. Justice Teare in New Balance Athletics, Inc v The Liverpool Football Club and Athletic Grounds Ltd,[1] delivered on 25 October 2019, offers insight into the commercial strategies and objectives of all three parties involved. It emphasises once again the importance of concise definitions in sportswear manufacturing and license agreements and breaks new ground on the question of valuation of marketing contributions. It merits close examination.  Accordingly, this article examines:

  • The background to the dispute
    • The matching clause
    • Nike’s offer
    • New Balance’s counter-offer
  • The High Court judgement
    • First alleged error – Japanese distribution points
    • Second alleged error – Chinese distribution points
    • Third alleged error – Brazilian market assessment
    • Fourth and fifth alleged errors - calculation of figures for North America, South Africa, India and South America
    • Matching Nike’s "marketing" obligations
  • Analysis
    • The importance of clarity and precision in drafting
    • Replica kit cannot be distinguished
    • The interpretation of "good faith"
    • Costs
    • The value of social media impact
    • Could New Balance have done any better?

Background to the dispute

In 2011, following Liverpool’s eight placed Premier League finish, Adidas declined the opportunity to renew a sponsorship agreement worth around £12 million per annum. Herbert Hainer, then Adidas CEO, declared that Liverpool’s perception of their own value was ‘not in balance’ with their performance.[2] New Balance did not share these concerns and later that year concluded a sponsorship agreement with Liverpool. The deal represented something of a coup for New Balance as the manufacturer began a deliberate campaign of expansion into football. Greatly improved on-pitch showings allowed Liverpool twice renegotiate the agreement in their favour and by late 2018 Liverpool were attracting new suitors while reportedly enjoying a £45 million per annum payment under the terms of the New Balance deal.[3]

The matching clause

The sponsorship agreement between New Balance and Liverpool included provision that prior to expiry the parties shall negotiate in good faith regarding renewal of the agreement. If no agreement were to be reached then Liverpool would be free to enter negotiations with a third party. Should an acceptable offer be received by Liverpool from a third party then the terms of any such offer must be submitted by Liverpool to New Balance. New Balance would then have thirty business days to notify Liverpool in writing of its willingness to enter an agreement with the club

"on terms no less favourable to the club than (i) the terms of this Agreement and/or (ii) the material, measurable and matchable terms of such third-party offer".

In December 2018, having failed to reach agreement regarding renewal, New Balance consented to Liverpool seeking third party offers. On 11 July 2019, Liverpool provided Nike’s offer to New Balance, delivering a signed contract between the club and Nike which was stated to be subject to a single condition precedent being notification to Nike by Liverpool that a "valid match" had been submitted by New Balance. Should such a valid match be submitted the contract between Nike and Liverpool would terminate.

Nike’s offer

Nike agreed to pay Liverpool £30 million per season plus 20% of net sales of all licensed products except footwear and 5% of net sales of licensed footwear. It is worth noting that Liverpool fought tooth and nail with New Balance in order to exit an agreement which involved a guaranteed payment of £15 million pounds more per season than that offered by Nike. The Nike offer exceeded the industry standard on net sales remission but the true attraction of the deal lay in Nike’s capacity to bring greater global exposure to the club through Nike’s access to new markets and superstar personalities.[4]

The High Court dispute centred on the distribution and marketing clause as set out in the contract entered into between Nike and Liverpool. It is necessary to detail same here:

Nike will produce/sell (including as to SKU ranger and distribution Licensed Products) and market LFC, in a manner that is consistent with Nike’s other top tier UK football clubs e.g. Tottenham, Chelsea (subject to similar performance). Without limiting the foregoing Nike will:

  • produce Licensed products under at least 2 global Nike-controlled brands (e.g. Nike and Converse);
  • produce Licensed Products in collaboration with third party brand(s), including in association with a major US sports team located in a major US market;
  • market LFC and/or Licensed Products through marketing initiatives featuring not less than three (3) non-football global superstar athletes and influencers of the calibre of Lebron James, Serena Williams, Drake, etc.…….;
  • sell Licensed Products throughout the Term (including for the avoidance of doubt, Licensed Products produced for the start of Season 2020/21 as follows (i) in not less than 6,000 stores worldwide, 500 of which shall be Nike owned or controlled with the potential for sale of Licensed Product in as many as 13,000 stores worldwide, and (ii) within not less than 51 countries online though Nike.com. Nike warrants that, as of the date of this contract, it can distribute Licensed Product in at least 6,000 stores worldwide, 500 of which are Nike owned or controlled.

