The Sports Law & Policy Centre | Bad Boys, Bad Boys, Whatcha Gonna Do? Moral Clauses In Endorsement Contracts
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Bad Boys, Bad Boys, Whatcha Gonna Do? Moral Clauses In Endorsement Contracts

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By Roshan Gopalakrishna


Introduction

Celebrities are often the top choice for advertisers, sponsors and companies when it comes to brand or product endorsement for a variety of reasons. (This newsletter has previously discussed in detail the broad features of a celebrity endorsement agreement and the use of a celebrity’s attributes.) While this is an effective endorsement and marketing strategy, there is a level of credibility assignable to the public image of a celebrity, which has to be balanced in line with the brand’s interests. There is no escaping the fact that along with the public adulation a celebrity garners, there may be questionable actions which not only affect the celebrity’s credibility but also adversely affect the successful endorsement of the product and tarnish the image of the associated company.

As a precautionary measure, celebrity endorsement contracts now include a ‘morals’ clause or ‘morality’ clause, which enables the company, advertiser or sponsor to terminate the contract with a celebrity in the event that the celebrity commits any act which affects the credibility, image and reputation of the celebrity and potentially harms the company’s reputation or brand image.

Recently, the exercise of the morals clause came into debate, after a number of sponsors including sportswear giant Nike, eyewear manufacturer Oakley, technology retailer RadioShack and brewer Anheuser-Busch, terminated cyclist Lance Armstrong’s endorsement contracts after the US Anti-Doping Agency (“USADA”) published a damning report in October 2012 that named Armstrong the ‘ringleader’ of ‘the most sophisticated, professionalized and successful doping program [cycling] has ever seen.’ Further, Armstrong faces the threat of legal action by American insurance company SCA, who have indicated they will attempt to reclaim around $12 million in bonus and legal fees over sums paid to him for his Tour de France victories. Ironically, Armstrong took SCA to court in 2005, forcing SCA to pay up after SCA initially withheld the money because of allegations that he had doped.

Background and Development of the Morals Clause

The morals clause started featuring in endorsement contracts as early as 1921, when the Roscoe ‘Fatty’ Arbuckle scandal created a furore in Hollywood. Paramount Pictures had struck a 3 year deal with the comedian. However, public opinion turned against Arbuckle after his arrest on suspicion of manslaughter. Paramount Pictures could not escape their obligations under the endorsement contract. As a pre-emptive measure, rival Universal Studios initiated a policy whereby all actors employed would be bound by a morals clause in their contracts. During the 1940s and 50s, the heyday of McCarthyism, the morals clause effectively evolved into a mechanism to control political affiliations rather than regulate conduct. It is rumoured that film studios took refuge behind the morals clause to terminate agreements with actors who were allegedly communists. However, it is only since the 1980s, that morals clause has become a fixture in celebrity endorsement agreements. In 2007, a survey indicated that 75% of the endorsement contracts contain a standard form of a morals clause.

Definition and Scope of the Morals Clause

The morals clause, being a contractual creation, has become more comprehensive in defining its purpose and scope over the years. While there is no stringent provision or strict statutory requirement a morals clause has to meet, a comprehensive morals clause clearly defines the scope of its application, the rights of the parties and conditions and consequences of termination. In determining the scope, it is important to ascertain the party that will exercise discretion, and whether such discretion will be unilateral or bilateral. Usually, for an endorsement agreement the company may want to retain the unilateral right to terminate the agreement, or take punitive action. A celebrity endorser, on the other hand, may want bilateral rights in this regard. While the circumstances in which a contract may be terminated by reason of violation of the morals clause may be varied, it specifically targets instances where the reprehensible behaviour of one party has adversely affected his/her public image and by association, the public image of the other contracting party.

One of the most important components of a morals clause involves specifying the events in which a party to the contract may terminate for breach. To this extent, morals clauses can broadly be classified into two categories:

  1.  Broad Morals Clause – A broad morals clause usually gives the company sole discretion in determining the actions of the celebrity which constitute a violation of the morals clause. Generally, such a clause uses vague terminology and language, such as moral turpitude, acts offensive to public morals, indecency and bringing disrepute to the company, without specifying situations or setting any tangible limits. The broad clause is solely in the interest of the company, as the company can, at its discretion, obtain a back door exit from the endorsement contract should the celebrity behave in a manner that the company deems unsuitable. Such a broad clause is not very ideal to the celebrity endorser, but is a useful tool for the company, when the celebrity has not committed any overtly criminal act, but is embroiled in a public scandal or negative publicity. Contractually, a broad morals clause needs instruments of interpretation and usually tends to be more litigated than a specific clause.
  2.  Specific Morals Clause– A specific morals clause does not give the company any discretion to determine a violation of the morals clause, but lists acts which may constitute a violation in the terms of the contract. Events of termination may include instances such as being arrested on criminal charges, pleading guilty to a criminal act, criminal convictions or drug/alcohol dependency. This type of a clause is favourable to the celebrity endorser, as the contract cannot be peremptorily terminated by the company under the guise of a morals clause violation. However, such a specific morals clause can be troublesome for the company, in the event that the celebrity’s conduct falls short of criminal conduct but still creates public outrage and scandal, resulting in adverse effects to the company.

