Just weeks before the new Scottish football season commences, Glasgow Rangers Football Club ("Rangers") finds itself prevented by Mike Ashley's Sports Direct Group from selling new replica football jerseys. This is not the first time the parties have fallen out over merchandising rights.
The existing distribution and licencing agreement between the parties has expired and Rangers proposes to replace Sports Direct with kit manufacturer Hummel. However Sports Direct is claiming a "matching right" in its contract with Rangers that entitles Sports Direct to match some or all of any third party offer. Sports Direct says that the information supplied to it by Rangers about Hummel's offer is not detailed enough and has obtained an interim Court injunction from the English High Court prohibiting Rangers from selling the Hummel kit pending the outcome of the full case. This has obvious financial implications for Rangers as the pre-season summer period is a peak time for the sale of new replica football club kits.
Right of first refusal
This "matching right", also known as a right of first refusal, puts Sports Direct in a stronger position than if it had a mere "right of first offer", which would only have obliged Rangers to enter into good faith negotiations with Sports Direct to try to reach agreement on mutually acceptable terms, after which it would be free to contract with Hummel.
The legal principles applicable to rights of first refusal were described by the UK Courts in the case of AstraZeneca UK Ltd v Albemarle International Corp (2011). In this case the grantor of the right argued that at most it was required to give the holder of the right an opportunity to negotiate on the same terms as the third party. The Court rejected that argument and described the right as a right to receive a contractual offer on terms which the grantor is prepared to accept, even though the detailed terms might require further negotiation.
The Court said that the right holder should be given an opportunity to match any third-party offer which the grantor might be minded to accept, and, in the event that the grantee matched the offer, to be awarded the business. The Court also held that the grantor of the right was obliged to act in good faith and to provide the right holder with the full details of the third party offer. It did not matter that the detailed terms might require further negotiation - this did not mean that the right of first refusal had no legal effect due to uncertainty.
Why do rights of first refusal create difficulties?
Various aspects of rights of first refusal can be challenging for the contracting parties, including:
- the danger (from the point of view of the grantor of the right) that the existence of such a right will deter third parties from engaging with the grantor, given that there is always the risk that they will be "pipped at the post" by the right holder;
- the negotiation of the more detailed terms of the agreement, even though the core "matching" terms may be clear; and
- addressing situations where aspects of a third party offer are not capable of being matched by the right holder – this was highlighted in the 2012 proceedings taken by Oakley against Rory McIlroy and Nike. Nike offered to pay McIlroy for his endorsement of a large range of products and clothing, including golf clubs. Oakley, a manufacturer of glasses and clothing, claimed a right of first refusal under its then existing endorsement contract with McIlroy but only in respect of certain aspects of the Nike offer.
Proceed with caution
As can be seen from the above, contracting parties should treat rights of first refusal with caution and with the benefit of professional advice.