The Sports Law & Policy Centre | Luck of the Irish? Understanding Oakley’s Suit against Rory McIlroy and Nike
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Luck of the Irish? Understanding Oakley’s Suit against Rory McIlroy and Nike

By Roshan Gopalakrishna

Introduction

On 15 December, 2012, Oakley, Inc. (“Oakley”) filed a suit against golfer Rory McIlroy (“McIlroy”) and competitor Nike Inc. (“Nike”) in a federal court at Santa Ana, California. Oakley’s claim is that McIlroy breached the endorsement agreement signed between them, more particularly the ‘right of first refusal’ clause therein, by reportedly entering into an endorsement agreement with Nike without affording Oakley the opportunity to match Nike’s offer.

This article seeks to review the basis of the lawsuit filed by Oakley against McIlroy and Nike, and discuss the significance of the ‘right of first refusal’ clause in endorsement agreements, particularly with regard to athletes.

Background

The plaintiff in this suit is Oakley Inc., an American manufacturer of sports equipment, apparel and accessories. Oakley was, until recently, a sponsor to McIlroy.

The defendants are Rory McIlroy, a professional golfer, currently ranked number one in the world; and Nike Inc., a multinational corporation which is a leading supplier of athletic shoes and apparel, and a major manufacturer of sports equipment. The defendants have purportedly entered into an endorsement agreement in breach of the agreement between Oakley and McIlroy.

In January 2011, McIlroy entered into a two year endorsement agreement with Oakley. In December 2012, with the imminent expiry of McIlroy’s agreement with Oakley, reports surfaced of a multi-year, high value contract between Nike and McIlroy. Although the terms of Nike’s offer to McIlroy were unconfirmed, Oakley proceeded to commence litigation against McIlroy and Nike asking for an injunction to stop the implementation of the contract between McIlroy and Nike.

Facts

The endorsement agreement between Oakley and McIlroy, covering eyewear, apparel and accessories, was valid for two years and expired on 31 December, 2012. This agreement contained a clause which granted Oakley the right of first refusal by affording Oakley the opportunity to retain McIlroy as an Oakley endorser beyond December 2012, by matching any offer that McIlroy might receive, in respect of the same product categories as specified in the terms of the agreement, for the period after the expiration of the Oakley deal.

Oakley claims that its contractual rights for McIlroy’s endorsements of its eyewear and performance apparel would be 30 percent of the total amount of the contract between McIlroy and Nike, which was a ‘head-to-toe’ endorsement arrangement, and had made an offer of the same to McIlroy, which was refused by McIlroy’s representatives. In response, McIlroy’s representatives contend that they received an email from a sports marketing executive at Oakley to McIlroy’s agent during contract negotiations which unequivocally waived the right of first refusal by stating, “We are out of the mix. No contract for 2013”.

However, even after receiving the above mentioned email of supposed waiver, McIlroy’s representatives continued to negotiate with Oakley, and it was only on October 23, 2012 that McIlroy’s attorney informed Oakley that the golfer “would not be continuing his relationship with Oakley beyond Dec. 31” and that they “would not engage in any further correspondence on the matter of the right of first refusal.”

Oakley contends that McIlroy had decided to proceed with the Nike deal and was determined not to allow Oakley to exercise its right of first refusal, and cause an impediment in the Nike-McIlroy deal. Thus, Oakley has commenced litigation, seeking an injunction to prevent the implementation of the endorsement contract between Nike and McIlroy. The Oakley lawsuit against McIlroy and Nike will be subject to the procedures followed by the United States District Court for the Central District of California, which include a mandated mediation process.

Analysis

Two of the rights that sponsors often seek for themselves in most sponsorship agreements are the rights of ‘exclusive negotiation’ (a variant of which is also known as the ‘right of first offer’) and the ‘right of first refusal’. Their primary object is to enable the incumbent sponsor to gain precedence over its competitors in securing extension of the existing contract for a longer term. The right of ‘exclusive negotiation’ restricts the right of the party being sponsored to negotiate with anyone other than the current sponsor for a fixed period leading up to the expiry of the contract. By so doing, the current sponsor is entitled to be the first entity to make an offer and to negotiate before other potential sponsors make their offers. It also benefits parties looking for continuous sponsorship deals, since the commencement of negotiations after the existing contract has expired would leave them without a sponsor until they are able to source and procure one. Thus, this right of exclusive negotiation can be a mutually beneficial term. It would not per se amount to a restraint on trade.

