Sponsorship contracts have to protect reputations of both parties
In light of the recent dispute between Rory McIlroy and sportswear company Oakley in relation to the termination of his sponsorship agreement with Oakley and his acceptance of a lucrative sponsorship contract with Nike, valued at $25 million a year, there exists key issues to consider in any sponsorship agreement in order to avoid potential litigation.
Oakley, whom McIlroy had acted for as a brand ambassador, had instituted proceedings against McIlroy in the state of California claiming that they had the right to match any new sponsorship offer that was made to McIlroy. They argued that they should have been offered a right of first refusal on any new sponsorship deal that may have been offered to McIlroy and that McIlroy had breached this contract term.
McIlroy and his then agency, Horizon Sports (whom McIlroy is embroiled in a legal dispute with), claimed that Oakley had declared themselves to be out of the running for any new potential deal and that they were free to negotiate with whomever they wished. Media reports have suggested that Oakley had sent an email to McIlroy's then agent, Conor Ridge, stating that they were 'out of the mix' for any new sponsorship deal.
The dispute was settled amicably, the details of which have not been disclosed. Regardless of the specifics of the case, this dispute demonstrates that sponsorship agreements, which are often overlooked as being mere 'template' contracts, must be carefully worded and various key clauses drafted appropriately on a case by case basis.
Rights of first refusal and rights of first negotiation were the issues at question in the McIlroy/Oakley dispute. Such rights give the existing sponsor the right to match the terms of any offer that the rights holder receives in good faith from another potential sponsor or the right to negotiate prior to the arrival of any new sponsor.
These provisions often lack clarity and can lead to major disputes as can be seen from the McIlroy/Oakley case. Time should be of the essence in these clauses and obligations to negotiate with the original sponsor should only last a certain short period. The rights should end upon failure of negotiations within the specified time period. It is imperative that the mechanisms for the availing of these rights is clearly defined in order to avoid litigation.
It is now considered best practice to have a Purpose Clause in place which outlines the purpose/objective of the sponsorship for both parties involved. For example, if a team wins a trophy the rights holder may be entitled to a bonus from the sponsor. Conversely, if the rights holder fails to give the agreed exposure and compliance to the sponsor they lose a percentage of the payoff. This would be pro-rated proportionate to the extent of the failure.
Morality clauses are hot topics in the sponsorship law world. They are clauses which allow either party to terminate should one party tarnish their image or bring negative publicity upon themselves or the sponsor. Recent high profile examples of sports stars losing sponsorship over reputational damage include Tiger Woods, Wayne Rooney, Lance Armstrong, Ian Thorpe and Oscar Pretorius.
It can of course be the sponsor that tarnishes the rights holder's image as was seen in the Robert Stanford case where the tarnished businessman sponsored a high-profile cricket tournament in the West Indies and subsequently was charged with corruption. The rights holders subsequently terminated all contracts with him. Stanford was subsequently charged with white-collar crime offences and sentenced to prison in the US.
The wording of these clauses should be specific and set out certain instances whereby a party may terminate with just cause. Such instances could include where the athlete fails a doping test or is convicted of a crime.
These provisions have become so topical that many sponsors now consider endorsement insurance as an option in order to manage the risk of a sponsorship with respect to potential scandal or negative publicity.
Competition law must also be considered in the context of sponsorship agreements as exclusive agreements have often been struck down the by the EU Commission as being anti-competitive. Exclusive agreements must not be for excessive periods, must not be discriminatory towards competitors and in some cases should involve an open tender. Notable examples where the EU Commission has directed sponsorship arrangements to be modified include Mastercard's sponsorship of the FIFA 2006 World Cup in Germany where there was no alternative payment for World Cup tickets other than via credit card sales channels. The EU Commission has also forced the likes of Sky TV and UEFA to amend its broadcasting agreements in order to comply with EU competition law.
Other key areas of sponsorship contracts which must be considered include the licensing of intellectual property and who owns what, ambush marketing and whether or not the rights holder has provisions in place for this, scope of exclusivity and restrictions on other sponsors and also provisions for multiples layers of sponsors and rights.