Renewal Clauses

In this post, I will be discussing Renewal clauses that involve the right of first refusal. Right of first refusal is a common clause in endorsement contracts between athletes and sponsors.  They allow the sponsor to match a third parties offer to keep the athlete on it's marketing team.  Right of first refusal can be a powerful tool for sponsors if it is drafted correctly.

Sports teams implement renewal clauses so that they can protect their star athletes.  However, it doesn't guarentee that they can retain the athletes services.  For example, in 2006, the Minnesota Vikings offered to make Seattle Seahawks free agent offensive lineman Steve Hutchinson the highest paid offensive lineman on their team after the first year of his contract.  The Seahawks already had a highly paid offensive lineman so they couldn't match the Vikings offer.  This tactic is allowed and it was a smart move by the Vikings identifying that the Seahawks wouldn't be able to match the offer.

In a renewal clause, sponsors need to define what elements need to be matched. An athlete might want the exact offer matched in the contract.  There are many objects that can be offered including base compensation, incentives/bonuses, royalties for products, or other non cash items such as a car or house.

Another concern with the right of first refusal is how to enforce it as a sponsoring organization.  A sponsor may seek an injunction requiring the athlete to fulfill the sponsorship.  The organization is allowed to do so because the right of first refusal is stated in the contract.  However, the athlete may not want to be a part of the original organization and it could risk other future sponsorships with athletes.  The athlete may not want to be a part of that organization and make it known publicly which would hurt the brand.

Right if first refusal clauses are considered the most restrictive to the sports propety/sponsor because it allows the athlete to test the open market which forces the property to make the decision to match the offer and ultimately pay more.

Renewal Clauses that aren't specific can lead to future problems when the contract expires.  For example, in 2007 Mastercard sued FIFA after FIFA reached a deal with Visa to sponsor the next two world cups.  Mastercard had been the payment card sponsor with FIFA for 16 years prior to the Visa deal.  FIFA believed they were free to find a new sponsorship deal because one couldn't be made with Mastercard.  However, the previous contract between Mastercard and FIFA had a right of first refusal which is why Mastercard sued.  FIFA lost $90 million because of the dispute and this shows the importance of making the terms of renewal clauses clear to both parties.



Another example of enforcing rights of first refusal was the Oakley v. Rory McIlroy and Nike case involving an endorsement agreement.  The right of first refusal granted Oakley the right to match any terms offered to McIlroy by a third party "regarding the endorsement of products the same as or similar in his agreement with Oakley (Eyewear, apparel, and accessories).  Obviously, Nike offers a similar product endorsement so what does this mean?


The remedy for a breach of personal services agreement is usually monetary damages unless services are unique.  However, courts would never enforce an individual to continue performing services.  Courts could enforce an injunction or non-compete but thats only if it doesn't impose undue hardship on the individual.  The deal of $200-$250 million was seen as unaffordable to Oakley and there was speculation that they waived the right of first refusal.  But what if Oakley didn't waive the right and tried to seek damages?


It would be difficult to measure damages and put monetary vale on McIlroy's brand image being associated with Oakley.  To remedy thos problem in the future, brands should consider including liquidated damage provisions in endorsement agreements in the event of a breach.  Right of first refusals can be a powerful tool if they are drafted correctly.

Hope you enjoyed my thoughts!

-Mark

Sources:

http://www.forbes.com/sites/oliverherzfeld/2013/03/19/oakley-v-rory-mcilroy-and-nike-enforcing-rights-of-first-refusal-in-endorsement-agreements/

http://www.acc.com/legalresources/publications/topten/sla.cfm

http://www.sportsbusinessdaily.com/Journal/Issues/2009/04/20090427/From-The-Field-Of/Properly-Drafted-Right-Of-First-Refusal-Helps-Sponsors-Keep-Stars.aspx