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Introduction
Morality clauses have long been an accepted part of sports sponsorship and endorsement contracts, particularly those of individual athletes. Such clauses allow a sponsor certain rights, most obviously a right of termination, in the event that the athlete conducts himself or herself in a way which will damage the image of the sponsor or the products the athlete is being paid to promote.
The association of Sir Allen Stanford and the English Cricket Board (ECB) ending, at least for the moment, with the termination by the ECB of its contractual arrangements with Stanford, has brought into focus what have been termed “reverse morality clauses”, whereby an athlete or sporting body may terminate its arrangements with a sponsor if the sponsor engages in activity which will tarnish the image of the athlete or body being sponsored.
This article differentiates the aims of morality and reverse morality clauses, and questions what, if anything, sporting bodies entering into sponsorship agreements can learn from the Stanford saga to protect themselves.
The Stanford Saga
Under a deal struck between Stanford and the ECB in 2008, the England cricket team were due to play five matches in the Caribbean each worth $20 million, with further games to be staged in England worth $9 million per year also planned. Sir Allen Stanford’s association with the ECB was controversial from the outset, from Stanford’s arrival at Lord’s in a helicopter, to widespread disapproval of his behaviour with the England players’ wives while watching the tournament. It was, however, the charge by the US Securities and Exchange Commission (SEC) that Stanford’s companies were engaged in a “fraud of shocking magnitude” that drove the ECB to terminate all contractual links with Stanford.
Differing objectives of morality and reverse morality clauses
Clearly a common ultimate aim of both types of clause is brand protection: in the case of a sponsor, the brand or campaign being promoted, and in the case of the sporting body, the value of its own brand to other sponsors. Nevertheless, while the substance of morality and reverse morality clauses appear similar, sponsors and bodies respectively will have slightly different reasons for including them in sponsorship agreements.
Financial expenditure
A morality clause will allow the sponsor to control its expenditure by suspending payments made to the athlete or body or by terminating the agreement. For example, Kelloggs’ cancelled its sponsorship of Michael Phelps in February 2009 following his admission that he smoked marijuana. This was, strictly speaking, a refusal by Kelloggs to renew its agreement rather than termination under a morality clause, but the same logic applies. Interestingly, the remainder of Phelps’ sponsors have stood by him. The sponsor may also want to reclaim money already paid to the athlete. In one of the more high profile invocations of a morality clause, Michael Vick, the rising NFL star, admitted in 2007 that he had bankrolled an illegal dog fighting operation. Not only did he have his endorsement contract with Nike cancelled, but his team, the Atlanta Falcons, succeeded in forcing him to repay some of the bonuses he had received under his player contract. A mechanism for repayment can even be drafted into an agreement. For example in 2000, Laveraneus Coles, then a wide receiver with the NFL team the New York Jets, signed an endorsement agreement under which he as obliged to repay $100,000 each time he was convicted of a crime, pleaded no contest to a charge, or was suspended by the NFL.
A sporting body, on the other hand, will generally want to maximise its income, so must weigh up termination with the resulting loss of income. If it terminates the agreement, the body must ensure is that the sponsor can no longer claim any connection to it, so for example no marketing materials may be used or the sponsor featuring the body. This will enable, the body to grant valuable, unfettered, rights to alternative sponsors.
Control
In a sponsorship agreement with an individual, a sponsor will want the clause to exert an element of control over the behaviour of that individual. On one hand this is a ‘stick’ approach, since in common with many termination provisions in any sort of commercial agreement, the very existence of a morality clause is designed to prevent an individual from acting in a certain way or risk losing income. On the other hand, this can be a ‘carrot’, since it is common for the sponsor to stagger the payments so that in the event of the morality clause being invoked, the sponsor can merely discontinue payments rather than having to reclaim monies already paid.
Different considerations apply to the sponsorship of a governing body of a sport, since governing bodies are reluctant to have another party dictate how to run their sport should be run. It is more difficult for sponsors to control athletes’ behaviour through an agreement with the sport’s governing body as it will be that governing body which regulates the athletes’ behaviour, and so a termination right on the basis of player misbehaviour would have to require something extremely serious before the sport or the governing body as a whole is brought into disrepute. A common compromise is a requirement that the governing body follows its own disciplinary procedures, which a governing body should find hard to oppose.