New Balance’s counter-offer

Following initial discussions, during which Liverpool formed the view that New Balance could match neither the distribution nor marketing terms offered by Nike, Liverpool proposed alternative acceptable terms to New Balance which did not require matching of the terms of the Nike offer. The terms proposed did, however, require an annual payment of £60 million and distribution of Liverpool products in 65% of all New Balance stores (increasing to 80%). These terms were quickly rejected via WhatsApp by Mr. Christopher Davis (New Balance Vice-President of Global and Sports Marketing). New Balance then commenced a due diligence exercise to identify sufficient distribution points to allow them match the Nike offer. In modelling its plan to match the Nike offer New Balance anticipated a loss during the 2020/21 season of over £10 million.[5]

On the 16th August 2019 New Balance replied to Nike with a signed offer stated as matching the "material, measurable and matchable terms of the Nike offer". The marketing and distribution clause was almost identical to that of the Nike offer. Crucially, while the clause promised marketing initiatives with "not less than three non-football global superstar athletes and influencers" there was an absence of named individuals.

On the 22nd August 2019 Liverpool replied to New Balance in the strongest of terms. The club advised that it did not consider "the NB offer to be a genuine one". Specifically, the club stated that the purported matching of the marketing and distribution clause did not represent "a bona fide attempt to match the terms of the Nike offer". New Balance commenced proceedings against Liverpool.

The High Court Judgment

The High Court was required to decide whether the terms submitted by New Balance matched those of the Nike offer in respect of marketing and distribution and to assess whether those terms had been provided on a good faith basis (Mr. Justice Teare was not required to decide as to whether New Balance could actually perform the terms of the offer).

New Balance’s internal due diligence led to a conclusion that Liverpool licensed products could be distributed through 6,300 stores of which 1,302 were owned or controlled by New Balance.[6] At trial, Liverpool argued that five serious errors in this due diligence, knowledge of which should be attributed to New Balance, resulted in an increase in the distribution capacity claimed by New Balance and thus the offer was not made in good faith.

First alleged error – Japanese distribution points

Liverpool argued that of the 400 Japanese stores nominated by New Balance as distribution points 250 sold footwear only, and as such New Balance breached the duty of good faith as the sponsorship agreement was primarily concerned with selling replica shirts which accounted for 90% of sales.[7]

Mr. Justice Teare found in favour of New Balance having confined his analysis to the agreement between New Balance and Liverpool and the Nike offer. Both contracts defined "Licensed Product" as including running shoes. As such, there was no breach of good faith in New Balance including footwear stores in their tally of distribution points. As Mr Justice Teare noted "had Liverpool FC wished to ensure that the only doors or stores which were to count for the purposes of Nike’s offer were those which sold a certain portion of replica kit then the club should have so stipulated".[8]

Second alleged error - Chinese distribution points

Liverpool argued that 616 of the 638 identified Chinese distribution points would distribute only lifestyle products rather than replica and training kit. The reasoning above was again applied and the argument inevitably failed.

Third alleged error – Brazilian market assessment

Liverpool argued that the growth analysis of the Brazil market, in which New Balance nominated 221 distribution points, was unrealistic and also that New Balance itself had identified concerns that kit manufactured in Brazil may be sub-standard which, if found to be the case, would lead to the nominated distribution points no longer being available. It was alleged that New Balance chose to ignore these concerns.

New Balance acknowledged the growth strategy in Brazil was aggressive as it forecast a ten-fold increase in sales but that this was justified by the presence of three Brazilian players as key members of a newly successful Liverpool team. New Balance argued that the company was at all times confident that the concerns regarding the quality of manufacturing would not lead to removal of distribution points in Brazil. New Balance’s arguments were accepted on both points.

