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April 10th, 2009
A Moral Dilemma: Morals Clauses in Endorsement Contracts
Seeking to grab the attention of customers and break through the clutter of everyday advertising, advertisers will often work with athletes to market their goods and services. Advertisers may spend millions of dollars in order to align themselves with athletes with the hope that such association will make a connection with customers. Choosing the right athlete for an endorsement can raise an advertiser's profile immensely.
Advertisers should be aware, however, that there are risks in aligning themselves with high-profile endorsers. As recent "scandals" involving well known athletes such as Michael Phelps, Alex Rodriguez, and Michael Vick show, advertisers, rightly or wrongly, may seek to disassociate themselves from an endorser in order to avoid consumer backlash. One way to do so is to include and utilize the "morals clause" in the endorsement agreement.
Morals clauses are one of the most controversial and heavily negotiated provisions in athlete endorsement contracts. Such clauses often give the advertiser the ability to suspend or terminate the agreement in the event that the athlete commits an act that falls within the purview of the clause – usually defined as behavior that is criminal, scandalous, or otherwise publicly reprehensible. See Nader v. ABC Television, Inc., 150 Fed. Appx. 54, 56 (2d Cir. 2005) affirming 330 F. Supp. 2d 345 (S.D.N.Y. 2004) (in upholding right to terminate actor for breach of morals clause due to criminal activity, the Second Circuit found that "morals clauses have long been held valid and enforceable"). Because the advertiser is paying for the use of the athlete's good name and image, the advertiser may want to end a relationship with an athlete whose misdeeds have tarnished that name and image.
As endorsement relationships should be partnerships rather than adversarial service arrangements, however, the parties should work together to develop an appropriate morals clause. There are a number of different issues to think about when negotiating morals clauses - such as who are the parties involved, what are the potential risks in the relationship, and what are the potential damages if an issue arises. Specific things to consider when negotiating these clauses include the type of behavior that is covered and the remedy for a violation of the clause.
If an advertiser is concerned with a particular athlete endorser, then the advertiser will often push for a broad morals clause that provides sufficient discretion to the advertiser to determine whether the endorsing athlete's acts constitute a violation. Such a clause might include the following language: "If at any time, in the opinion of Sponsor, Athlete becomes the subject of public disrepute, contempt, or scandal that affects Athlete's image or goodwill, then Company may, upon written notice to Athlete, immediately suspend or terminate this Endorsement Agreement and Athlete's services hereunder, in addition to any other rights and remedies that Sponsor may have hereunder or at law or in equity."
On the other hand, athletes and their advisors will often want to strike such language, on the ground that it is too subjective and uncertain – what is a disreputable, contemptible, or scandalous act to one person may be quite acceptable to another. Similarly, if the athlete is concerned about the morals language, the athlete may want to include more objective language that permits suspension or termination only when specific acts occur. Thus, athletes and their advisors may consider language similar to the following: "If at any time during the Term Athlete is convicted of a felony or pleads guilty or 'no contest' to a felony, then Company may, upon written notice to Athlete, suspend or terminate this Agreement and Athlete's services hereunder, in addition to any other rights and remedies that Sponsor may have hereunder or at law or in equity." While such specificity helps the athlete, such language could be problematic for advertisers where the athlete engages in behavior that falls short of criminal conduct but still causes public outrage or scandal.
Although morals clauses generally focus on endorser's behavior, the endorsing athlete should also consider the risk of being associated with certain advertisers. In light of recent well-publicized corporate wrongdoing, athletes may now want to think about including morals clause language for advertisers' behavior as well, thus ensuring that they have the ability to extricate themselves from an endorsement deal if an advertiser engages in questionable behavior. Such a "reverse morals clause" may include language that would allow the athlete to terminate if punitive actions are taken by a court or governmental authorities, such as the SEC, DOJ, or FTC.
Regardless of what types of behavior are included in the clause, the remedy for a violation of the morals clause may perhaps be more important than the behavioral language in the clause itself.
The advertiser may seek one of several remedies for a morals clause violation, including: terminating the agreement; suspending the agreement but retaining the services of the athlete for a later day; imposing a financial penalty for the "immoral" behavior but allowing the endorsement to continue; or seeking damages for breach of the agreement.
Termination and suspension raise another issue – the payment of compensation. If either option is exercised, the advertiser may want to: hold back compensation owed to the athlete; pay the athlete on a pro-rata basis either for the services performed to date or based on the term of the agreement (and pay nothing else going forward); or seek a refund of any compensation paid to the athlete (however, a refund clause is often a difficult provision to insert).
A payment schedule providing compensation over time may be another way to balance the risk. For example, rather than pay all or most compensation up front, a prudent advertiser may spread the payments out over time, thus avoiding the necessity of recouping compensation for a morals clause violation. See Team Gordon, Inc. v. Fruit of the Loom, Inc., No. 3:06-cv-201, 2009 WL 426555 at *6-7 (W.D.N.C. Feb. 19, 2009) (Sponsor not able to recover sponsorship payments after termination due to, among other things, a morals clause violation because sponsorship agreement did not provide sponsor with the right to pro-rate payments or obtain a refund for such violation; here, the front-loading of payments hurt the NASCAR team sponsor). Such tactic makes compensating the athlete conditional on the athlete's good behavior.
The advertiser should also consider including a "pay or play" provision in the endorsement agreement, which states that the advertiser has no affirmative obligation to air, publish, or distribute the materials featuring the athlete. Although the advertiser would have to pay the stated compensation, such a provision allows the advertiser to avoid negative publicity by pulling (or simply refusing to air or publish) media when a morals issue arises.
While endorsements can and should advance the business interests of both parties, a negotiated morals clause can help each side reduce the risk of untoward behavior.
© 2009 Christopher R. Chase. This article first appeared in Sports Litigation Alert, Volume 6, Issue 6 (April 10, 2009). Christopher R. Chase is an attorney with Frankfurt Kurnit Klein & Selz, PC, where he counsels clients in the sports, advertising, and entertainment industries. His diversified practice includes structuring and negotiating endorsement agreements, brand and celebrity licensing agreements, sponsorship agreements, and content releases and licenses. The author can be reached at firstname.lastname@example.org. This article presents a general discussion of legal issues, but is not legal advice and may not be applicable in all situations.
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