December 11, 2019

December 11, 2019

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December 10, 2019

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December 09, 2019

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The LeBron Effect, Grand Slams and Record Sales: Matching Rights in Football Kit Sponsorship Deals

On 25 October 2019 Mr Justice Teare handed down his judgment in the kit sponsorship dispute between New Balance Athletics (“NB”) v Liverpool Football Club (“LFC”). The dispute concerned whether NB had validly exercised its matching right set out in the contract between the parties entered into on 3 June 2011 (the “NB Agreement”) in the context of a competing offer from Nike (the “Nike Offer”).

The Nike Offer contained, inter alia, commitments in respect of distribution (the “Distribution Obligation”) and marketing (the “Marketing Obligation”). The key issues for the Judge to consider were: (i) was the matched distribution obligation in NB’s revised offer made in good faith; (ii) what was the Marketing Obligation in the Nike Offer and was it measurable and matchable; and (iii) whether the Distribution Obligation and Marketing Obligation in the Nike Offer were matched by NB.

Although a substantial portion of the judgment considered whether NB had complied with an implied duty to act in good faith in making its offer, the case turned on the Judge’s finding that the offer from NB was less favourable than the Nike offer because of the failure to name global stars “of the calibre of LeBron James, Serena Williams, Drake etc.” This decision is interesting, since the Judge accepted that the term in question did not commit Nike to using those specific celebrities. Rather, the Judge found that since the influence of those individuals could be measured, the clause contained a specific commitment which was not matched by NB. LFC was therefore free to enter into a new agreement with Nike.

The Background

 The NB Agreement, as is customary in these types of agreement, contained a matching right at clause 16. Clause 16 provided for the following mechanism:

  1. As the contract neared its end, the parties were required to negotiate the renewal of the NB Agreement. During this time, LFC was prohibited from entering “into negotiations, or contract with or invite any offers from” any third party.
  2. If the parties could not reach an agreement by 14 February 2019, LFC was permitted to negotiate with a third party competitor of NB.
  3. If LFC received any acceptable offer from a third party, it was required to provide the terms of the offer to NB, which then had 30 days to notify LFC in writing whether it would enter into a new agreement with LFC “on terms no less favourable to the Club”.

On 11 July 2019, LFC notified NB that it had received an offer from Nike. LFC sent the Nike Offer to NB, which was in fact a contract already signed by both parties. The Nike Offer contained a term within it titled  ‘Condition Precedent’ which acknowledged NB’s matching right and provided for the Nike Offer to take effect only if NB failed to  validly exercise its right to “Match or Better all the material, measurable and matchable terms in this [Nike Offer]”.

Two other key terms of the Nike Offer were the Distribution Obligation and the Marketing Obligation. These two terms are particularly significant since the Nike Offer provided for a £30 million payment per season plus 20% of net sales of all licensed products except footwear, and 5% of net sales of licensed footwear. The Distribution Obligation committed Nike to:

“sell Licensed Product throughout the Term (including, for the avoidance of doubt, Licensed Products produced for the start of Season 2021/21) as follows: (i) in not less than 6,000 stores worldwide, 500 of which shall be NIKE owned or controlled, with the potential for sale of Licensed Product in as many as 13,000 stores worldwide, and (ii) within not less than 51 countries online through NIKE.com. Nike warrants that as of the date of this Contract it can distribute the Licensed Product in at least 6,000 stores worldwide, 500 of which are Nike owned and controlled”.

The Marketing Obligation included commitments to:

  • “market LFC…in a manner that is consistent with Nike’s other top tier UK football clubs e.g. Tottenham, Chelsea…;
  • produce Licensed Products under at least 2 global Nike-controlled brands (e.g. Nike and Converse)”; and
  • market LFC and/or Licensed Products through marketing initiatives features not less than three (3) non-football global superstar athletes and influencers of the caliber of LeBron James, Serena Williams, Drake etc with such initiatives being used to market certain Licensed Products produced for the start of season 2020/21”

 Following receipt of the Nike Offer, NB engaged in an accelerated due diligence process in order to audit the company’s distribution network so that it could  determine whether it could match the terms of the Nike Offer.

On 16 August 2019 NB purported to exercise its option to renew the NB Agreement by agreeing to enter into terms no less favourable than the Nike Offer.  LFC rejected the NB renewal on the basis that the offer was not genuine “both because of the contrived and unconsidered replication of the warranties and terms in the Nike offer, and because [NB] cannot deliver on those warranties and terms”.

The Pleadings

NB’s position was that, to the extent the relevant terms in the Nike Offer were “material, measurable and matchable” terms, then it had fulfilled the requirements in its renewal offer and it could deliver on those terms. NB accepted that the Distribution Obligation and Marketing Obligation were material terms, but not that they were measurable or matchable.

LFC argued that NB’s had not acted in good faith by making the offer because the relevant officers  of the company either knew that NB could not match the terms of the Nike Offer, or acted recklessly in asserting that the terms could be matched.

