The Sports Law & Policy Centre | The Anatomy of an Endorsement Agreement
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The Anatomy of an Endorsement Agreement

The Anatomy of an Endorsement Agreement

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By Roshan Gopalakrishna

Introduction

Over a period of time, celebrity endorsements have been viewed as an effective and prominent marketing tool by many companies. Typically, a public figure would appear in advertisements and promotional material marketing the products or services of a company.

However, the past couple of decades have witnessed the evolution of ‘celebrity endorsements’ into ‘brand associations’, wherein companies look to celebrities as ‘brand ambassadors’ who spread awareness about a brand, rather than merely promote a brand. Celebrity endorsements can usually be classified into:

a. traditional endorsements, which involve a celebrity promoting specific goods, relying on the celebrity’s fame and ability to influence purchase decisions. Kapil Dev’s endorsement of Boost in the late 80s is a classic case of a traditional endorsement that brings a direct link between a professional cricketer and a leading malt-based health drink;

b. co-branding or product placement where two distinct brands come together to create a new co-brand, such as in case of ‘Gatorade Tiger’ range of sports drinks launched by Gatorade while being endorsed by Tiger Woods;

c. licensing, where a celebrity lends his name and attributes to create new products and services. Undoubtedly, the most famous example of celebrity licensing is Nike’s legendary ‘Air Jordan’ brand of shoes and athletic apparel; and

d. joint ventures/equity agreements, wherein the celebrity shares in the profits of a new venture. In 2007, Sachin Tendulkar entered into a joint venture with the Future Group and Manipal Group to launch healthcare and sports fitness products under the brand names ‘S Drive’ and ‘Sach.

This article outlines the structure of a typical celebrity endorsement agreement. It outlines some of the key provisions that ought to be documented and their basis. Ultimately each agreement will likely deviate from this structure and substance based on commercial and other context.

Parties – The endorsement agreement should, at the beginning, clearly identify all parties to the agreement along with their individual/corporate status, any other identifying information and their registered or mailing addresses. This is of particular significance in multi-party agreements that include an intermediary such as an agent, marketing representative or management company which retains certain marketing rights to the celebrity, as this forms the basis for structuring the respective obligations and responsibilities of the parties. It is important to ensure that the management company has the required authority to sign for and bind the celebrity.

Definitions and interpretation – The agreement should clearly set out a list of definitions to establish or clarify the meaning of important terms in the contract. As these defined terms appear throughout the agreement, they are usually capitalised. It is advisable to cross-check the meaning of the word in the definitions section each time it is used in the agreement as its entire meaning, inclusive of limitations and exceptions, is imported into the provision in which it is used.

Term – This provision will describe the duration of the agreement, i.e., the length of time that the parties agree to be legally bound. The term is usually a specified number of months or years. It should be noted that while the endorsement agreement expires at the end of the Term, there are usually a number of provisions, such as confidentiality, cooling-off periods, etc that will survive the termination or expiry of the agreement. It is possible that there could be an initial term, which could be renewed through one or more mechanisms, including the notification of one of the parties, the mutual agreement of the parties and so forth. In the case of an extension, the extended term is considered the term of the agreement. It is also advisable to include possible extensions to provide for completion of marketing activities, such as the right to air TV commercials beyond the Term.

Early Exit Option – Many celebrity endorsement agreements operate for an initial term of one year, followed by successive options for a number of additional years, exercised at the discretion of the endorsee company. The rationale is to limit the company’s financial risk. Recent years, however, have witnessed a substantial increase in multi-year initial terms. While such arrangements can lower annual costs and help in creating a deeper association, companies face the risk of associating with a celebrity for a substantial period of time, during which risks associated with the celebrity’s behavior must be carefully considered. One possible remedy is an early exit option which may be exercised by the company upon payment of a “break fee”.

Territory – This provision will describe the geographic area within which the agreement is relevant and within which the parties perform their obligations as well as enjoy their rights under the agreement. This can be a particular city, state, country, region or even the entire world. Along with the provision on term, the provision on territory places explicit limitations on the tenure, extent and scope of the rights and obligations created under the agreement.