The ‘right of first refusal’, as has been most commonly drafted, commences after the contract has expired or otherwise terminated. This apparently allows the incumbent sponsor to match any offer received from other sponsors. If the former sponsor does match the offer, the party sponsored has to renew the contract on the new terms. If the former sponsor refuses to match, the sponsored party is free to enter into a fresh contract with a new sponsor on such disclosed terms. This term primarily benefits the sponsor, unlike exclusive negotiation. However, it does not necessarily harm the party being sponsored since its best offer is being matched.

The major issues in the current litigation are the nature of the parties’ respective obligations un­der the “right of first refusal” provision and whether they satisfied those duties, including the detail about Nike’s offer that McIlroy’s representatives were required to divulge to Oakley, especially in light of Oakley’s conten­tions that McIlroy’s representatives “only provided rudimentary information” to Oakley “about the total amount” of the Nike offer, and failed to share specific detail concerning the portion of the total amount of the Nike offer that was “covered by the right of first refusal, as opposed to other elements,” such as golf equipment. Conversely, certain emails quoted in Oakley’s complaint indicate that Mc­Ilroy’s representatives took the position that McIlroy had satisfied his duties under the first refusal provision by disclosing the “material terms” of the Nike provision, though it is unclear exactly what exactly was communicated to Oakley.

A key issue could be whether McIlroy’s disclo­sure included enough information to provide Oakley with a genuine opportunity to match Nike’s offer. One of the oddities of the situation is that Nike’s proposal encompassed more product cat­egories than the Oakley agreement, and could possibly be structured differently. Therefore, a significant issue that has arisen is whether the level of detail about the Nike offer that McIlroy’s team disclosed was sufficient to enable Oakley to determine the value of the portion of the Nike proposal that could reason­ably be allocated to “eyewear, apparel and accessories.”

In Miller v. LeSea Broadcasting, Inc., [87 F.3d 224, 226-28 (7th Cir. 1996)] and USA Cable v. World Wrestling Federation Entertainment, Inc., et al., [766 A.2d 462, 466 & nn. 8-9 (2000)], courts have required that ex­ercises of rights to first refusal should be exact matches of all of the relevant and material terms of the competing offer, namely, the components of the competing offer that are coextensive with the subject matter of the original contract.

Another hotly contested issue is likely to be whether Oakley waived its right to match a competing offer by sending McIlroy’s representatives an email that stated, in part: “We’re out of the mix.” Oakley’s complaint indi­cates that the email in question, which its representatives allegedly sent while awaiting details of Nike’s proposal, prompted McIlroy’s representatives to assert that Oakley had waived its first refusal right and relieved McIlroy of any further obligations.

In general, however, courts are generally loathe to force individual athletes or entertainers to perform services against their will, and are only slightly more willing to en­force negative covenants in personal services con­tracts by enjoining individuals from proceeding with alternative employment that conflicts with their pri­or commitments. In American Broadcasting Cos. v. Wolf, [430 N.Y.S.2d 275, 283-84 (1980)], a New York appellate court found that a local sportscaster had breached the first refusal and good faith negotiation provisions of his contract with ABC by accepting an offer from CBS without first giving ABC an opportunity to match CBS’s offer, yet refused to order the sportscaster to afford ABC the right to match the CBS offer or to enjoin the sportscaster from working for CBS. While noting that “equity has fashioned injunctive relief in other right of first refusal cases,” the court reasoned that specific performance of personal services contracts is highly impractical, especially when litigation has “exacerbated an already strained relationship.”

Contractual Restraints under Indian law

Contractual restraints, often including terms such as the ‘Right of First Refusal’, can include within their ambit conditions which provide right or relief to one of the parties but which might be an unreasonable constraint on the other’s freedom. The Indian position on the restraint of trade is governed by section 27 of Indian Contract Act, 1872. It voids ‘every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind’. The only exception made is in the limited case of sale of goodwill. Restrictions incorporated in a contract would not amount to restraints on trade: (a) if they are restrictions on freedom in carrying out the activity, and not a bar to carrying it out; and (b) if they serve to promote trade rather than restrain it. Courts determine the validity of the restraint at two levels: (a) when it acts; and (b) its reasonableness.

If a contractual restraint acts beyond the term of the contract, it is void, and no consideration of its reasonableness is needed. If it acts only during the term of the contract, its reasonableness will be examined, and upheld if reasonable. If it acts both during and after the contract, and is reasonable, that part of it acting during the contract will be valid.

Zaheer Khan case

Zaheer Khan (Zaheer), an Indian professional cricketer, had signed a promotional agreement with Percept D’ Mark India Pvt. Ltd. (Percept) in 2000 for a period of three years, with the original contract term ending in October.