In the alternative, LFC denied that the NB Agreement did in fact match the material, measurable and matchable terms of the Nike Offer because: (i) there was no commitment to use marketing initiatives with superstar athletes and influencers  “of the calibre of LeBron James, Serena Williams and Drake…”; (ii) there was no commitment to market LFC in a manner consistent with how Nike markets its top tier UK football clubs such as Tottenham F.C and Chelsea F.C.; although NB promised Warrior as a secondary licencing partner, that was not equivalent to Nike’s Converse brand.

 The Judgment

Good faith and the Distribution Obligation

The Distribution Obligation included a commitment on the part of Nike to sell the ‘Licenced Product’ in 6,000 stores worldwide, 500 of which had to be owned or controlled by Nike. In the industry, the term “doors” is used to describe stores which sell sportswear.

Both parties accepted that there was implied obligation of good faith in respect of NB’s matched obligation. NB’s position was that it could only be in breach of its implied obligation if it did not intend to meet, or knew that it could not meet, the Distribution Obligation. LFC submitted that NB could have been in breach of the implied obligation if it did not reasonably believe that it could perform the terms of its offer. There were therefore two questions – did NB’s offer constitute an offer no less favourable than the Nike Offer and was that offer made in good faith.

Mr Justice Teare referred to Alan Bates and others v Post Office [2019] EWHC 606 (QB) and concluded that the question was ultimately “whether reasonable and honest people would regard the challenged conduct as commercially unacceptable”. Given the parties’ contentions in respect of good faith, a substantial amount of evidence was given on the subject of doors.

The Court heard that although NB had initially understood it to be impossible to match the  Distribution Obligation in the Nike Offer, this was due to a misunderstanding of the obligation. Thus the manuscript note of call by an individual at NB (on 14 June and therefore before receipt of the Nike Offer) which said “Doors – Distribution – Impossible to Match” turned out to be insignificant. That individual had misunderstood the commitment to be to sell products in 6000 stores owned or controlled by Nike, when in fact the commitment was to sell products in 6000 stores worldwide, only 500 of which were to be Nike owned or controlled.

LFC alleged that there were five material errors which evidenced NB’s bad faith, since the errors “were known to someone in senior management at New Balance or those entrusted with the task of doing [the audit of the company’s distribution network]”. The five alleged errors were:

(i) Japan: in their calculation of the number of doors, the regional manager had included stores which sold footwear, which amounted to a breach of the duty of good faith because the Nike Offer was primarily about selling replica shirts which accounted for 90% of all sales;

(ii) China: the regional manager miscalculated the number of doors because it included stores which sold lifestyle products;

(iii) Brazil: the estimate of the number of doors was unduly aggressive particularly in circumstances where certain issues with the manufacturers quality was known to the regional manager;

(iv) North America: the senior financial analyst at NB who consolidated the regional managers’ returns should have expressed doubt in respect of her figures for the North American region as she had previously indicated that the figures would “come down” (this individual declined to give evidence); and

(v) Unit to doors ratio: a calculation of the number of doors against expected sales in India and South Africa was high and the figure in respect of India was stated to be 140 doors, whereas the actual figure was 8 doors.

In each case the Judge rejected the submission that NB had acted in bad faith. The allegations in relation to Japan and China were rejected as the calculations made by NB were held to be in line with the contractual interpretation of the commitment in the Nike Offer. The figures in respect of Brazil and North America were found to be based on a reasonably held view by the respective individuals and the Court found that there was no basis upon which either could be said to have acted in bad faith. Finally, the errors in the unit to doors ratios were also held not to have been the result of a breach of the obligation to act in good faith, because they were the result of a keying and an arithmetical error. The Judge found that “even if it is assumed that, notwithstanding the shortness of time, the exercise ought to have been done as a matter of prudent business practice, an imprudent failure to carry out the exercise does not amount to a breach of the implied duty of good faith.”

Mr Justice Teare therefore rejected the allegation that the NB was reckless in asserting that it could meet the Distribution Obligation and that “[o]n the contrary [NB] wanted a due diligence exercise carried out before deciding to match Nike’s offer.” NB had therefore matched the Distribution Obligation in the Nike Offer in good faith.

The Marketing Obligation

The key clause in the Marketing Obligation was the commitment to market LFC using three non-football global superstar athletes and influencers “of the caliber of LeBron James, Serena Williams, Drake”.

The issue as to whether NB had matched the Marketing Obligation was dealt with more succinctly and turned out to be the decisive issue. The Judge found that the omission of the words “of the calibre of LeBron James, Serena Williams, Drake, etc” from its new offer was material and amounted to a less favourable offer.

The Judge accepted that the words did not amount to a commitment to use those global stars, but could not see a valid reason for the omission of the words:

“The reason why these words were omitted was not made clear. It is possible that they were omitted because New Balance  did not have contracts with the named persons though since the term did not commit the offeror to use the named persons (as  Mr. Davis accepted) that would not be a reason for not including those words. It is possible that the athletes or influencers with whom New Balance had a contract were not comparable to the named persons. If this was the reason then New Balance observed the duty of good faith.”