Fourth and fifth alleged errors - calculation of figures for North America, South Africa, India and South America

The final errors charged by Liverpool against New Balance related to the calculation of figures for North America, South Africa, India and South America. Liverpool argued the figures were incorrect and demonstrated the "shambolic state of New Balance’s door count".[9]

Mr. Justice Teare found that acting in error is not evidence of acting in bad faith and that while a more careful study may have been useful and "ought to have been done as a matter of prudent business practice, an imprudent failure to carry out the exercise does not amount to a breach of the implied duty of good faith". [10]

Despite the allegations of Liverpool that New Balance "either knew or did not care that it could not match 6,000 doors" Mr. Justice Teare found that "New Balance matched the distribution obligation in the Nike offer in good faith".[11] As mentioned above, Mr. Justice Teare did note that actually performing the distribution obligation would be another matter but it was held that the New Balance offer was a valid match of Nike’s regarding distribution.

Matching Nike’s "marketing" obligations

It was in attempting to match the marketing obligation under the Nike offer that New Balance faltered. In failing to nominate specific global superstars of the calibre of "Lebron James, Serena Williams, Drake etc." New Balance proposed an offer to Liverpool which was less favourable than the Nike offer. Per Mr. Justice Teare "the missing words must have been agreed for a purpose" and that purpose must have been to impose an obligation on Nike to use specific stars or stars of the same calibre an obligation which was absent from the New Balance counter-offer.[12]

New Balance argued that the marketing term as a whole was so vague that it could not be said to be a "material, measurable and matchable term"as required by the terms of the agreement between New Balance and Liverpool. Therefore, New Balance was under no obligation to match the marketing term. However, the Court pointed out that New Balance had matched every part of the marketing term bar naming specific stars. For that reason, the final question to be decided was whether the effect of the term requiring Nike to use global superstars "of the calibre of Lebron James, Serena Williams and Drake etc." is measurable.[13]

Mr. Justice Teare found that today the marketability of personalities and influencers is more readily quantifiable than ever before. Indeed, a document prepared by New Balance and provided alongside their original renewal proposal gave a value to Liverpool and certain Liverpool players. This value was measured by the social media presence and exposure of the club and players. The Court held that "the evidence is clear that the calibre of such athletes or influencers can be measured in a variety of ways"

Analysis

The importance of clarity and precision in drafting

As is so often the case when contractual disputes end in a court battle the decision highlights the need for clarity for both sides on exactly what has been agreed under the contract and what exactly the rights and obligations of both parties to the contract are. New Balance, in agreeing to match all the "material, measurable and matchable terms"of any third party offer, exposed themselves to considerable risk and uncertainty. New Balance were able to match the Nike offer to a very great extent and fell down only on a term which they argued strongly was not a matchable term. If the terms which New Balance would have to match had been restricted in some form, then litigation may never have been necessary and New Balance may have retained the Liverpool contract.

That said it should be remembered that the balance of power in the negotiations around the form of the matching clause was likely held by Liverpool as one of the world’s leading football teams, rather than New Balance as a manufacturer attempting to establish a firm presence in football.[14]

Replica kit cannot be distinguished

The refusal of the Court to countenance the idea that replica kit may be distinguished from other forms of licensed products simply because shirt sales generally form the central item of manufacturing sponsorship agreements is also of note. Any argument that, by reason purely of their importance to these types of agreements, club shirts should be treated differently to other licensed products will (quite rightly) fail.

Again, it is a reminder, if one was needed, that categories of licensed products and how these categories are to be treated must be specifically defined and agreed in writing. Had Liverpool ensured that shirts were carved out from other categories of licensed products they would have stood a far better chance of success in arguing that New Balance could not put forward footwear stores as distribution points.

