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Despite the amount of money at stake, athletes and their representatives often do not appreciate the legal details of endorsements, exposing the athlete to unnecessary risk, diminished business terms and other negative consequences. What follows are 10 legal issues that agents, attorneys and athletes should consider when negotiating endorsement contracts.
1. Scope of endorsement
The contract should clearly establish the scope of the athlete’s endorsement duties, i.e., specifically when and how the athlete is endorsing what product. The failure to establish duties that the athlete understands and will satisfy can have serious consequences.
If the company demands exclusivity in the product category, as is customary, the definition of the category should not overly restrict the athlete from obtaining other endorsements. For example, if Tom Brady agreed last year to endorse Under Armour exclusively in the clothing category, rather than something like athletic apparel, he could not have signed his ensuing deal with Ugg Boots. Moreover, any conflict with an existing endorsement should be disclosed and waived.
Each endorsement contract grants the company a license to use the athlete’s name, likeness and other characteristics. The grant should specify at least the purposes for which the license may be used, the media in which the license may be used and the license territory. The athlete should also have the right to pre-approve any materials bearing his image (illustrated by Carson Palmer’s embarrassing 2007 print ad for John Morrell sausages).
Provisions that permit the company to extend the endorsement, such as options and rights of first refusal, should be minimized if they would prohibit the athlete from realizing the fair market value of his or her endorsement at the end of the term. Many agents particularly abhor rights of first refusal, which give the company the right to match a competing offer and thus less incentive to make an independent renewal offer. They also chill other offers, as a competitor would not want its offer revealed or stolen. From my experience, however, many companies will drop a right of first refusal request if the athlete agrees to exclusively negotiate (but not necessarily sign) an extension before seeking another deal, a more attractive alternative for the athlete.
Companies often require appearances as part of the endorsement, such as for an outing with key customers. Particularly in NASCAR, where drivers make appearances for a carful of sponsors, the terms are negotiated in heavy detail. Appearances should be scheduled only at convenient times, upon advance notice and up to a specific time limit, with all travel expenses reimbursed.
Under new Federal Trade Commission guidelines, an athlete can be liable for making a false or unsubstantiated testimonial about a product, even if prepared by the company. Thus, the company should be prohibited from asking the athlete to make testimonials that violate the FTC guidelines, even just a false tweet. Moreover, the athlete should have the right to review testimonials in advance and object.
The contract should clearly establish the business deal, which may include fixed fees, incentive compensation, royalties and/or free products. Particularly, representatives should carefully define performance terms only previously discussed at a high level, such as “sales” or “revenues.” In a recent negotiation where a client’s compensation had been generically designated as “10 percent of the company,” it was successfully negotiated that he receive 10 percent of the company’s “gross revenues” rather than “net profits,” a much more lucrative deal.
The company should be permitted to terminate the endorsement early only if the athlete materially breaches the contract and fails to cure. Ideally, material breach will be defined, with reasonable examples including missing appearances, disparaging the company or violating a morals clause. However, where athletic performance is contractually required — a golfer playing in 20 PGA Tour events for his equipment company, for example — illness or injury should not be cause for termination (although a compensation deduction is normally appropriate).
Singh continued to wear Stanford Financial’s brand after the company faced SEC charges.
Companies increasingly require morals clauses, which permit the company to terminate the athlete for an act that significantly devalues the endorsement or embarrasses the company. Recently, using morals clauses, Sprint terminated Miss Sprint Cup Paige Duke for racy photos, and Champion terminated Rashard Mendenhall for offensive tweets (for which Mendenhall sued last week). These clauses, while highly customized, should never be so broad as to allow the company to terminate for other reasons (e.g., it just made a bad deal). Further, morals clauses should exclude on-field acts within the scope of the sport, such as fighting in hockey. Oppositely, in an era of corporate wrongdoing, the athlete should be permitted to terminate the company for an immoral act. In 2009, Vijay Singh continued endorsing Stanford Financial after the company was charged with defrauding investors in a $7 billion Ponzi scheme, likely because his contract did not include such a reverse morals clause.
Despite the legalese often attached, the concept of indemnification is simple. Indemnification is an obligation of one party to compensate another party for its losses. The remedy is severe and thus is typically triggered only if the losses are caused by the compensating party’s bad act (e.g., willful misconduct). An athlete should give an indemnification provision only if receiving an equivalent provision from the company. Meanwhile, an athlete with significant leverage could potentially negotiate a broad, one-sided indemnification provision from the company.