The ability for an individual athlete or body to control the actions of a sponsor is much more limited. Most obviously, as it is the sponsor who controls the funds, the body will have a much lower degree of leverage. It is rather more difficult to see, outside a few specific examples such as a requirement to abide by ethical standards over child labour, what influence a sporting body could have over a corporate sponsor through its contractual arrangements.
Indeed, this imbalance is also reflected in the limited ways in which the behaviour of sponsors could impact a sporting body’s brand. Sportswear manufacturers are continually dogged by accusations of unethical behaviour, and yet the world’s most valuable sporting brands have maintained their relationships with the manufacturers. As a more current example, while bankers are being pilloried in the UK and abroad for precipitating a global financial crisis, there is no suggestion that Barclays have brought the Premier League, or RBS the Six Nations Championship, into disrepute. Indeed the only criticism of this form of sponsorship has been criticism of RBS for signing a new deal to renew its sponsorship of the Six Nations Championship until 2013. 1
Crisis management
A sponsor would also want to be able to have a role in managing any crisis which develops, such as restraining publication of a damaging article or otherwise working with the athlete to ensure that any damage to the brand or the campaign is minimised. This, clearly, is something which even the most powerful sporting body would find difficult to achieve, particularly if it is unrelated to sport. How, for example, could the ECB have managed the fraud allegations, or the Scottish Rugby Union have exerted any influence on managing HBOS’s problems in light of its sponsorship of Scotland’s autumn rugby internationals? Further, where large companies sponsor a large number of events, it seems impractical that one or more events or body could influence the crisis management of a corporate sponsor.
Extent of clauses
When negotiating a morality clause, an individual will aim for a sponsor to be able to terminate only in specific, objective circumstances, such as criminal activity or suspension from their sport, and for termination to occur only when allegations have been proved, or at the very least for the individual to have the right to explain themselves. As such, such termination provisions are not dissimilar to any commercial or indeed employment agreements. There are many actions which fall well short of a criminal conviction which would tarnish a sponsor’s image, as indeed accusations can be as damaging as actual conviction, and so the sponsor will aim for a more broadly worded clause which would allow it, in its sole discretion, to determine whether that individual’s actions warrant termination. A sponsor of an individual would usually be in a strong position to include a wide morality clause, since it would be difficult for the individual to argue that he or she has the right to misbehave. Given the balance of power between sponsor and athlete, such clauses often do end up widely drafted, but that may not necessarily be helpful for the sponsor. Where a clause is very wide, there is a risk it could be challenged on the grounds that it is too uncertain to be enforceable.
As set out above, however, a governing body of a sport would be very unlikely to accept any fettering of its ability to run its sport, or indeed to risk allowing the sponsor to terminate outside very specific circumstances.
Just as a governing body of a sport would be unlikely to accept a third party controlling its activities through a broad reverse morality clause, neither would most sponsors. A sponsor, particularly a listed company, has a range of existing duties to employees and to shareholders and would be very unlikely to agree to fetter its actions at the option of an individual or body it has sponsored. Further, having invested large sums of money in sponsoring an event or body, a sponsor would be very unwilling to accept the right of a sporting body unilaterally to terminate its arrangements, irrespective of what standard of reasonableness is required when making that decision.
A sponsor would be more likely to accept specific termination triggers, such as fraud or other serious criminal activities alongside more usual triggers such as insolvency of the sponsor. A sponsor may give additional comfort to the body in relation to the use of advertising materials, so for example it may undertake to advertise only in line with advertising codes, or not to promote indecency or discrimination. These would be unlikely to be termination triggers themselves; rather, a body would have to look at the specifics of the termination provisions and rely on termination for, say, material or persistent breach of that obligation. A broader undertaking as to the operation of the company outside the sponsorship arrangements would be very rare.
Other methods of protection
Clearly at the very start of the process, a body should undertake due diligence on a sponsor, just as a sponsor will investigate an athlete or governing body. This due diligence, together with warranty protection, is designed to flush out any skeletons that the counterparty has in its closet.
