The Stokes equation
As cricketer Ben Stokes joins the rest of his England teammates in New Zealand this week, he will be hoping that his off the field troubles are behind him.
Providing some comfort to Stokes is the fact that he is due to receive 125,000,000 rupees (£1.37m) for playing in this year's Indian Premier League ("IPL") tournament and was again the star attraction in the auction held on 27 January 2018, becoming the most expensive overseas player for the second year running.
This news follows a difficult period for Stokes: on 30 September 2017, the Sun newspaper released a video allegedly showing Stokes brawling outside a Bristol nightclub. Stokes was omitted from England's tour of Australia and New Balance, Stokes' cricket and footwear sponsor, terminated its agreement with the cricketer. He was subsequently charged with affray, has entered a not guilty plea and faces a court date in March.
However, another of Stokes' sponsors, Red Bull, has maintained its support and his value in the recent IPL auction points to his continued marketability.
Sponsors increasingly face difficult decisions of whether to stand by sports stars following off-field incidents, indiscretions and media storms. Crucial to such decisions are the contractual rights contained in the endorsement deals.
Conversely, sports stars receive substantial portions of their income from personal sponsorship and do not want sponsors to be able to terminate at the merest hint of bad publicity.
This article discusses typical 'morality clauses' which brands seek to include in endorsement deals and identifies some recent trends in the negotiation of such clauses.
Athlete endorsement deals
Sportsmen and women have been promoting the goods and services of brands since baseball players were featured on the back of tobacco cards in the 1870s. However, recent years, and the rise of social media in particular, have seen a huge increase in the impact and value of sponsorship deals.
Brands look to sign athletes to endorsement deals in order to create a brand association between their products and the star. In the case of New Balance and Stokes, New Balance supplied Stokes with cricket equipment (value in kind) and a sponsorship fee (rumoured to be worth around £200,000 a year). In return, Stokes likely licenced his images rights to New Balance for promotional use and committed to promote New Balance through personal appearances or through social media posts. The aim of such an association is two-fold; the first is tangible, that sales increase. The second is less so, that the association raises the company's profile and creates the impression of New Balance being a 'premium' brand (as in the case of Rolex's sponsorship of Wimbledon, which provides an impression of luxury and exclusiveness for both brands).
Just as the association with premier sports men and women creates value for brands, any change in perception of these athletes by the public can affect the brand. When ending its partnership with Stokes, New Balance's press release stated that "New Balance does not condone behaviour by our global athletes that does not match our brand culture and values, and therefore we have ended our relationship with Ben Stokes, effective October 11, 2017".
In order to protect their brands, sponsors seek to include language in sponsorship and endorsement deals that allow them to terminate, suspend or reduce payments due to stars who have devalued or could potentially devalue their brand. Such provisions are known as morality clauses and are often heavily negotiated, with the brands wanting them drafted as widely as possible whereas the athlete would prefer a discrete, narrow set of circumstances.
Typical morality clauses
A typical morality clause will set out the situations in which the sponsor can terminate the arrangement. The bargaining power of the parties will often determine what these circumstances are. Each endorsement deal is unique and must be tailored to the star as well as the brand they are endorsing.
The right to termination may be triggered by various acts or omissions of the athlete, for example:
- Catch-all clause – a brand will typically attempt to insist on including a clause that enables it to terminate if the athlete does or omits to do any act which may affect the reputation or image of the brand or company. While athletes will seek to avoid such wide-ranging provisions, these clauses remain relatively common. However, wide clauses can also be problematic for sponsors – it can often be hard to prove whether an athlete's conduct has adversely affected a brand's reputation or brought them into disrepute and thus may create an argument of wrongful termination. Therefore sponsors are often wary of exercising such rights.
- Criminal conduct – brands may seek to include termination rights if a sports person is arrested, charged or convicted of a criminal offence. Athletes will seek to limit such rights, for example excluding convictions for road traffic offences or requiring an actual conviction before the right is invoked. Recently, we have seen athletes seeking to exclude convictions for tax offences and any conviction that did not result in imprisonment from justifying termination.
- Scandal – it is not only criminal conduct that can affect the perception of an athlete and by association a brand. In this era of 24 hour news reporting and social media's capacity for instant sharing, any indiscretion can be made public. Determining what type of activity warrants activating a termination right will be hotly negotiated (for example, whether an extra-marital affair justifies termination). One solution is for a sponsor to have the right to terminate following unfavourable media speculation only after the athlete has failed to publicly (or privately) deny allegations following a request from the sponsor. Athletes may also seek to exclude past transgressions which are already in the public domain, although sponsors may be wary of new, unfavourable, information coming to light.