In July 2003, the company sent him a draft agreement for renewing the contract for another five years in accordance with the renewal clause contained therein. Zaheer turned down the offer for renewal, as he was being approached by other management agencies. Percept approached the Bombay High Court seeking an injunction against Zaheer signing with a third party. The matter then went on appeal to the Supreme Court. Percept relied on clause 31 (a) and (b) of the contract as per which Zaheer could not accept any offer for endorsements, promotions, advertising or other affiliation with regard to any product or services during the contract term and for a period of 180 days thereafter. Further, prior to accepting any offer, he was under an obligation to provide Percept in writing all the terms and conditions of such third party offer and provide the appellant the right to match such third party offer.

Percept’s main argument was that the terms were in promotion of trade and did not restrain the player in any way. Further, it was urged that all negative covenants were not in restraint of trade although they may have an impact at a stage after the term of the contract. Percept’s other contention was that the contract spoke of the first term being an initial term, and the full term contemplated was beyond the initial term of 3 years. Since the right of first refusal was acting only after the initial term, and not the full term, the restraint, if any, was not post-contractual. Thus, the argument advanced was that the Court ought to look into the reasonableness of the restraint, and hold it to be valid. The final contention was that the right of first refusal was a standalone, separate agreement that stood independent of the original sponsorship contract.

In its decision, the Court held that the relevant clause was void and unenforceable as it clearly restricted the player’s freedom of contract and hence was an impermissible restraint. In such case, the reasonableness of a restraint could not be considered either, since the restraint was post- contractual. The Court rejected the initial term argument, and held that the right of first refusal clearly restricted Zaheer’s future liberty to deal with the persons he chooses for his endorsements, promotions, advertising or other affiliations and such a type of restriction extending beyond the tenure of the contract is clearly hit by section 27 of the Indian Contract Act and is void.

Yuvraj Singh case

This case involved Percept’s attempt to enforce the “right of first refusal” clause in its promotional agreement with cricketer Yuvraj Singh (Yuvraj). The contract entered into in 2003 gave Percept the exclusive rights to manage and market Yuvraj during the four-year contract period which was due to expire on December 11, 2007.

The “right of first refusal” clause gave Percept the right, during the contract period as well as subsequent to that, to match any third party offer received by Yuvraj and to continue the relationship on those commercial terms for the period beyond the original service period. Taking into consideration the Supreme Court of India’s precedent in the Zaheer Khan case and other decisions that had been followed in the Zaheer Khan case, the High Court held the clause to be a “post-termination negative covenant in a personal services contract” and, therefore, void and unenforceable.

In both the aforementioned cases, the courts drew up a set of principles that will be applicable in any future litigation of a similar nature:

a) The right of first refusal in promotional agreements is in the nature of a negative covenant;

b) The legal position with regard to post-contractual negative covenants or restrictions has been consistent, unchanging and completely settled in India. The legal position clearly crystallised in India is that such post-contractual negative restraints are void and that while construing the provisions of section 27 of the Indian Contract Act, neither the test of reasonableness nor the principle of restraint being partial is applicable, unless it falls within the express exception engrafted in section 27 dealing with sale of goodwill;

c) In view of the personal nature of the service and relationship between the contracting parties, a contract of agency/management/promotional agreement is incapable of specific performance and to enforce performance thereof would be inequitable. Similarly, a court cannot grant an injunction restraining an athlete from contracting with a third party as that would have the effect of compelling the athlete to be managed by the agency he was previously contracted to and in substance, effect a decree of specific performance.

Conclusion

As a general matter, the on-going litigation serves as a timely reminder to parties to a contract with a first refusal provision that their conduct from the time that a competing offer is made may later be placed under a microscope. If the party with the first refusal right is con­sidering matching a competing offer, it should take ex­treme care to avoid words or actions that might later be construed – even misconstrued – as inconsistent with an intention to exercise that right.

Among other things, this dispute underscores the need for parties to right-of-first-refusal provisions in endorse­ment agreements to anticipate future scenarios and to document the parties’ duties as precisely as possible at the time of contracting. The litigation also serves as a re­minder that, when a party’s first refusal right is implicat­ed, the other contracting party may be held to account if it behaves in a manner inconsistent with affording the right holder a genuine, bona fide, good faith opportunity to ex­ercise its matching right. Furthermore, for parties with first refusal rights, this litigation brings to light the difficulty of enforcing such provisions – even if the right has been violated. Above all, this dis­pute should give parties entering into endorsement deals cause to reflect on the practicality of a first refusal provision – including whether, if the athlete or celebrity is ready to move on to another corporate patron when the term of the deal expires, it makes good business sense for the company to seek to force that individual to continue endorsing its products.

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