Generally the due diligence undertaken by a sporting body on a potential sponsor is more limited, particularly given the short supply of sponsors available, and in any case would focus on the sponsor’s ability to pay the sums due. Giles Clarke, the Chairman of the ECB confirmed that the emphasis on its due diligence on Stanford was focused on his ability to pay rather than investigation into the character of Stanford. A case filed in January 2009 by the Chicago Cubs alleging its sponsor reneged on its obligations shows the importance of ensuring that a sponsor is able to pay the sums promised under the agreement. 2
Lessons from Stanford
What lessons, then, can sporting bodies learn from the Stanford affair in drafting contractual remedies for the misbehaviour of a sponsor? For many commentators, the accusations of fraud against Stanford are a vindication of their views of him as an individual. Indeed this is not surprising, since Stanford’s endorsement of English cricket was unlike more usual sponsorship arrangements, such as the sponsorship of the Premier League by Barclays or the Six Nations Rugby by the Royal Bank of Scotland. Although the sponsorship monies were provided by though Stanford’s companies, Sir Allen Stanford tied himself personally to the ECB and the events he sponsored, with his picture on the dressing room doors and personal access to the players. One of the many ironies of the Stanford saga was that it was this personalisation of the endorsement, and Stanford’s behaviour as an individual which received the most criticism in the press and the cricketing world, but it was the behaviour of Stanford’s companies and Stanford himself as a businessman which led to the termination of the contractual relationship with the ECB.
It is therefore important to ask not just whether a reverse morality clause would have helped the ECB, but what sort of protection could have helped. Clearly specific triggers would be vital in this situation. The ability for the ECB to terminate after news of the investigation broke would have been crucial, as would the post-termination provisions. A clean break, with no ongoing obligation of the ECB to continue to participate in Stanford-endorsed events would be necessary.
But more generally, would a broadly drafted reverse morality clause have helped the ECB exit from its arrangements with Stanford? The answer is probably no. In the absence of the allegations of fraud, much of the dislike in the cricketing world centred around Stanford as a person, but it is hard to specify individual trigger events, or even argue that taken as a whole Stanford’s actions brought the ECB into disrepute. Kevin Pietersen, who captained England at the time of England’s ill-fated matches sponsored by Stanford, may have called Stanford a “sleazebag” in his column in an English tabloid, 3 and many character assassinations have appeared in the press, but general dislike and distrust are very difficult things to capture with sufficient certainty to allow a termination right to stem from them.
Indeed, in this case the unwillingness of the ECB to terminate its relationship with Stanford is an illustration of how bodies are unwilling, particularly in the current economic climate, to terminate agreements under which they will gain funding. Here, the formalities of a quadrangular event to run until 2011 were still being finalised as the SEC investigation was announced. Clearly at that stage there was no appetite within the ECB, or at least at the higher levels of the ECB, to terminate the arrangements on the basis of Stanford’s personal behaviour.
If hindsight does teach us anything from Stanford, it is the value of due diligence. There has been much comment now on how the ECB failed in its due diligence of Stanford. Given that the ECB’s arrangements with Stanford were terminated following a financial fraud which was not picked up by the many sophisticated investors in Stanford’s businesses, it is difficult to see how this aspect could have been improved by the ECB. Yet in the case of Stanford, the ECB should learn lessons from corporate sponsors’ dealings with individual athletes. If a sporting body is to link its brand so intimately with an individual, in an ideal world it is vital to ensure that this individual will fit in closely with the body on a personal level. Vodafone’s decision not to renew its own sponsorship of the ECB and the reduction of sponsorship for Formula 1 indicate there are may be a reduction in sponsorship revenues available. Nevertheless, what the Stanford saga shows is fuller investigation of a potential sponsor, particularly where that sponsor is in effect one individual, is as key as investigation of an individual being sponsored.
Angus Bujalski
This article has been published in World Sports Law Report, Volume 7 Issue 3, March 2009 and reproduced with kind permission.
1 See, for example, John Mann MP, of the Treasury Select Committee, describing such sponsorship as “reckless” as reported by the Sunday Times, 15 February 2009. RBS has since announced it will reduce its expenditure on sports sponsorship, including ending its sponsorship of the Williams Formula 1 team at the end of the 2010 season.
2 Chicago National League Ball Club, LLC v Under Armour, Inc., case 09CV419 filed 22 January 2009 in the District Court for the Northern District of Illinois.
3 News of the World, 22 February 2009.
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