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  • Adidas has landed several key sponsorships from colleges and endorsements from star NBA players. Is that because the company has created an unfair playing field, as Skechers claims in its lawsuit?
By Michael McCann
May 11, 2018

If one footwear company uses illegal bribes to lure star recruits into both attending sponsored colleges and signing endorsement deals, who suffers more harm: the federal government or rival footwear companies?

As we know, the U.S. Department of Justice sees the federal government as the clearly harmed entity. Federal prosecutors contend that Adidas executives “bribed” elite basketball recruits. In doing so, prosecutors charge, the executives inflicted damage upon the interests of the federal government. This is because (1) the federal government subsidizes colleges through financial aid and grants, and (2) those colleges are supposedly hurt when they enroll students who are ineligible to play under NCAA rules. According to this logic, scholarships awarded to ineligible players could have instead been assigned to eligible, albeit less talented, basketball players. Also, in some cases, schools with ineligible players are caught and punished by the NCAA.

Many are not persuaded by the Justice Department’s theory of criminal fraud. For one, it has never been a crime in the U.S. to pay a high school student to attend a particular college. Sure, paying a recruit violates NCAA rules, but never before has it been classified as a criminal act. Also, the college that lands an elite recruit often doesn’t resemble a “victim.” The school enrolls a basketball star who then helps the school win games. In turn, the school sells more tickets and merchandise, and also attracts more television viewers, prospective students and alumni donations.

Rival footwear companies may possess a far more persuasive argument than the government for claiming harm. After all, if Adidas can play by an easier set of recruiting rules than its rivals, those rivals seemingly suffer as a result: They are less likely to direct recruits to play at sponsored schools, less likely to later sign those recruits to endorsement deals and, as brands, are less likely to resonate with consumers who are interested in buying basketball sneakers.

Enter Skechers, which in recent years has jockeyed with Adidas for the status as the second-largest athletic footwear company in the U.S. behind Nike. This week, Skechers filed a false advertising and unfair competition lawsuit against Adidas in the U.S. District Court for the Central District of California. The multibillion-dollar footwear company charges that by “funneling hundreds of thousands of dollars in secret payments to players,” Adidas has “co-opt[ed] young players into wearing or implicitly endorsing [Adidas] products.” Skechers insists that Adidas’s alleged “illicit payments” deny Skechers and other footwear rivals a fair chance to compete for “the cachet of having trend-setting high school and college athletes seen in their products.” Skechers contends that it is victimized when a rival—Adidas—enjoys “unfairly bolstered consumer perceptions of Adidas’s overall brand quality and image well beyond the basketball.”

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Skechers brings its legal “A Game” to the Adidas lawsuit

Skechers has retained a prominent attorney to take on Adidas. Daniel Petrocelli rose to fame in the late 1990s when he successfully represented Fred Goldman in Goldman’s wrongful death lawsuit against O.J. Simpson. While Simpson was found not guilty for the murders of Goldman’s son, Ronald Goldman, and Nicole Brown Simpson, Petrocelli ensured that Simpson would be found civilly liable for those deaths. During Simpson’s civil trial, Petrocelli famously showed jurors photos of Simpson wearing size 12 Bruno Magli shoes—a rare shoe—which matched footprints found at the murder scene. A jury concluded that Simpson was liable for the deaths. Simpson was ordered to pay $33.5 million.

Petrocelli has represented other notable clients, including President Donald Trump in the Trump University litigation and Fox Sports in its litigation with former Fox Sports National Networks President Jamie Horowitz. While Adidas has dismissed Skechers’s lawsuit as “frivolous and nonsensical,” Adidas is no doubt aware that an attorney of Petrocelli’s prominence would be unlikely to take such a case if he felt it had no chance. Petrocelli and other attorneys from the Los Angeles firm O’Melveny & Myers—including attorneys Mark Samuels, Jeffrey Barker and Christopher Whittaker—will now take on Adidas.

Assessing Skechers’s key arguments

Skechers’s 30-page federal complaint maintains that a turning point in the Skechers-Adidas turf war occurred in May of 2015. It was then when retail tracker NPD Group declared that Skechers had overtaken Adidas in terms of market share of the U.S. sports footwear market. Skechers contends that the news caused Adidas to panic. From Skechers’s perspective, Adidas began to aggressively “game the system” of college basketball recruiting. They allegedly did so in ways that violated NCAA rules and possibly criminal statutes as well. Such actions also purportedly damaged rival footwear companies.