Consideration – The section on consideration must clearly indicate the nature, quantum, method and schedule of payments (i.e., endorsement / licensing fees / royalties / profits, cash or value-in- kind, a lump-sum payment, up-front payment or installment payments, whether there will be a minimum guarantee, etc.). The triggers and the quantum of payment associated with such trigger need be to mutually determined. It should also clearly indicate what interest rate will be applicable in the event of late payment.

Often, especially in the case of athletes, performance based incentives are negotiated and arrived at. Serena Williams’ endorsement consideration for Nike is linked to her ranking and performance at grand slams, in addition to a flat endorsement fee. Conversely, companies often negotiate for a reduction in payment if the celebrity fails to perform at a certain level or fails to generate positive publicity. For instance, marketing agreements for young cricketers often include clauses which state that the consideration payable will be reduced if the player fails to make a certain number of appearances for the national team during the term.

In the event that the compensation depends on sales generated, the company will look to make payments only after deducting taxes, transaction costs, bad debts, returns (actual and projected). If the endorsement agreement relates to an apparel or equipment manufacturer, the celebrity is usually entitled to receive pre-determined value-in-kind or merchandise at a discounted rate.

Product/Service Category – This provision describes the company’s product or service categories that will be endorsed or may be associated by virtue of the endorsement agreement. The proper definition of this category also has an impact on the scope of the company’s exclusivity, which is often a common demand. It is important to accurately define the category as, potentially, there may be myriad sub-categories within a general category, each capable of exclusivity. At the same time, companies need to be aware of the pitfalls of celebrity endorsements, especially if it is revealed that the celebrities do not use the products or services that they endorse.

In the US, a lawsuit filed by a consumer group forced sports giant Nike to admit Tiger Woods does not use the Nike Tour Accuracy golf balls he endorsed and that Nike was misleading golfers into thinking they were playing with the same ball as Woods.

Exclusivity – It is usually of fundamental importance to the company that the endorsement agreement contains an exclusivity clause, restricting the celebrity from offering similar services to a competitor. Such restrictions often go further, and prevent the celebrity from directly or indirectly doing anything which may cause the public to believe that he is associated with a competitor. The agreement may also prevent the celebrity from endorsing competing products for a specified period after the product endorsement agreement has expired, since the public could continue to associate the celebrity with the company’s brand.

Defining exclusivity in an endorsement contract should thoroughly be considered in negotiations. A company must also think about specific companies with which the company does not want the celebrity associated. Moreover, if the company does not want a celebrity to do certain things in public, e.g., wear a competitor’s product etc., such restrictions needs to be covered in the exclusivity clause and specifically mentioned.

In November 2008, actor Charlize Theron reportedly settled a $20 million lawsuit brought by watchmaker Raymond Weil, alleging she breached her endorsement contract by appearing in advertisements for Montblanc watches and making a public appearance wearing a Christine Dior watch at a press event.

Services Required – Depending upon the nature of the product or services as well as marketing objectives, the list of services is unique to each endorsement agreement. It is extremely important that the company considers in detail the benefits it wishes to receive and the celebrity understands what it is granting, and that these are specifically documented with as much detail as is possible.

The scope of endorsement services to be provided by a celebrity can be broadly categorised into the nature of services and the media in which those services may be broadcast or published. The kind of services generally fall within predictable categories in which the performance of the celebrity is required—video (including commercials, infomercials and point of sale video), radio commercials, print photography, and personal appearances. In relation to personal appearances, it is important to specify the company’s expectations from personal appearances.

The most valuable asset in any celebrity endorsement agreement is the number of personal appearances that the celebrity can make. Depending upon, among other things, the negotiating strength of the celebrity and incentives involved, the number and length of personal appearances to be made by the celebrity during each year of the term should be agreed in advance. Such appearances can be utilised for photo and ad-shoots or ‘meet and greet’ sessions, as agreed between the parties. The industry standard for each personal is taken to be one day of eight hours for each personal appearance, excluding travel time. The company might retain the option of utilising the personal appearances in single days or as half days of four hours each. Further, the company also needs to retain the right to use all personal appearances in any given year of the term at a stretch, subject to the celebrity’s availability.

