Maryland Bar Bulletin
Publications : Bar Bulletin : September 2007

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Companies of all shapes and sizes turn to celebrities and athletes to publicly endorse their products. Whether representing a Fortune 500 company bidding for the services of a perennial Wimbledon finalist or a local car dealership seeking the endorsement of a popular hometown baseball player or musician, it is important for legal counsel to understand the current endorsement agreement landscape.

Grant of Endorsement Rights

To a layperson, an “endorsement” tends to suggest that a celebrity agrees to appear in advertising, wear or otherwise publicly use the endorsed products, or be an outspoken advocate of use by the buying public of the endorsed products. In reality, the parties enter into a more nuanced agreement whereby the celebrity licenses aspects of his name and likeness and the parties agree on a range of other commitments and incentives. It is critical for the company to carefully draft sufficiently broad endorsement language, for instance, to allow the company to use the celebrity’s endorsement in various approved media to promote the endorsed products. Each of the terms “endorsement”, “approved media” and “endorsed products” should be carefully defined. For example, an “endorsement” is the grant of rights in one’s name and/or likeness, and should include the celebrity’s image, likeness, name, initials, voice, video and film portrayals. The approved media should encompass all current media, such as film, television, radio, print advertising and the Internet, as well as those media “yet to be developed.” Companies that failed to foresee the rise of the Internet found themselves at an endorser’s mercy when they sought to use the endorsement on their websites.

Endorsed Products

The endorser and the company have competing interests as to the definition of endorsed products and many other aspects of the endorsement agreement. The company prefers a broad definition of products, reducing the chance of the endorser endorsing competitive products or businesses. The endorser, on the other hand, has an interest – much like the owner of a copyrighted work – in segmenting the market for, and therefore enhancing the value of, his endorsement. In any event, the parties should expect that the endorser will be barred from endorsing any other products competitive with the endorsed products during the term of the endorsement. Similarly, the endorser will be required to wear endorsed products during company-sponsored appearances and film, video and photo shoots. Often this will be extended to all public appearances, particularly at events relevant to the celebrity’s industry (e.g., the ESPY Awards), although companies may also be forced to accept only a ban on the celebrity’s wearing of products that display the logos of competitive enterprises. This may require an endorser to redact competitive logos (athletes have been known to wear tape over competitive brands visible on their shoes and apparel during play), but be aware that the teams, leagues or associations responsible for the celebrity’s livelihood may require him to wear or promote competitive brands as a condition to participation. These circumstances should be discussed and addressed during negotiations.

Term and Territory

The scope of one’s celebrity often dictates the breadth of the market for his endorsement. An endorser’s ultimate goal is to receive value for his endorsement on a national or global scale, and to do so during the high times of his celebrity and afterwards. The larger the market, and the longer the term of the agreement, the greater the endorser’s expected compensation. The reality of fleeting or episodic celebrity, with dips resulting from injury or continued poor play, and surges from breakthrough performances, should translate into a contract that allows adjustments to compensation based on those events or other changing circumstances.

Both the endorser and the company have an interest in a lengthy relationship, each having invested a certain amount of credibility in the initial endorsement relationship. In light of the potential for the value of the endorser’s endorsement to wane or explode, each party has an incentive to enter into a short initial term followed by options, or exclusive rights of first refusal or first negotiation. Rights of first refusal should lapse prior to the expiration of the endorsement term, to allow the endorser to secure another endorsement without enduring “endorsement lag”. Rights of first negotiation are sometimes agreed to as an alternative or supplement to rights of first refusal. A first refusal that extends beyond the lapse of a first negotiation right helps to ensure each party truly has the other’s exclusive attention during negotiations. The company may consider extending it beyond the term to further reduce the risk of chicanery.

Compensation

Compensation may be comprised of annual base compensation, bonuses, royalties and in-kind gifts. Base compensation may be subject to base escalators in the event of the endorser’s achievement of certain bonuses or in-year milestones. Bonuses are often tied to in-industry performance (e.g., win NBA scoring title, finish among top 10 on annual USTA Tour), media exposure (e.g., cover of Sports Illustrated), or other goals. In special cases, the endorser’s brand value may be so great that the company elects to create a “signature line” of products featuring the name or likeness of the celebrity (e.g., Air Jordan shoes), or expects the endorsement to impact a major sales category. In those cases, the endorser may negotiate a royalty equal to a percentage of gross or net sales of the endorsed products, or at least the signature products. The endorser may require a minimum marketing spend and/or approval rights on product design or advertising, since his stature and/or financial security are linked with the sales of one or more product lines. Finally, companies typically provide the endorser, and perhaps members of the endorser’s family, with minimum quantities of the endorsed product for personal use. This constitutes compensation to the endorser, but also helps to ensure the endorser and those close to him have a ready supply of the endorsed products on hand, enhancing the potential “endorsement touches”.

Suspension and Termination

The value of an endorsement is almost always tied directly to the public’s positive perception of the celebrity and/or to the celebrity’s continued performance at the top of their industry. When drafting termination language, it is critical to bear that in mind.

For example, the company should consider whether to secure the right to terminate if the endorser misses one or more scheduled appearances, is seen publicly wearing a competitor’s products, is overheard disparaging the company or its products, or retires or otherwise is absent from the sport or other industry in which the person’s value as an endorser was earned. Lastly, endorsement agreements commonly contain a “morals clause” which gives a company a right to terminate if the endorser misbehaves, rationalized because of the assumption (sometimes false) that the endorser’s value is tied to the public’s positive perception of the endorser. Here, an endorser may want to limit the contemplated “bad acts” to those that actually result in a conviction for a felony or any crime constituting “moral turpitude”. This desire is in tension with the company’s belief that perception is reality – a position bolstered as the reader recalls NBA stars accused of rape and NFL players implicated in illegal dog-fighting enterprises. Thus, the company may negotiate for termination upon arrest, indictment or conduct that tends to place the company in a bad light. While potentially unfair to the endorser, this broader language protects the company from what it sees as a soured investment.

As an alternative to termination, consider including a right of suspension (company obligations are suspended and the term of the contract is extended by the duration of the suspension) in the event of extended injuries, suspension by a governing body, or any of the negotiated “morals clause” events.

This article is intended to highlight the critical issues, common to endorsement agreements, of importance to both endorsers and the companies whose products or services they seek to endorse. Naturally, any endorsement agreement should address these issues, but also many other terms and conditions not discussed here, from the boilerplate to industry-specific.

Jeffery N. Zinn, formerly counsel to one of the world’s largest athletic footwear and apparel companies, is currently an associate with the law firm of Saul Ewing LLP, concentrating in the area of intellectual property.

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Publications : Bar Bulletin: August  2007