To that end, Adidas—at least as Skechers tells it—“became concerned that key basketball prospects might not join certain Adidas-sponsored university basketball programs based solely on the merits of those programs.” In response, Adidas allegedly “funneled” large amounts of money to top recruits and their family members.

Skechers’s complaint details several alleged recipients of Adidas’s newfound beneficence. One was high school basketball phenom Dennis Smith Jr., who now plays for the Dallas Mavericks. Skechers relies on federal charges filed last month in the U.S. District Court for the Southern District of New York to claim that Adidas directed approximately $400,000 to Smith’s father in order to ensure that Smith (1) enroll at North Carolina State, an Adidas-sponsored school, and (2) promise to sign an endorsement deal with Adidas after Smith turned pro.

The alleged payment didn’t net Adidas all of what it sought—upon entering the NBA, Smith ditched Adidas to sign a deal with Under Armour. Still, as Skechers details, Adidas benefited greatly from Smith “consistently wearing footwear and clothing with prominent Adidas logos” while he played at NC State during the 2016-17 season. Smith’s college games were also broadcast on local, regional and/or national TV. Further, Smith wearing Adidas is apparent whenever someone watches online highlights of him in college.

Skechers argues that it has endured several kinds of financial injuries on account of Adidas funneling impermissible/illegal payments. Namely, the company has had to increase advertising and marketing costs to try to even the playing field with Adidas. Skechers also claims to have lost sales, market share and suffered diminished good will, all on account of Adidas.

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Skechers estimates that Adidas has caused damages in excess of $75,000. Keep in mind, this dollar figure reflects the legal requirement of pleading at least $75,000 in damages in order to establish proper “subject matter jurisdiction” in a federal lawsuit involving parties from different states. Should Skechers’s lawsuit go to trial and should Skechers prevail, the company would expect far more than $75,000 in damages. Most likely, the expectation would be tens of millions of dollars. This would include an award of profits that Adidas “unlawfully derived” from its “wrongful conduct” as well as compensatory damages. Under the federal Lanham Act, compensatory damages for false advertising would be automatically trebled (multiplied by three). Skechers also demands a court-ordered injunction that would prohibit Adidas from “making any payments to high school students, NCAA student-athletes or their families that are not fully disclosed to the public.”

Skechers expends considerable effort in the complaint detailing the value of endorsements—and, by implication, the value of lost opportunities to land endorsements. Skechers highlights academic studies that “have demonstrated that celebrity and athlete endorsements generally positively influence consumer perceptions of a brand and likewise have positive, spillover effects on a brand owner’s reputation, sales, and stock price.” Along those lines, endorsement deals can substantially increase brand recognition and enable a company to become associated with a particular product line—like basketball sneakers. Skechers also illuminates how Adidas developing a long-term relationship with a star athlete is a relationship that only amplifies in value over the course of the star’s career: “The competitive benefits of such endorsements increase over time as the athletes advance in their careers ... a company’s sales and stock returns tend to jump noticeably each time an athlete-endorser wins a major event or championship.”

Building on this point, Skechers contends that Adidas’s endorsements have misled consumers in violation of Federal Trade Commission guidelines. Until recently, Skechers asserts, consumers haven’t known that college stars wear Adidas’s sneakers because those stars (allegedly) received “secret, illegal payments” from Adidas executives while in high school. This arrangement is legally problematic, Skechers notes, since the FTC requires that sellers let consumers know of connections that “might materially affect the weight or credibility of the endorsement.” Skechers believes some consumers wouldn’t have purchased Adidas footwear if they knew Adidas had (allegedly) broken rules to “block out the competition and lock up valuable, highly talented athlete-endorsers early in their careers.”

Breaking down Skechers’s legal claims

Skechers’s complaint contains three causes of action: false advertising and unfair competition under the federal Lanham Act; false advertising under California law; and unfair competition under California law. Collectively, these claims portray Adidas as misleading consumers as to the legitimacy of their contractual relationships with both sponsored colleges and basketball players with whom Adidas eventually signed endorsement deals.