In view of the celebrity’s status and existing endorsement obligations, details relating to standards of travel (business class), commute (make of luxury cars) and accommodation (5-star) are often detailed in the contract. Usually, such costs are borne entirely by the company.

A potential stumbling block in any celebrity endorsement agreement is of scheduling the celebrity’s appearances. Celebrity endorsements are almost always subject to the celebrity’s commitments in their primary field of engagement. On the other hand, production costs and logistics of planning often tend to be very time sensitive and expensive. The key to negotiations in this respect is to identify critical dates for appearances in advance and capture them as firm commitments in the contract. A procedure for notification often proves helpful in confirming schedules. Once the agreement is executed, it is critical to appoint a representative to liaison with the celebrity’s agent. In the event of cancellation of pre-agreed dates, the celebrity’s agent should then provide the company with alternative dates, failing which, the company can retain part of the consideration.
In 2008, Indian captain MS Dhoni was in the eye of a legal storm when Karnataka Soaps and Detergents Ltd cancelled their endorsement agreement with Dhoni and slapped a legal notice on Dhoni for breach. Dhoni had promised KSDL a total of ten personal appearances over two years and was able to provide only three days, without committing dates for the remaining personal appearances.

Retirement, Injury, Death – A celebrity endorsement agreement should take into account every foreseeable circumstance which may affect the celebrity, including death, injury and retirement. For instance, the agreement may provide that if the celebrity passes away or is permanently injured during the term of the agreement, then the company may continue to use creatives and marketing material until the time when the agreement would have naturally terminated. Further, if the agreement provides for full ownership by the company of any materials produced as a result of the services rendered by the celebrity, then the celebrity’s death may have little or no impact on the agreement if all the services have already been performed, unless the circumstances of the death may negatively impact upon the brand. The agreement could contain provisions such that in the event of retirement of the celebrity during the term of the agreement, the celebrity provides an increased number of personal appearances at no additional remuneration.

Insurance – If the celebrity’s death or permanent injury would significantly impair the company’s marketing program, consider obtaining a suitable ‘key person’ life insurance policy that would cover this risk, with the celebrity’s consent. Similarly, the US and UK have witnessed an increase in the number of corporations/companies seeking to protect their investments, their brands and even their sales when their celebrity endorsers suffer public embarrassment, as in the case of Tiger Woods and Wayne Rooney. Such insurance policies can cover money paid to celebrities as well as the cost of producing and booking television commercials, print advertisements and other promotions. Some insurers also cover the costs of new commercials with replacement celebrities.

Right of First Offer, Right of First Refusal and the Right to Match: These are a variety of provisions that encourage the parties to continue their relationship beyond the original scope, term or territory. By virtue of Indian legal precedent, the rights of the company to make a first offer (before any third party does), to have the right to match a third party’s offer or any other similar right must be enjoyed during the term of the agreement and not post termination of expiry thereof. While biasing the parties to continue their relationship, provisions of this nature allow the celebrity and the company to go to the market for an independent financial valuation. These are often hotly-contested provisions in an endorsement agreement as they curtail the commercial freedom of the celebrity in the future. At the same time, they can be valuable to companies and celebrities that would like to establish longer term relationships bringing a degree of long term certainty to both.

Intellectual Property – This provision generally grants the company a limited right and license to the celebrity’s intellectual property (name, image, likeness, signature, attributes, etc.) and also sets out the fact that each party will respect the other party’s intellectual property and proprietary interests. It is a standard provision in all endorsement agreements and must be carefully drafted to avoid any confusion on its scope. There must also be clarity on the ownership of the intellectual property that is created during the tenure of the relationship, whether  individually by either party or jointly by the parties. The celebrity should also retain the right to approve in advance any promotional material and advertisements that bear the celebrity’s name or other identification.

Undertakings/Restrictions – This section is important as it often details what the contracting parties agree to do to honour the agreement between or among them. Factors such as the Term, the scope of the services to be provided, and the consideration usually determine the level of restrictions imposed on the activities of the celebrity. For instance, the agreement may require the celebrity to refrain from especially taking part in high risk activities. The agreement may even go as far as requiring that the celebrity warrant that he is in good health, and that he will take all necessary steps to ensure that he remains in good health.