The interpretation of "good faith"

Also of note is the interpretation of "good faith" applied by Mr. Justice Teare. The standard applied by Mr. Justice Teare was

"whether reasonable and honest people would regard the challenged conduct as commercially unacceptable".[15]

It is interesting to consider this in the context of the allegation by Liverpool that the forecast sales for Brazil were unachievable. The New Balance regional manager for Latin America, a Mr. Cullen, had emailed his concern at the sales which might be made in Brazil predicting in his submission as part of the due diligence exercise that the first year of the proposed new Liverpool deal would see a "slight drop" in sales in Brazil followed by a "slow increase".[16] Yet the estimate used when responding to the Nike offer allowed for a ten-fold increase on the historical average during the proposed new term. The estimate placed great faith in the marketing power of Alisson, Fabinho and Firmino who combined have a little over 10% of the Instagram followers of Brazilian footballs only current global superstar - Neymar. Despite the concerns of Mr. Cullen, and the seeming lack of reality to the estimate, the Court was satisfied that there was no reason why this aggressive estimate might be considered as one made in bad faith. In addition, it would seem that a failure to carry out a careful study of the capacity of a company to match another’s commercial terms may be imprudent but not "amount to a breach of the duty of good faith".[17] Clearly, the bar to be reached in proving that a person or body has acted in a manner that is "commercially unacceptable" is a high one.

Costs

It was revealed in Court that Liverpool had incurred costs of £555,000 in defending the case. Despite that Defence being successful Mr. Justice Teare awarded only 20% of this amount to Liverpool as the greater part of the case had been fought on the distribution point on which Liverpool had failed. This aspect of the decision highlights the importance of litigants on both sides not only choosing their battles wisely but of winning those they fight.

The value of social media impact

For brands, manufacturers, athletes and influencers the decision is confirmation that the social media impact of major celebrities carries a measurable commercial value. Moreover, that commercial value is readily measurable to the extent that the Court was willing to distinguish between mere global superstars and global superstars "of the calibre of Lebron James, Serena Williams and Drake etc."

Could New Balance have done any better?

Whether New Balance could have acted any differently when submitting their counter-offer is an interesting question. The inclusion of "etc." in the Nike offer did allow scope for New Balance to simply nominate three athletes or influencers of the calibre of Nike’s recruits. On paper at least this would have been a match to the Nike offer. However, to do so without a reasonable belief that New Balance could access stars of this calibre would have been a breach of the duty of good faith thereby invalidating the offer. To actually gain access to such stars would have created a loss far above the £10 million New Balance were willing to budget for.

Realistically, having made great efforts to match the Nike offer on distribution, there seems to have been nothing further New Balance could do to have matched the Nike offer on marketing without greatly increasing their allowable loss figure. Ironically, New Balance has lost the jewel in its footballing crown due to a lack of access to stars from other sports and backgrounds.

On the 1st November 2019 New Balance was refused leave to appeal the decision of Mr. Justice Teare.[18] New Balance are now left to search for a new partner assuming this experience has not left them entirely disenchanted with European football.

Related Articles

Author

Tomas_Nolan

Tomás Nolan

Solicitor, Clark Hill 
 
Tomás Nolan is a solicitor in our litigation department. Tomás possesses a rounded knowledge of litigation at all levels, both general and commercial, with a particular focus on contentious commercial matters, cross-border disputes, employment law and debt recovery. Tomás is equally comfortable when advising and assisting clients engaged in adversarial litigation and in managing conflicts and resolving disputes at the pre-litigation stage.

Tomás holds a Masters of Law from NUI Maynooth and worked with the Irish Courts Service for a number of years prior to qualifying as a solicitor.

Commercial Litigation and Dispute Resolution

- Advising an extensive client base including large corporate bodies, small and medium enterprises, professional partnerships and private clients on a diverse range of litigation including numerous matters before the Commercial Court Division of the High Court;
- Advising both Plaintiff and Defendant clients across a range of matters including contractual disputes, contentious property matters, debt recovery and judicial review actions;
- Advising, representing and advocating for both claimants and respondents before the Workplace Relations Commission;
- Confident and competent advocator on behalf of clients before both the High Court and the Circuit Court;
- Advising clients in dispute with banks and other financial institutions both as to restructuring options, the prosecution of claims against the institution and the defence of debt/security recovery actions;
- Assessing actions on behalf of both potential claimants and respondents and advising clients on statute, previous judicial decisions and the commercial implications if and when litigation is progressed;
- Providing advice and assistance on cross-border enforcement before all levels of the Irish Courts.
  • This email address is being protected from spambots. You need JavaScript enabled to view it.