Mr Justice Teare did find that the inclusion of those names contained a measurable commitment on the part of Nike. The Judge started with the presumption that the “words must have been agreed for a purpose” and rejected the submission that their calibre could not be measured:

“…a calculation based upon social media exposure is based on appearances which can be counted. It may be that different people have different views as to the most relevant way in which such appearances can be valued but some of those methods used (for example “max add value” or “share of voice value”) will have a repeatable methodology. I accept that the calibre of the named athletes can be valued in a number of ways but it would be unrealistic (and contrary to the evidence in this case) to say that their calibre cannot be measured.”

Since NB had failed to match the terms of the Nike Offer, the Judge found that LFC was not obliged to enter into an agreement with NB.

Comment

Upon receipt of the Nike Offer, NB had a short period of time to deliver a full audit (and future projection) of its global distribution network. It is clear that the Judge was impressed by the efforts made by the company and accepted that the individuals had acted in good faith in trying to procure the relevant information. The Judge noted that “the matching exercise had to be done in 30 business days and by 6 August time was very short”. A key lesson for companies with expiring sponsorship deals that contain distribution obligations, is to ensure that full due diligence on distribution capability (and projected capability) is undertaken prior to the expiry of deals. Distribution obligations are matchable terms and having this information on hand could prove decisive when trying to better a competitors offer. It is also noteworthy that in this case it was not only sportswear stores that were taken into consideration. Incumbent brands with smaller distribution networks may be placed in scenarios where they need to increase their number of outlets and broader non-sport specific strategic partnerships may be an attractive option.

Based on the lengthy submissions in relation to good faith, it is assumed that neither party thought that this case would turn on the commitment to use stars of a certain calibre.  Although the Judge’s decision hinged on a term that did not amount to a commitment to use the specific named persons, it is unsurprising that the judge found that the words amounted to a measurable commitment.  The Judge reasoned that there were two potential reasons for the omission of the words “of the calibre of LeBron James, Serena Williams, Drake, etc”. One option proffered by the Judge was that NB knew it could not procure that calibre of superstar. If that was true then it would follow that the Nike Offer was not matched. NB’s position was that its omission of the words was immaterial since it did not view the term as matchable and measurable.

The Judge heard evidence about the measurable calibre of the aforementioned superstars and found that that the commitment was measurable and matchable. In particular, he heard that “LeBron James is the world’s most famous basketball player, that Serena Williams, having dominated women’s tennis for twenty years, is one of the most famous athletes in the world and that Drake was the world’s top selling recording artist in 2016 and 2018.”

In the age of influencers, and their effect on marketing and advertisement campaigns, it is unsurprising that there are ways of measuring the impact of these kinds of global stars. This is why companies spend millions of pounds on endorsements, such as NB’s deal with NBA title winner and former Raptors star Kawhi Leonard earlier this year to promote the OMNI1S basketball ‘sneaker’.

Does Leonard match LeBron? It is questionable whether there are any influencers ‘of the same calibre’ as LeBron. He is an athlete of such global influence that his move from the Eastern Conference with the Cavaliers, to the Western Conference with the Lakers, has shifted the whole NBA schedule to allow for more social viewing times in other countries – it’s called the LeBron effect.

A more interesting observation is that Mr Justice Teare did not settle on one method of assessment, with the words in parenthesis “(for example “max add value” or “share of voice value”)”. Although the Judge was not asked to pick a method of assessment in this case, it is conceivable that this could be contentious in similar cases going forward. Take Instagram for example – if companies are concerned about reach, the total number of followers of multiple stars could equal the total number of follows of a single big name. Would that constitute a like for like match? Alternatively, it may be specific areas of the market, or ‘quality’ of followers that is most important. The point is that although star influence can be measured, it can be measured in so many different ways. For this reason, the words ‘of the calibre of’ may not be so helpful in the future and this kind of ambiguity is fertile ground for disputes concerning similar influencer commitments.

On one hand it is not surprising that the Court found that certain types of stars attract a measurable value, and it appears that global apparel brands will be forced to seek out superstar endorsees in order to match rights in sponsorship deals. Although there was no cause for the Court to opine on how that ‘value’ should be measured in this case, we can assume that clauses which do not specify precise metrics will be open to challenge in the future. One thing is for certain – this judgment will no doubt further buoy the influencer stock.

© Copyright 2019 Squire Patton Boggs (US) LLP

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About this Author

Simon Grossobel UK Litigation Attorney Squire Patton Boggs Law Firm
Associate

Simon Grossobel is an associate in our Litigation Practice Group. Simon advises on commercial litigation and regulatory matters with a particular focus on sport related disputes and regulation. He has a broad experience of High Court litigation and sports related arbitrations and has advised on a range of multijurisdictional commercial disputes across a range of industries and for a variety of clients, including domestic and international sports teams, sports governing bodies, recruitment companies, consulting agencies and banks.

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