Negotiating Protections for Sports Sponsors When Disputes Arise Between Teams and Players

Most recently, from marquee national and international brands to lesser-known local and regional brands, the threatened cancellation of NBA regular season games meant a potentially staggering loss of brand exposure in various markets. Existing sponsors who already signed agreements made an investment in the NBA, its teams and the various venues where NBA games are played throughout the country. Such sponsors rely on the timely beginning of a sports season because they need significant lead-time to create their marketing and packaging materials, plan and place their campaigns, and coordinate with distributors and retail channel partners. Uncertainty surrounding when and if there would be an NBA season put a stranglehold on these activities. Moreover, after an extended lockout in the NBA, fans would come back to the game at a slower rate, or not at all, meaning less exposure for the sponsor's brands than before the lockout.

Contractual Options

Force majeure clauses are often included in sponsorship agreements. These provisions generally excuse one party from failing to perform (or timely perform) its obligations under the agreement if the failure to perform is due to an event beyond the non-performing party's reasonable control. Although it is typical for force majeure clauses to cover natural disasters or other “Acts of God,” forgiving the team owner's failure to perform due to a player strike or owner lockout does not make a sponsor whole. Indeed, nothing will completely recapture the time and value that was lost due to a strike or lockout. But sponsors can seek to incorporate some flexibility and protection for their interests in the event of a player strike or owner lockout.

These protections generally seek to clarify:

• When the force majeure clause is triggered in the event of a strike, lockout or other work stoppage;
• How long the consequences of the force majeure event last;
• What happens to the term of the sponsorship agreement during a work stoppage; and
• What happens to the sponsor's payment obligations.

On the issue of when the force majeure clause is triggered and how long it lasts, strictly requiring a strike or lockout to go into effect before the force majeure clause is triggered might not provide sufficient protection to the sponsor. For example, was there a contractually defined “lockout” in the NFL during the days between the enjoining by the U.S. District Court for the District of Minnesota of the NFL owner's lockout and the decision by the U.S. Court of Appeals for the Eighth Circuit to vacate that injunction? See, Brady v. National Football League, 644 F.3d 661 (2011).

Rather than leave the parties to the sponsorship agreement guessing at the answer to that sort of question, sponsors should seek protection during any labor dispute that occurs during the sponsorship term, and broadly define “labor dispute” to include a strike or other work stoppage by essential personnel, such as the applicable players association and/or its members, a lockout by the team owners, the decertification of the applicable players association, and/or a court challenge to an owner lockout or players association decertification for as long as injunctive or other equitable relief is available to either side of the dispute or actually in effect in any such challenge.

As for the sponsorship agreement term, if the team is prevented from performing by reason of a force majeure event, then the sponsor should ask that the sponsorship agreement and the amounts payable to the team be suspended automatically from the date of such force majeure event. The sponsor may elect to extend the term ' and any option period or other time period specified in the sponsorship agreement ' for a period of time equal to the period of suspension.

On the issue of payment, it is generally accepted that no sponsorship payments become due to the team during any period of suspension. But implementing that consequence is easier than it sounds. Team owners will generally agree to discount the sponsorship fees that are payable by their sponsors based on some pro rata formula if the work stoppage or other force majeure event causes regular season games to be cancelled.

But due to the significant lead times needed to create materials and plan campaigns, sponsors also suffer cognizable harm if the force majeure event occurs in the off-season, even if no regular season games are actually cancelled. A pro rata reduction of the sponsorship fee based on cancelled games does nothing to compensate a sponsor that is forced to postpone or forego its campaign planning and activation if very few or no games are actually cancelled. Instead of settling on the cancelled-games formula, it is in a sponsor's interest to negotiate a reduction in the sponsorship fee if the force majeure event puts the scheduled start date of the league's regular season in doubt. Without that or similar protection, sponsors may find themselves committed to payments with little recourse and nothing more than their branded logo in an empty arena.

[Editor's Note: Just as this issue was going to press, the NBA and the NBA Player's Association reached a deal to end their labor dispute. If ratified by the union, an abbreviated season will begin on Dec. 25. No vote on the agreement for either side was set at press time.]

Benjamin R. Mulcahy is a partner in the entertainment, media and technology practice group at Sheppard Mullin Richter & Hampton in the New York and Century City offices. Jay J. Fragus, a law clerk in the entertainment, media and technology practice group in the Century City office, assisted in the preparation of this article.

The end of a collective bargaining agreement between a professional sports league and the players association that represents the athletes triggers a series of dominos: The players go on strike; the league implements a lockout of the players; the parties meet over the course of several weeks to try to negotiate a new deal; both sides posture, with the league cautioning that pre-season and regular season games will be cancelled and the players association threatening to decertify as a union if a new agreement cannot be reached; the league files an unfair labor practice complaint with the National Labor Relations Board coupled with a declaratory judgment action in U.S. district court seeking a ruling that the lockout is a legitimate negotiation tactic under the labor laws; the union decertifies and files its own lawsuit claiming that the league's lockout constitutes price-fixing and an illegal group boycott in violation of the antitrust laws; and fans brace for lost games.

