Mcle Article: Building a Successful Relationship Through an Effective Sponsorship Agreement

• Publication year: 2017
• Author: By Diane L. Cafferata and Jeremy M. Evans

MCLE Article: Building a Successful Relationship through an Effective Sponsorship Agreement

By Diane L. Cafferata and Jeremy M. Evans

Diane L. Cafferata is a partner based in the Los Angeles office of Quinn Emanuel Urquhart & Sullivan, LLP, the largest all-business-litigation firm in the world. Diane specializes in complex commercial litigation, including intellectual property cases, class actions, financial matters and business breach and tort cases, for both plaintiffs and defendants. Diane has been repeatedly recognized as a Southern California Super Lawyer and was named one of the Benchmark Plaintiff Top 150 Women in Litigation in 2014. She can be reached at dianecafferata@quinnemanuel.com.

Jeremy M. Evans is the Managing Attorney at California Sports Lawyer®, representing sports, entertainment, and business professionals in their contract, negotiation, and intellectual property matters. Evans is an Outreach Captain for the Sports Lawyers Association and is an award-winning attorney and community leader based in Los Angeles. He can be reached at Jeremy@CSLlegal.com or via his website: www.CSLlegal.com.

(Check the end of this Article for information about how to access 1.0 self-study general credits.)

In this article, Jeremy Evans with California Sports Lawyer® and Diane Cafferata with Quinn Emanuel Urquhart & Sullivan, LLP provide insights into the drafting and negotiation of sponsorship and endorsement agreements. Both attorneys are based in the heart of the entertainment and sports industries, Los Angeles, California.

The sports industry's rapid evolution and growth continues to generate increasing opportunities for sponsorship exposure. In North America, the world's largest sponsorship market, sponsorship spending is projected at $23.2 billion, up from $22.3 billion last year, with sports accounting for 70% of that market.¹ Per Forbes:

"[W]hat separates the Dallas Cowboys ($2.3 billion value) and Oakland Raiders ($825 million) is their stadiums and the revenue derived from each venue. Sponsorship revenue plays a huge part in this. The Cowboys earned $100 million from sponsorships and advertising signage last season, and this was before owner Jerry Jones inked his 25-year, $500 million naming rights deal with AT&T. Teams like the Raiders and Buffalo Bills generate less than $20 million in sponsor revenue."²

Per CNBC:

In [Major League Baseball], the league reached $695 million³ and $778 million⁴ in sponsorship revenue for 2014 and 2015, respectively. Since 2011, sponsorship revenue has gone up every year.⁵

Sponsorship agreements, the legal vehicle creating such relationships, are becoming increasingly common as a result. Whether you represent a sponsored party, a sports league, a charity, a company, or the government, it is wise to be familiar with these agreements and their key provisions before they cross your desk. The purpose of sponsorship agreements—to clearly describe the contours of the parties' successful relationship into the future—compels candid discussion and clear and unambiguous drafting of the parties' rights and obligations under the agreement.

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There are many articles that explore the basics of sponsorship agreements, and the typical provisions that should be included,⁶ but here we examined some provisions that have generated significant litigation over sports sponsorships in the last several years to illustrate and develop some conclusions about how these agreements may be drafted to avoid or at least minimize such disputes in the future.

PROPER REPRESENTATIONS OF PARTIES' CAPACITY AND AUTHORITY

In addition to ensuring that the agreement properly identifies the parties to the agreement, there should also be clarity around each party's authority to enter into the agreement and its ability to grant the rights it will provide under that agreement.

In VICI Racing, LLC v. T-Mobile USA, Inc., 763 F.3d 273 (3^rd Cir. 2014), for example, section 5.8 of the parties' agreement provided that "VICI grants to [T-Mobile] the right to be the exclusive wireless carrier supplying wireless connectivity for the Porsche, Audi and VW telematics programs beginning in model year 2011 with such exclusivity continuing throughout the term of this Agreement."⁷ In that case, T-Mobile terminated the agreement and alleged that VICI, a former operator of a racing team that competed in the American Le Mans Series, had breached this provision of the agreement because "VICI does not have and has never had the authority to grant such rights."⁸

The district court found section 5.8 was "too convoluted to have any one clear meaning."⁹ For example, it could mean the sponsor had bargained for the right to seek the telematics business from those companies, or it could mean the sponsored party was supposed to facilitate the sponsor's efforts to get that business, or it could have some other meaning entirely. Further, it included undefined key terms that were open to conflicting interpretations, and the balance of the contract contained no other provisions that would clarify section 5.8.¹⁰ The court held section 5.8 severed from the contract and unenforceable based on the parties' clear intention in section 14.7 of the agreement that unenforceable provisions would be severable.¹¹ This result was upheld on appeal.¹²

A sponsored party's capacity came into play in a different way in Oakley Inc. v. Nike, Inc. et al, 988 F.Supp.2d 1130 (C.D. Cal. 2013). In that case, Oakley and professional golfer Rory McIlroy had signed a two-year endorsement contract for the period January 1, 2011 through December 31, 2012, which contained a provision requiring McIlroy to provide Oakley a right of first refusal for the next endorsement period after 2012.¹³ In September 2012, an Oakley executive backed out of the running for that next endorsement deal with a late-night email: "Understood. We are out of the mix. No contract for 2013."¹⁴

Nevertheless, when McIlroy entered into a new agreement with Nike, Oakley sued him for breach of contract and Nike for intentional interference with contractual relations.¹⁵ The Court entered summary judgment in favor of Nike, because McIlroy's representatives had repeatedly stated to Nike that they had the ability to contract with Nike and that Oakley was not submitting a competing proposal and in fact had chosen not to do so.¹⁶...