Most companies specify a list of their competitors or competitive product categories at the time of negotiating the agreement. As such, this section of the contract will typically constrain the celebrity from endorsing, directly or indirectly, the products of a competitor (or its subsidiaries). It is also in the celebrity’s interest to ensure that the company honours certain obligations under the contract. Usually these will include terms such as not publishing any content, photos or advertising materials featuring the celebrity without prior consent, not publicly comment on the relationship without the other party’s consent, not using the other party’s intellectual property beyond the scope of licenses granted and other terms that help the parties maintain mutual respect and properly bind the scope of their relationship.

These kinds of restrictions must then be coupled with a clear provision on the consequences of breach, and what damages can be recovered by the company.

Morals Clause – To guard against the risk that a celebrity’s commercial value might be damaged by misconduct, endorsement contracts commonly include morality or morals clauses. These clauses permit the company to end the endorsement agreement if the celebrity tarnishes his or her image, or the image of the company or its products and services. This could cover situations such as convictions for any offence involving dishonesty, violence or illegal narcotics, or the use of lyrics, performances or public utterances to incite violence, demean or discriminate against any person or group of persons. Prominent examples include Kellogg’s decision to opt out of a contract extension with Michael Phelps after pictures emerged of Phelps with a bong, on the basis that such behaviour was inconsistent with the company’s brand image. Similarly, Nutella and McDonald’s decided against continuing their association with basketball superstar Kobe Bryant after he faced allegations of sexual assault.

One brand however that stands out for its treatment of athletes in breach of the morals clause is Nike. In July 2011, the company officially re-signed American football quarterback Michael Vick after he served time in prison for his involvement in an illegal dog fighting ring. This is especially notable considering this is the first time a sponsor has ever brought back an athlete after dropping the athlete from previous marketing campaigns.

Conversely, reverse moral clauses allow the celebrity to terminate the endorsement agreement if the company commits some sort of corporate violation, as detailed in the contract. In the modern context, this clause has its origins in the spectacular collapse of Enron. The Houston Astros had to pay $2.1 million to erase Enron’s name from their ballpark after the energy broker collapsed in scandal. More recently, Dash Dolls LLC, terminated the agreement for the co-branded ‘Kardashian Kard’ after the Connecticut Attorney General launched investigations into the card for high and hidden fees and targeting young adults.

Representations, Warranties – This section of the agreement will typically be generic, with the possibility of a few additions depending on the context. It will generally act as an assurance that both parties are acting within their legal capacity to enter into contract, that they indeed possess the rights and ability to grant the rights being granted and perform the obligations being committed to and that they have no conflicting contractual or legal obligations (and will not enter into such contracts or obligations) that could jeopardise the nature and scope of the agreement being entered into.

A representation is defined as an account or statement of facts, allegations, or arguments. Representations present everything from its past to its current status. A warranty generally moves from the present to the future. The warranty obligates both parties to the terms of the contract. Usually, both parties warrant not to enter into any such agreement in the future that would hamper their ability to perform their obligations under the sponsorship agreement. When a contract uses the terms “representations” and “warranties” together, they blend the past, present, and future together within terms of the contract. The scope of the representations and warranties can also have an impact on the indemnification rights of the parties.

A representation is defined as an account or statement of facts, allegations, or arguments. Representations present everything from its past to its current status. A warranty generally moves from the present to the future. The warranty obligates both parties to the terms of the contract. Usually, both parties warrant not to enter into any such agreement in the future that would hamper their ability to perform their obligations under the sponsorship agreement. When a contract uses the terms “representations” and “warranties” together, they blend the past, present, and future together within terms of the contract. The scope of the representations and warranties can also have an impact on the indemnification rights of the parties.

