“The Dalton Principle”, Navigating Partnerships in the Age of Covid-19

by | Apr 7, 2020

The sponsorship space is certainly going through unprecedented times.

How do brands navigate this process?

To help answer that question, we would like to introduce our Executive Vice President, Brand Marketing, Andy Silver:

My name is Andy Silver, EVP of Pivot’s brand division and a licensed attorney who has worked in a legal and marketing capacity in sports since 1995. I’ve worked with, drafted, and advised clients about licensing and sponsorship contracts for most of my adult life. But, like most of you reading this blog, I’ve never seen anything remotely similar to this coronavirus pandemic.

In California, where I currently reside, I’ve read through natural disaster clauses, such as what to do regarding fires, or earthquakes, but I’ve seen only a few agreements referencing a global pandemic. I fully expect to see language applicable to this situation in future sponsorship agreements, but many of us are being asked to deal with the here and now.

To that end, I will share some key thoughts with you that I have recently been sharing with many of my clients. This is not inclusive or representative of all potential situations, nor is this legal advice. It is also important to point out that this blog post covers the contractual relief due to the coronavirus from the perspective of brand sponsors as that is most familiar to me. However, many of the principals are applicable to either side.

There are two (2) primary issues that have been raised by my clients:

(A) Properties are not capable of fulfilling the obligations and assets of the agreement. Clients are concerned they’ve already paid fees, or a payment is due, and they will not receive adequate (or any) value from the property in exchange for those fees.

(B) A smaller portion of my clients in certain industries, cannot keep up with the consumer demand for its products. As a result, my clients do not want to advertise or promote products that are not regularly available on store shelves since the coronavirus impact, due to this unanticipated consumer demand. Cleaning items, pharmaceuticals, and toilet paper would be representative of this segment – why advertise, or promote a product that isn’t available? Some retailers have even placed restrictions and demands preventing CPG companies from exercising certain sponsorship rights at retail, such as building and maintaining in-store displays. For those reasons, even if a property was able to deliver the assets, the utility of the sponsorship is compromised to such a degree that the benefits are rendered worthless.

Here are some general rules of the road to help steer your discussions with properties related to coronavirus impact.

(1) Reasonableness. If you follow this first rule, you may find that none of the other tactics will be necessary. Sports properties ultimately want to keep partners happy and engaged long-term. Thus, many of the solutions accepted by the parties will be “off-contract.” Sometimes it is best, initially, to keep the contract jargon to a minimum and focus on reaching a reasonable solution to the problem, without sole reliance on the contract.

If you’ve had a reasonable prior relationship with the property, simply engage them in a discussion before “lawyering up.” More often than not, in situations such as these, you may find the property is willing to bend over backwards and may even suggest better remedies or alternatives than expected. As Dalton, Patrick Swayze’s character in (the greatest movie ever) Road House once said, “Be Nice.” Be like Dalton. It may resolve 90% of your potential issues.

(2) Force Majeure Clauses. A Force Majeure clause simply covers an “Act of God” that changes the obligations owed by one party to the other based on the impossibility of fulfillment due to uncontrolled circumstances. Force Majeure can benefit either party in the transaction but is often detrimental to the interests of a brand because it often excuses unfulfilled performance obligations by the property. That said, it is important to know whether a Force Majeure clause exists, and if so, what are its limitations in terms of relief from a brand standpoint.

Some of the agreements that I recently read, limit Force Majeure style remedies to specific incidents that can hardly be considered an Act of God. Labor strikes or lockouts for instance, are definitive man-made creations and common impediments to the fulfillment of sponsorship obligations by teams and leagues. An argument can be made that the coronavirus situation is most similar to a labor dispute that would cancel an entire season, or shorten it to such a degree that the fulfillment of assets by the property is impossible. But, language matters in a contract, and courts or arbitrators often take a very literal interpretation.

(3) “Make-Goods”. “Make-Goods” are traditionally favored rather than a refund, which is an option of last resort for the properties. If you are so inclined, you may be able to ask for a “Make-Good” that is significantly more valuable than existing assets, as avoiding a refund can give you leverage in negotiations. This is especially true for “make-goods” that do not represent out-of-pocket costs, or opportunity costs to the property, such as granting a unique license, digital assets or other intellectual property assets.

In some cases a “Make-Good” would not be appropriate, such as a single unique event sponsorship that was cancelled and will not be rescheduled. As such, I would go back to option No. 1, reasonableness as a first resort and see if a mutually agreeable buy-out is an option before exercising more extreme options such as the one below.

(4) Breach of Contract. For contracts without an applicable Force Majeure clause, or simply because other remedies offered in the Agreement will not provide relief, a party may be able to claim breach of contract. Breach of contract sounds punitive, but a contract is an economic matter, not a criminal or moral judgement issue. Simply put, if the other party cannot meet its obligation, regardless of intent to fulfill the agreement, that party is technically in breach if there are not conditions that mitigate the obligation of that party to perform.

Many contracts place conditions or limitations to claiming breach of contract. Such limitations include; (i) Force Majeure clauses, referenced above, (ii) liquidated damages provisions, such as “Make-Goods,” also referenced above, and, (iii) opportunities for the opposing parties to “cure” non-performance of a contract. The coronavirus is not curable – both literally at this date, and figuratively as the non-performance of obligations under the contract due to coronavirus, is not typically going to be within a party’s ability to control and “cure.” So, in these cases, breach of contract may be appropriate, in which case there could be many relief options, including, but not limited to; refund or partial refund. This is usually the nuclear option, but in some cases, depending on your circumstances, the appropriate one.

(5) Roll-Over. This is off-contract for many, and in other cases, a rollover clause exists, but typically only for labor incidents. The situation facing the leagues is so dire and unanticipated, yet so similar to the impacts of a massive labor dispute, that the relief of choice for both or either party will be to simply rollover benefits of sponsorship to the following year, so that the parties are made whole. Simple, elegant, but again, this does not help brands that are looking to exit deals, are lame-duck, or whose category replacements have already been identified.

(6) Common Law Frustration of Purpose. Frustration of Purpose is the “Hail Mary” of contract law, and has more academic and theoretical applications than it is used in practice. However, the unique situation of the coronavirus makes it a candidate for consideration under this common law principal. The problem with Frustration of Purpose, is that just about any calamity impacting one party or the other can trigger a claim of frustration of purpose. It’s become so vague as to be unusable. I may try it as a fallback “couldn’t hurt” argument to augment a stronger one.

Contracts are unique instruments so a blog post like this is unlikely to meet your specific needs, but I hope this general overview was helpful. If any of you have a different perspective, or constructive criticism, I welcome your thoughts. I certainly do not have all the answers, and I am humbled by the enormity of this particular problem.

Again, I would focus on No. 1 – be reasonable (and nice) – Be Dalton. This has been a tremendous shock to the system, for both properties and brands alike. We at Pivot think being fair as possible is not only best but also the way that the sports industry once again sets the tone for the way the rest of the country does business.

Be Safe and Be Reasonable!

Andy

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