Sponsors Left on Bench

Many writers, observers and enthusiasts following this year's professional sports labor disputes in both the National Football League (NFL) and the National Basketball Association (NBA) focused solely on the players, the owners and the fans. But there is another group of stakeholders that is inevitably affected by a lack of labor peace: sponsorship partners. Sponsors such as banks, beverage companies, electronics manufacturers and athletic apparel companies that spend millions of dollars a season to sponsor the teams and promote their products to fans may be left losing much of the value they bargained for, even if no pre-season or regular season games are actually lost. These sponsors are, at best, left playing catch-up and will be unable to effectively activate team or league-related advertising, marketing and promotional campaigns until well into the regular season, even if part of the regular season can be salvaged.

Most recently, from marquee national and international brands to lesser-known local and regional brands, the threatened cancellation of NBA regular season games meant a potentially staggering loss of brand exposure in various markets. Existing sponsors who already signed agreements made an investment in the NBA, its teams and the various venues where NBA games are played throughout the country. Such sponsors rely on the timely beginning of a sports season because they need significant lead-time to create their marketing and packaging materials, plan and place their campaigns, and coordinate with distributors and retail channel partners. Uncertainty surrounding when and if there would be an NBA season put a stranglehold on these activities. Moreover, after an extended lockout in the NBA, fans would come back to the game at a slower rate, or not at all, meaning less exposure for the sponsor's brands than before the lockout.

Contractual Options

Force majeure clauses are often included in sponsorship agreements. These provisions generally excuse one party from failing to perform (or timely perform) its obligations under the agreement if the failure to perform is due to an event beyond the non-performing party's reasonable control. Although it is typical for force majeure clauses to cover natural disasters or other “Acts of God,” forgiving the team owner's failure to perform due to a player strike or owner lockout does not make a sponsor whole. Indeed, nothing will completely recapture the time and value that was lost due to a strike or lockout. But sponsors can seek to incorporate some flexibility and protection for their interests in the event of a player strike or owner lockout.

These protections generally seek to clarify:

• When the force majeure clause is triggered in the event of a strike, lockout or other work stoppage;
• How long the consequences of the force majeure event last;
• What happens to the term of the sponsorship agreement during a work stoppage; and
• What happens to the sponsor's payment obligations.

On the issue of when the force majeure clause is triggered and how long it lasts, strictly requiring a strike or lockout to go into effect before the force majeure clause is triggered might not provide sufficient protection to the sponsor. For example, was there a contractually defined “lockout” in the NFL during the days between the enjoining by the U.S. District Court for the District of Minnesota of the NFL owner's lockout and the decision by the U.S. Court of Appeals for the Eighth Circuit to vacate that injunction? See , Brady v. National Football League , 644 F.3d 661 (2011).

Rather than leave the parties to the sponsorship agreement guessing at the answer to that sort of question, sponsors should seek protection during any labor dispute that occurs during the sponsorship term, and broadly define “labor dispute” to include a strike or other work stoppage by essential personnel, such as the applicable players association and/or its members, a lockout by the team owners, the decertification of the applicable players association, and/or a court challenge to an owner lockout or players association decertification for as long as injunctive or other equitable relief is available to either side of the dispute or actually in effect in any such challenge.

As for the sponsorship agreement term, if the team is prevented from performing by reason of a force majeure event, then the sponsor should ask that the sponsorship agreement and the amounts payable to the team be suspended automatically from the date of such force majeure event. The sponsor may elect to extend the term ' and any option period or other time period specified in the sponsorship agreement ' for a period of time equal to the period of suspension.

On the issue of payment, it is generally accepted that no sponsorship payments become due to the team during any period of suspension. But implementing that consequence is easier than it sounds. Team owners will generally agree to discount the sponsorship fees that are payable by their sponsors based on some pro rata formula if the work stoppage or other force majeure event causes regular season games to be cancelled.

But due to the significant lead times needed to create materials and plan campaigns, sponsors also suffer cognizable harm if the force majeure event occurs in the off-season, even if no regular season games are actually cancelled. A pro rata reduction of the sponsorship fee based on cancelled games does nothing to compensate a sponsor that is forced to postpone or forego its campaign planning and activation if very few or no games are actually cancelled. Instead of settling on the cancelled-games formula, it is in a sponsor's interest to negotiate a reduction in the sponsorship fee if the force majeure event puts the scheduled start date of the league's regular season in doubt. Without that or similar protection, sponsors may find themselves committed to payments with little recourse and nothing more than their branded logo in an empty arena.

[Editor's Note: Just as this issue was going to press, the NBA and the NBA Player's Association reached a deal to end their labor dispute. If ratified by the union, an abbreviated season will begin on Dec. 25. No vote on the agreement for either side was set at press time.]

Benjamin R. Mulcahy is a partner in the entertainment, media and technology practice group at Sheppard Mullin Richter & Hampton in the New York and Century City offices. Jay J. Fragus, a law clerk in the entertainment, media and technology practice group in the Century City office, assisted in the preparation of this article.