May 14, 2013

For years, the story of the Fortunate 50 was always Tiger Woods, who seemed like the lone endorsement king of the sporting world. Then, the story was his scandal and just how much it would damage his sponsorship prospects. Now, very recently, experts say that endorsement contracts are undergoing a major shift, and it's due to scandal -- but not the one Woods endured.

"This whole industry has changed because of ... Lance Armstrong, not so much Tiger or other scandals," says Peter Carfagna, former general counsel for mega agency IMG and now sports contract law lecturer at Harvard. "He had federal sponsors, like the postal service, and what recourse do they have when it is alleged, now, that he fraudulently induced them at a time when he was doping. He must have given them some rep that he was clean."

So how do companies now protect themselves when signing a deal with an athlete they believe is squeaky clean? The problem isn't just about steroids, but conduct as well -- who's to say the star won't make a wrong ethical move and embarrass the brand as well as lose fans?

For one thing, there are often "clawback clauses" that allow a sponsor to recoup its investments (even money they already paid a star) if they can prove that the athlete misrepresented himself when the contract was signed. But that can be difficult to prove.

The language of a contract depends on leverage, and the amount of security a company can work in to protect itself is higher if the athlete has made mistakes in the past (say, if some brands begin talking to Mike Vick again). When an agent's client has a damaged reputation already, he's going to get a number of annoying clauses that allows the contract to be canceled at the sponsor's option. Contracts have always had a number of "reps and warranties" (representations and warranties; various promises from both parties and conditions agreed upon at the signing of a deal) upfront.

But now, in the wake of so many high-profile athlete scandals, the balance of the reps and warranties are shifting in favor of the companies. "They used to be mostly promises made by the brand, like, 'Company X will provide this much equipment, Company will run a minimum of two ads featuring Athlete,'" says Carfagna. "Now more and more there are reps and warranties coming back the other way, from the athlete, saying, 'I am a professional golfer, I will maintain current standing, but I will also remain in compliance with all laws and rules.' They're setting up a trip wire for doping, or for breaking the law, or for being accused of anything illegal."

And yet the endorsement contracts aren't only protecting companies against the athlete doing something illegal. What about scandals that ruin a player's reputation even when he didn't technically break any law? Tiger Woods cheated on his wife -- that doesn't look very honorable, but it isn't a crime. Brett Favre allegedly sent cell phone photographs of his genitals to a woman; he was not found to have violated any NFL conduct rules or broken any law.

Thus: the morals clause. Morals clauses aren't new, either, but they are getting far stricter. Ironically, that's happening through broader language about "public disrepute," which is expansive enough to apply to any wide range of misconduct. As long as the company can prove that the athlete's actions caused disrepute for the company, they can terminate a contract without being sued.

In some cases, instead of dropping an athlete, the company will temporarily cut an endorser's pay. As Fortune reported in 2011, according to an industry source, Nike did exactly that to Woods after his 2009 troubles, renegotiating his contract to pay him only $10 million in 2010 and $10 million in 2011, down from the normal $20 million annual average of that long-term deal. A company can certainly do that if it can prove that association with the athlete is doing damage to its brand. With regard to Tiger's scandal, any of the many cartoons, critical blog posts, or fake memes that ridiculed Woods's sponsors could be good fodder for such a claim. "If people are running away from the athlete, and it's causing damage to the brand, that is quantifiable," says Carfagna.

And a guy can cause damage to his sponsors not just with a serious crime, ethical misstep, or public outburst, he can do it on social media, too. That's the other big change causing companies to use tougher trigger language allowing them to suspend deals. The widespread flood of social media and its prevalent use -- by everyone, from fans to officials, coaches and even the athletes themselves -- had permanently altered the language of contracts. Many of the athletes that do use it often do so disruptively. Thus, sources say companies are getting more aggressive in making it clear to players that there will be consequences to offensive outbursts.

Rashard Mendenhall learned that the hard way when he sent out a slew of tweets in May 2011 that seemed to some as though he was sympathizing with Osama bin Laden. Hanes promptly dropped its contract with him; Mendenhall sued. The language of the clause that Hanes brands cited in the case was that Mendenhall could not do anything "tending to bring Mendenhall into public disrepute, contempt, scandal or ridicule tending to shock, insult or offend." Some experts felt that language looked pretty iron-tight; Mendenhall's tweets certainly offended. Others pointed out he has the right to his opinions. The two sides only just came to an agreement in January 2013 -- they reached a settlement. Terms were not made public, so it's hard to know who "won," but what's likely is that Mendenhall got at least some amount of what he was owed by the brand. We may soon, if not already, begin to see clauses in endorsement contracts that specifically cite Twitter and lay out regulations for how an athlete should (or, the key: should not) use it. As Eric Goldman, law professor at Santa Clara University, pointed out on his law blog, "Unlike the government, which has to comply with First Amendment constraints, private employers and brands can freely restrict the speech of their employees or endorsers."

Forget about scandals or misbehavior outside of the sport. On a simpler level, what happens when an athlete who just signed a major endorsement deal stops playing well? It's too early to tell, but Rory McIlroy may prove to be one such example. Since signing his monster deal with Nike he has struggled in big tournaments. A company usually can't end a deal simply because a guy is struggling, but it may not need to: in the individual sports, endorsement deals are already heavily dependent on rank and performance; they always have been, and are becoming more so:

"Golf and tennis right now, generally speaking, it's a tough go. The dollars aren't what they used to be," says Carfagna. "Almost all of it is rankings-driven. The bases are tricky; they're getting lower in the golf industry." (Deals are also getting tougher in NASCAR, where ratings are down and thus dollars are down, but may be growing for UFC, where the Pay-Per-View numbers are getting better and better.)

That means McIlroy's whopping deal with Nike, which was widely reported to be worth somewhere between $200 and $250 million over 10 years, could end up bringing McIlroy a lot less in its first year than the amount you'd get from simply dividing the total by 10.

The best agents get their clients long-term deals with big brands when the client is at the peak of their ability. It's why guys like Phil Mickelson, who in 2012 was only the 10th highest earner on the PGA Tour, still have big bloated deals. Mickelson is missing out on bonuses that come as a result of performance, but likely still has high base pays that were agreed to years ago.

"When you're No. 1 in the world, that's when you want to re-do your deals, get the maximum number of years, take out the risk," says Carfagna. "The art of negotiating these endorsement deals is protecting the athlete for the maximum so that they can get money for as long as possible. Once you stop winning, that renewal ain't going to be there. It's the cyclical nature of the individual sports."

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