- Sporting sanctions – conduct which is prohibited by the rules governing a particular sport may have a negative impact on reputation of brands. Falling foul of anti-doping rules is a particularly sensitive area but violent conduct or other integrity issues leading to bans are often discussed. Brands may seek specific termination rights if an athlete is sanctioned by the relevant sports governing body for such matters.
Aside from provisions relating to the conduct of athletes, sponsors may also seek termination rights in event of:
- use by the athlete of equipment or apparel of a competitor. This should be subject to permitted exceptions such as requirements of club or national team kit;
- retirement, inactivity (including due to injury) or death; and/or
- derogatory comments made by the athlete regarding the company.
Termination rights in personal endorsement deals are typically far wider than the equivalent employment contracts for sports stars, particularly where those contracts are standard form agreements collectively negotiated with the relevant player's union. For example, the standard contract for Premier League footballers contains limited termination rights relating to gross misconduct.
Right of Reduction
There may be situations where the player or athlete does something that impacts the value of the image rights but the sponsor does not want to terminate the agreement. In this situation, the sponsor should include a right of reduction in the agreement. This will set out in what circumstances and by how much the sponsor may reduce fees payable to the athlete as a result of the act.
A typical event that would trigger a right of reduction is if the athlete were to use another manufacturer's product when competing or if the athlete covers up the logo on the equipment whilst competing. Repeated infringement of this type will often lead to a right of termination. It is common for there to be overlap between the acts or omissions that give rise to rights of termination and reduction. This allows the brand greater flexibility when deciding how they would like to proceed.
It is also typical for reduction of fees to, indirectly, reflect loss of form. For example, many deals between footballers and boot manufacturers will include reductions in payments if the player in question is transferred to a less desirable club or league or ceases to be selected for the national team.
Suspension of Agreement
There may be situations where the sponsor may simply wish to merely suspend its association with the athlete (and any payments due), for example where there are charges or disciplinary proceedings brought against the athlete. This can be beneficial to both parties as the arrangement can continue if the athlete is cleared of wrongdoing.
Walk away rights
Sports stars in a strong bargaining position are often successful in obtaining very narrow morality clauses. One additional option for brands is to include provisions which expressly provide for early termination subject to a lump sum payment (typically being the sums due to the remainder of the term less a discount).
Paying large sums to end a relationship with a sports star mired in scandal may not be an ideal solution but this can provide a clean break and certainty. In a different context, football clubs are increasingly adopting the approach in contracts with managers by agreeing compensation payments following exit at the time of hire.
Clear walk away rights enable a brand to act decisively without the threat of legal action if there is a debate as to whether morality clauses can be invoked.
As an alternative, brands sometimes simply choose to run down deals, continuing to pay the athlete but not seeking to exploit the rights granted to them. This approach can often lead to less publicity for both parties compared to a press release announcing termination at the height of media interest in a scandal.
Nearly all current endorsement deals contain obligations on athletes to make social media posts promoting the sponsor's brand or products. Until recently, ending a contract and pulling current or future campaigns would be sufficient to create separation between a brand and an athlete with a tarnished reputation. However, historic social media posts, if not deleted, can create an enduring and unwanted association. Accordingly, it is becoming increasingly common for sponsors to demand a right to require historic social media posts mentioning the brand to be deleted.
Reverse morality clauses
High profile athletes may also request rights to end an association with a brand where the brand does something which may cause reputational damage to the athlete, which may include public criticism of the athlete. Many of the above issues will arise in negotiation of such clauses.
Positive associations between brands and sports stars are driven by the reputation of both parties. As such, morality clauses are a key point of negotiation. While such clauses are nothing new, practice is constantly evolving with walk away rights and cleansing clauses becoming increasingly common. Nonetheless, bargaining position remains the decisive factor.
While we cannot speculate on the detail of Ben Stokes contract with New Balance, it is notable that Stokes had not been charged with any criminal offence or subject to any sporting disciplinary processes when the contract was terminated.
No doubt Stokes will be scrutinising the morality clauses in his next bat sponsorship deal a little more closely and indeed the provisions of his new IPL contract. 125,000,000 rupees may depend upon it.