Legal Enforcement of Morals Clause

The morals clause becomes an important pre-emptive measure for companies, advertisers, sponsors, television networks and motion picture studios against any potential negative publicity an endorser might receive. There have been several instances where companies, advertisers and sponsors have enforced the morals clauses in celebrity endorsement contracts. In the United States, a number of courts have upheld the morals clause in celebrity endorsement contracts. As early as 1950, in Lowe’s Inc. v Cole [185 F.2d 641 (9th Cir. 1950)], a federal appeals court upheld the termination of a Hollywood screenwriter who was convicted of lying to the McCarthy Commission. More recently in 2005, in Nader v ABC Television Inc. [330 F.Supp.2d 345 (2004)], the federal court upheld the validity and enforceability of morals clauses, by holding that an advertiser was justified in enforcing a morals clause where an actor’s misdeeds had tarnished his name and image.

In September 2011, the legality of morals clauses was called into question in Mendelhall v Hanesbrands [2012 WL 1230743 (M.D.N.C.; Apr. 12, 2012)], when National Football League player, Rashard Mendenhall filed a suit against Hanesbrands Inc. for breach of contract after Hanesbrands terminated his endorsement contract due to his tweets about several sensitive social and political issues. The District Court for the Middle District of North Carolina denied the Hanebrands’ motion for judgment on the grounds that Hanesbrands’ discretion to terminate the contract did not extend to a simple disagreement with Mendenhall’s statements. Mendelhall is one among the several other celebrities including Charlie Sheen and Kim Kardashian who has had trouble after tweets. There has been an increase in the number of endorsement contracts being terminated, especially with the celebrities becoming more vocal on social media platforms over the past few years. Another recent example is that of Australian Olympic Gold Medallist swimmer, Stephanie Rice who was summarily dismissed from being the spokesperson for Jaguar, after she tweeted a decidedly homophobic comment after her team beat South Africa in a swimming tournament.

A rising concern seems to be whether a standard morals clause is sufficient to encompass controversies arising out of social media, or if there’s a need for more stringent agreements. Ideally companies, advertisers and sponsors would want to safeguard themselves from any likely damage that might occur to the credibility of the brand. However, it has to be kept in mind that all such efforts by companies, advertisers and sponsors to streamline, curtail or control the celebrity on a social media platform will have to be consistent with the constitutional right of free speech.

Remedies for Breach of Morals Clause

There are several remedies available with the advertisers in case of breach of the morals clause in the contract by the celebrity. The remedies include: (a) Terminating the agreement; (b) Suspending the agreement but retaining the services of the athlete for the future; (c) Imposing a financial penalty for the “immoral” behaviour but allowing the endorsement to continue; and/ or (d) Seeking damages for breach of the agreement. While a company may have discretion to enforce a morals clause, the company may at times decide not to enforce such clause even if there has been breach on the part of the celebrity. For instance, in 2002, Reebok continued to sponsor Allen Iverson, even though he was charged with felony assault. The decision, though severely criticized, worked in Reebok’s favour as the product continued to be successful even after Iverson’s arrest. Similarly, Nike continued to back Tiger Woods, even while other sponsors terminated his endorsement contracts following the public outrage over the reports of his various infidelities. Hence, prior to deciding whether or not to actually enforce a morals clause, a company has the delicate task of weighing the relative backlash from deserting an idolized endorser against the damage from continuing to be associated with a disreputable figure.

Conclusion

The morals clause has become a permanent contractual fixture in celebrity endorsement contracts, partly because of the increasing significance and public outreach the media has grown to have. With the sudden entry of social media like Twitter and Facebook, the celebrity has become a more accessible entity, scrutinized more minutely than ever before by both the media and the masses. Minor transgressions that might have gone unnoticed a few years ago are now published on the Internet and discussed within a matter of hours. From the companies’ point of view, it is important that the celebrities do not commit any act on any platform that will prejudice their commitment to the brand, endanger their public image, as well as the reputation of the company endorsing it. However, the extent of such control should not transgress constitutional boundaries of free speech and privacy, valuable to the celebrity.

For a long time, contracts were silent about the reputation, image and brand rights of the celebrity endorser. However, in recent times with companies garnering much negative publicity and loss of credibility, a concept called the reverse moral clause has come to the forefront. The reverse morals clause allows the celebrity endorser to distance himself from the company in the event the company’s actions adversely affects the name, brand, image, reputation and likeness of the celebrity endorser.

Last but not least, in a development bound to be of interest to the burgeoning celebrity endorsement/management and insurance industries in India, New Zealand-based insurance major Apex General has recently launched three new policies to cover the sports sponsorship industry. Policies offer cover on non-appearances, ”death, disability and disgrace” and payout of performance bonuses. Under these policies, sponsors of sportspeople who miss an appearance or whose reputation ends up in tatters may be able to claim insurance against losses incurred.

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