While an endorsement likely presents additional legal issues, such as confidentiality, choice of law and force majeure, close attention to these issues should help establish a concise contract that reflects the business deal and protects the athlete’s interests.
David T. Miller (firstname.lastname@example.org) is a sports and entertainment associate with Robinson, Bradshaw & Hinson in Charlotte.
In terms of sheer exposure, it’s hard to find sponsorships that generate as many impressions. Whether it’s connecting with consumers through television and radio broadcasts or logo placement on all venue marketing assets including tickets, signage and online portals, every big game, concert and gathering holds the promise of sustained brand exposure before an engaged, captive audience.
All naming-rights deals contain most, if not all, of these components, but as in any long-term relationship, a vital success factor is partnership compatibility. As important as exposure and profile are to Sun Life Financial, commitment to the communities we serve is a cornerstone of our philosophical approach, so we had to make sure we found the right market and partnered with the right organization. That was one of the things that really sealed the deal for Sun Life Stadium: that Sun Life and the Miami Dolphins share the same philosophy about giving back to the community. It wasn’t just about putting our name on a stadium, but rather how we could work together to contribute time, talent and dollars to the local community.
While philanthropy is a key corporate initiative for Sun Life, it’s critical that beyond exposure, companies keep an eye toward specific business objectives when structuring these deals to ensure they benefit multiple aspects of their business. Perhaps the most important piece of the puzzle is developing an effective and creative activation plan that ensures these benefits are realized.
Huddle up with your community
A smart game plan for making the most of any sponsorship agreement starts with a strong and active commitment to the local community. A naming-rights deal affords the title sponsor a unique opportunity to join with local organizations on community affairs efforts that, if well-executed, will have a positive impact and engage local residents while increasing brand awareness.
Brand affinity is much more achievable when support is geared toward an important issue that aligns with the sponsor’s core business mission. For example, a personal goods company that sponsors a stadium might be inclined to work with organizations that support women’s health issues, while a mortgage lending company may see the community partner model as a way to host events that promote sound lending practices.
Whether the subject is education, economic development or social issues, a stadium sponsor holds a prime position for creating awareness, raising funds through hosted events and promoting worthy causes. When viewed through a charitable lens, stadiums take on a new life. They become vehicles that enrich the surrounding community and deepen the sponsor’s civic ties to the region where it has established a visible brand presence.
Tackle a cause
Nearly every modern professional sports franchise has a team foundation devoted to addressing critically important local needs. Because of a stadium’s highly visible position, as well as the physical asset itself, a sponsor has the power to be the driving force behind a signature event or program that inspires and benefits the local community.
Sun Life joined with the Dolphins to bring our signature corporate philanthropy program, the Sun Life Rising Star Awards, to South Florida. Now a cornerstone of the Miami Dolphins Foundation, the program improves the lives of underserved youth in major metropolitan areas across the country by providing students with financial resources and access to educational opportunities.
Dolphins executives and players participated in the Sun Life Rising Star Awards South Florida grant presentations and served on the program’s regional judging panel. Then Sun Life Stadium served as host venue for the first annual Sun Life Rising Star Awards National Summit, where we convened Rising Star award recipients and their nominating nonprofit organizations together with nationally renowned education leaders and celebrities like tennis great Venus Williams and Dolphins players Davone Bess and Chad Pennington to discuss critical societal education issues.
Clearly, a national forum involving education stakeholders discussing the state of public education in one of America’s major cities extended well beyond the typical stadium activity. What’s more is that the program leveraged multiple partnership assets and marketing vehicles including player and front office participation, extensive promotion through team and stadium marketing vehicles, and in-game presentations, to make a difference while shining a light on an important corporate initiative.
Naming-rights partnerships often include opportunities to create new, branded events that blend seamlessly into a partnering organization’s core mission. Examples include unique, branded sporting contests involving out-of-market teams (e.g., European soccer teams) or companion events to larger happenings (e.g., a college hockey event scheduled during the same week as the NHL’s iconic Winter Classic). Branded events provide sponsors yet another chance to create tremendous excitement and generate valuable exposure around their product or service.
The overall success of a stadium naming-rights partnership depends on a brand’s ability to connect with key audiences creatively and in a way that carries impact. A carefully designed and implemented program packs a much bigger punch than merely delivering millions of marketing impressions; it can serve as a statement about the future of your brand and its commitment to extending deep into the hearts and minds of a region.
Priscilla Brown is senior vice president, head of marketing and strategy for Sun Life Financial, U.S.