Following this logic, consumers were deceived if—as the Justice Department contends—Adidas executives violated NCAA rules and potentially criminal statutes in recruiting high school stars. After all, those consumers watched star players wear Adidas sneakers and later endorse Adidas products. According to Skechers, consumers developed the false impression that Adidas must be the superior product over Skechers because it keeps landing the big names.

In contrast, Skechers says it has played by the rules. Perhaps as a result, Skechers has been largely shut out of sponsorship and endorsements with major AAU and college basketball programs as well as with star NBA players.

For these reasons, Skechers contends that if fans had only known the (alleged) “truth” about how Adidas recruited elite high school basketball stars, some of those fans would not have bought Adidas footwear. Instead, they would have bought footwear made by another company, such as Skechers.

Breaking down Adidas’s likely defenses

In the weeks ahead, Adidas will answer Skechers’s complaint. Adidas will surely deny the allegations. The company will also signal some of their key arguments.

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At the most basic level, Adidas will stress that the Justice Department’s prosecutions of persons who have worked for, or with, Adidas have not been proven in a court of law. Skechers’s complaint accepts allegations against Adidas as facts when, in reality, those allegations have not yet been proven.

Second, Adidas will assert that Skechers is simply not a credible rival to Adidas in the basketball sponsorship and endorsement industry. Stated differently, Adidas will reason that if consumers didn’t buy from Adidas, they probably wouldn’t buy from Skechers either. Perhaps they would purchase footwear made by the industry leader, Nike. Regardless, Adidas will argue that Sketchers wouldn’t become the beneficiary of its lost sales. As a result, Adidas will insist that irrespective of Adidas’s conduct, Skechers cannot credibly establish that Adidas has harmed Skechers.

Skechers’s complaint anticipates this line of reasoning. The complaint attempts to convince the court that it really is in the same sponsorship ballgame as Adidas. To that end, Skechers insists that it “competes with Adidas on the regional and national level for endorsements by professional athletes, including NBA-level endorsers.”

Skechers then mentions an endorsement deal it signed “several years ago” with Jamal Crawford while he played for the Los Angeles Clippers. While Crawford has enjoyed a long and productive NBA career—the 38-year-old guard just finished his 18th season in the NBA—Crawford has never been an NBA star. It’s unclear what kind of value his endorsement would carry. Regardless, Skechers admits that it later lost Crawford to Adidas, which offered him a “richer endorsement deal.”

Skechers has also “worked with” Los Angeles guard Lonzo Ball through Skechers’s consulting relationship with the Big Baller Brand. Further, Skechers says its products “have been endorsed” by Dallas Mavericks owner Mark Cuban as well as by a group of now-retired stars, including Larry Bird, Karl Malone and Kareem Abdul-Jabbar. Still, it is safe to say that among current NBA players, Skechers and Adidas are not playing in the same arena: Adidas has deals with James Harden, John Wall, Jaylen Brown, Kristaps Porziņgis and other stars.

It’s also not clear that Skechers has reached sponsorship deals with many big-time college athletic programs. Most of Skechers’s deals seem to be unrelated to college basketball programs or to active professional basketball stars.

Adidas can use those points to argue that consumers have not been misled by Adidas in any way related to Sketchers. Consumers interested in basketball footwear and apparel, Adidas will assert, simply buy the products that are most relatable to their interests.

Of course, Skechers might respond by stressing how this landscape reflects Sketchers adhering to NCAA recruiting rules and Adidas (allegedly) cheating on those same rules. In other words, Skechers’s apparent lack of success in college and NBA basketball isn’t necessarily the result of a merit-based process. The company will say it flows from the consequences of one company playing fair and the other playing dirty.

As always, the case could end in an out-of-court settlement. For now, however, two footwear companies will match up in court.

SI will keep you updated on developments in the Skechers v. Adidas lawsuit.

Michael McCann is SI's legal analyst. He is also the Associate Dean for Academic Affairs at the University of New Hampshire School of Law and co-author with Ed O'Bannon of the new book Court Justice: The Inside Story of My Battle Against the NCAA.

 

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