Impairment – It is often understood by the parties that endorsement are dynamic in nature and that circumstances can change making delivery of all the committed rights and entitlements (including the committed number of celebrity appearances) impossible or unfeasible. To this extent, it is prudent to include provisions with respect to impairment of rights that would provide basis for termination of the contract. These provisions often provide the opportunity for renegotiation of benefits/fees and/ or the substitution or equivalent benefits for those not delivered or incapable of being delivered. Often, a third party agency or an industry expert may be relied upon for valuing the relative delivered and undelivered benefits and the value of substitute benefits. The breakdown of this process and/or the inability or unwillingness of the parties to mutually agree on impairment remedies may ultimately be a basis for termination of the agreement.

Termination and its consequences – Every contract will usually set out the circumstances under which it can be terminated prior to the expiry of the term. That is, a contract will generally come to an end when it is considered to be fully performed, or when it has come to the end of its Term. However, usually if there is a material breach of the endorsement agreement, the party which breaches the agreement may be considered to have defaulted on its promise. Accordingly, the other party may terminate the contract at will. This may arise if the company does not make timely payment, or if the celebrity does not properly deliver the services to the company. Sometimes, a company may opt for endorsement agreements, the term of which is directly linked to the period that the celebrity remainsprominent and favourable in the public eye.

It is important to lay down the consequences of termination. Often, the consequences include proportionate payment or refund of the endorsement fee. Depending on the materiality and circumstances of the breach, the parties may even agree on a full refund. With respect to failure to pay endorsement fees or royalties, a money suit is often the only available remedy after termination. In other case`s of substantive deliverables, specific performance may be an alternative to be explored prior to termination.

In essence, the consequences of termination could also serve as a deterrent to prevent either of the parties to the agreement from terminating the agreement for no good reason. It is also important to note that contract law does not favour ‘penalties’ for breach that are unconnected to the actual loss or damage suffered and therefore the nomination of liquidated penalty amounts, regardless of circumstance, is rarely recommended.

Miscellaneous provisions – The celebrity endorsement agreement will list a number of standard miscellaneous provisions that constitute an important part of any contract, including:

(a) Force Majeure: This provision will usually free both parties from obligations or liability when a superior external force affects the performance of the contract. Examples which are commonly listed in a contract include acts of God, war and riot, terrorist attacks, strikes, changes of law, etc. If a force majeure event continues for a certain extended period, the parties may have the right to terminate the agreement and not just suspend their relative affected obligations thereunder.

(b) Indemnification: The parties will generally agree to indemnify the other party for any loss that may occur due to their own negligence, due to inaccuracy of their representations and warranties, or due to their acts of omissions. Indemnification is a key contractual remedy and the scope and procedures for indemnification must be carefully set out. It is also common to limit indemnification for direct (rather than remote) losses and damages and/or to put a commercial cap (e.g., the total consideration payable) on the indemnification obligation of a party so as to limit its total potential liability under the contract.

(c) Dispute Resolution: This provision outlines the manner in which the parties will resolve any dispute that may arise out of the contract. Common dispute resolution clauses refer such matters to negotiation, conciliation, meditation, arbitration and litigation. It is common to specify the rules governing each of these and the seat of arbitration, if that is the chosen remedy.

(d) Governing Law and Jurisdiction: This provision will outline the set of laws the parties wish to be bound by. This is particularly important in the event of a dispute as the judge or arbitrator will consider the governing law when making a final and binding decision in terms of which party is liable for any wrongdoing. The jurisdiction provision will set out where the dispute should be heard. Law requires both the governing law and jurisdiction chosen to have a relevant nexus to the parties and/ or the transaction and to this extent the parties’ choice is bounded.

(e) Assignment and Change of Control: This section will generally state that the rights afforded under the endorsement agreement are personal and that they may not be assigned to a third party without the other party’s prior consent. Similar provisions relate to continuance of obligations when the other party undergoes a corporate change of control. This is to ensure that a party is not forced to interact with someone they had not originally agreed to work with. However, it is also common that companies retain the right to assign without consent in order to retain flexibility of their operations.

(f) Confidentiality: Confidentiality is a standard provision in endorsement agreements. Parties will agree to keep most finance-related and contractual dealings strictly confidential between them subject to a few standard exceptions. This is on the understanding that the parties will often be in a close relationship where lots of non-public information is shared between them in the course of their dealings.

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