The first barrier is a general lack of understanding about how marketing works.
There’s an old adage from John Wanamaker: “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.” Many organizations consider marketing to be a necessary evil. Those outside of the marketing department are not sure what they actually get from a marketing investment, even though they understand it is a vital function in every successful company. Why is this? In general, I believe it is due to a misunderstanding about the return on investment in marketing spending when compared with a company’s other investments. ROI and ROO can, and must, be calculated for marketing investments. Without them, navigating the large and diverse organization is all the more challenging.
Secondly, many large organizations have ceded much control over regional and business-level marketing spending to lower-level managers. There are many reasons for this. Managers often quip, “You don’t understand my territory/product/service. I need to spend marketing dollars this way.” While these differences are very real, this behavior creates massive inefficiencies in spending as well as possible resentments and misunderstandings. This loss of control to territory/product/service levels of management creates three problems: significant communication issues both inside and outside the company, inefficiencies in spending, and dilutive brand messaging — all of which potentially create a cancerous division among the various company units.
So how does a manager overcome these obstacles?
1. An investment must start with a goal in mind.
This may sound incredulous, but I have seen many investments in marketing at very large organizations that happen because no one has ever asked why they are spending what they are spending. The budget process in very large organizations (at least those that are not under massive and life-threatening pressures) can be an alarmingly simple process. You take last year’s budget and see what needs to be modified. Thus, if we spent “X” dollars on print media last year, we could reasonably expect to spend “X” dollars again. Internal budget negotiations rarely address the question of the efficacy of the spending. There is little way to judge success when the investment was not specifically designed to return a defined set of results.
Managers may muse that since market share went up, the print campaign must have worked. The print campaign might never have been designed to go after market share; it might have been to build the brand and create sales. To our earlier discussion on ROI and ROO, a company must align and design marketing processes to deliver on measurable, defined and agreed-upon results.
2. There must be a clear delineation and understanding of efficiencies.
While the argument for simple return can be clear, it must also be clear how this will save money in the overall business. By focusing on the core brand positioning, the message can enjoy greater reach and frequency.
One great example of this strategy would be GE’s investment in the Olympics. It made a conscious decision to enter into only one major sponsorship relationship, and that one sponsorship delivers against no less than 13 of its major divisions. By combining all efforts on one significant, global-reaching sponsorship, it has maintained unity of message while aligning the iconic GE brand with the iconic Olympic rings.
In the same manner, by concentrating a company’s sponsorship marketing resources on one sport — or one league or team — a company can deepen the message by exiting relationships that do not directly support the stated goals. This approach makes saying “no” to the hundreds of requests for sponsorships easier and less damaging, even when the requests are made by consumers and clients. Saying “no” correctly is very important in order to maintain customer and client good will. The rejection is no longer perceived as unsympathetic; it’s just that the company is focused on this one sport or art or entertainment segment. Meanwhile, an overall cost savings can be built into the new strategy.
DuPont’s sponsorship of Jeff Gordon’s No. 24 became a unifying force throughout the company.
A company cannot retain regional/product/service disparities and expect any sort of unifying results. Good managers seek harmony in the total organization. Marketing investments done in the correct manner can help accomplish that result. These highly visible market statements powerfully communicate to the public, investors and employees what the company stands for. DuPont achieved this unity by focusing nearly all of its sponsorship spending on NASCAR and one driver in particular, Jeff Gordon. While this arrangement was initially considered a business expansion and unifying strategy for the paint division (a terrific alignment with Rick Hendrick, who was a major customer of that division and the owner of Hendrick Motorsports, for whom Jeff drives) it quickly became the team spirit of the entire company, loved and backed by all division employees as the highly visible and successful investment that it was.
Newly acquired companies or divisions have different cultures. A marketing investment positioned correctly can provide the unifying, flag-raising theme to rally the troops.
This effort is normally led by the CEO/COO. But that doesn’t describe all managers. So they need a champion. This is a senior manager with influence at the top levels of the organization who can help position the new strategy as better defined, more measurable, creating greater cost savings through efficiencies of scale, all the while providing a unifying force within the company. While this may sound obvious, it is often more difficult in practice because we fail to provide the champion with the ammunition to make them want to put their social and political capital into the project.
By following the three critical steps above, managers can give their champion the fuel to drive the project home.
Raymond Bednar (email@example.com) specializes in advising and implementing optimization strategies for investments in marketing channels at Hyperion Marketing Returns - Rockefeller Consulting in New York City.