Master of Disaster

Catherine Dunn

Corporate Counsel

12-01-2012

Like a lot of star athletes, cyclist Lance Armstrong racked up plenty of product endorsements along with his big wins. But in October—a week after the U.S. Anti-Doping Agency published a report on allegations that Armstrong and his teammates cheated for years—his brand-backers started backing away from the former champ, who within days was stripped of his seven Tour de France victories. Nike Inc., Trek Bicycle Corporation, and a score of others bid Armstrong and his tarnished image goodbye.

Endorsement agreements can be high-risk, high-reward propositions. Corporations are banking on a positive association with the star, but there's plenty of room for things to go wrong. And when they do, says Richard Grant, managing partner of the Los Angeles office of McGuireWoods, "it's critical that the brand be able to take action to protect themselves."

That's where morals clauses come in. These passages in athletes' endorsement contracts allow companies to terminate an agreement and/or recoup payments—whether because the athlete was convicted of a crime, violated athletic rules, or behaved in a way that sullied the brand. "A well-drafted morals clause that sets real clear standards of conduct is probably the best thing you can have in your pocket," Grant says.

The aim is flexibility. "The goal is for the sponsor or the company to have unfettered discretion," says Rob Simmons, assistant general counsel at Molson Coors Brewing Company. But companies should definitely expect pushback from the other side.

"It's strictly a negotiation," says Arent Fox attorney Maidie Oliveau, who specializes in sports law. Sponsor companies are trying to narrow down the determination of when a contract can be terminated, while a celebrity or an athlete's agent is examining any measure that could be interpreted as too subjective.

But even when an athlete violates a morals clause, a company has to consider whether it will be better off terminating the agreement. "The brand has to do a careful balancing act," says Grant. Nike and Trek, for example, distanced themselves from Armstrong, but reaffirmed their support for his namesake foundation, which supports cancer research.

"Part of the in-house counsel role is to align the expectations of the company with the ability of the artist or athlete to meet those expectations," says Simmons. The goal, after all, is to have a clause that's never invoked.