The (New) Balance in sponsorship matching clauses

Posted: 17/01/2020

Last week Liverpool Football Club (LFC) announced its multi-year partnership with Nike as official kit supplier from 2020-21. Since 2015, New Balance (NB) had held the title of kit supplier but the relationship had broken down culminating in a dispute in the English courts.

With the Nike deal now announced, what lessons can be learnt from the latest in a line of football sponsorship disputes? This article considers the claim issued by NB with commentary on the risks associated with matching terms in sponsorship deals and a restatement of the English law position of the implied duty of good faith.

Background

In June 2011, LFC had just finished eighth in the Premier League and Adidas had declined the opportunity to renew its shirt sponsorship deal. Attempting to establish a firm presence in football, NB entered into a shirt sponsorship deal with LFC to manufacture and sell LFC’s replica football shirts. Fast forward eight years and LFC is currently the Champions League trophy holder. With LFC’s agreement with NB due to expire at the end of the 2019/2020 football season, LFC has found itself in a much stronger negotiating position this time round.

The current agreement between NB and LFC includes a provision that, prior to expiry, the parties will negotiate in good faith the terms for renewal of the agreement. Where the parties do not reach an agreement, LFC may negotiate alternative terms with competitors for the future. Should LFC receive an acceptable offer from a competitor, then NB has the option to match such an offer “on terms no less favourable to the club” than the “material, measureable and matchable terms” contained in the third party offer. Where NB is able to match the competitor’s terms, the parties are obliged to enter into a new agreement on equivalent terms. If NB is not able to match the terms or does not wish to continue the relationship on the basis of the new terms, then LFC may switch from NB to a new shirt provider. 

The parties entered into discussions to attempt to agree a new deal during 2018. By December 2018, they were not able to reach an agreement and NB allowed LFC to approach the market to discuss a sponsorship deal with its competitors.

LFC’s performance on the pitch in 2019 helped the club to negotiate a lucrative sponsorship opportunity with Nike. This included an annual payment of £30 million to LFC, on top of royalty payments on net sales of LFC licensed products. Nike was also able to bring greater global exposure to LFC through the brand’s access to new markets and its star studded list of sports and media personalities. Acutely aware of the matching clause in the sponsorship agreement with NB, LFC sought to include some specific commercial requirements relating to distribution channels and global reach that Nike was able to provide, but that LFC expected NB would be unable to meet in practice. 

These included:

• ability to sell in not less than 6000 stores worldwide, 500 of which to be Nike owned or controlled; and
• marketing initiatives featuring at least three non-football global superstar athletes and influencers of the calibre of Lebron James, Serena Williams and Drake.

As required under the terms of the current sponsorship agreement, LFC notified NB of the Nike offer, giving NB the opportunity to match it. NB undertook a due diligence exercise to assess whether it had sufficient distribution points to enable it to equal Nike’s offer. Believing it could, NB made a further offer, which it claimed complied with the matching clause and was no less favourable than the material, measurable and matchable terms of the Nike offer. This new offer from NB included the following obligations:

• to sell in not less than 6000 stores worldwide, 500 of which shall be NB owned or controlled; and
• to use marketing initiatives featuring not less than three non-football global superstar athletes and influencers – notably, no individuals were named.

LFC rejected NB’s offer alleging it was not “a genuine one” as it believed that NB could not deliver on the terms of its new offer. In particular, LFC did not consider NB could match the marketing and distribution channel requirements and so considered that the offer had not been made in good faith.  NB did not agree and asserted that it was entitled to the sponsorship deal under the matching clause.  NB subsequently brought a claim in the English High Court to enforce its matching rights in the sponsorship agreement.

The High Court was required to decide whether the terms submitted by NB had been provided on a good faith basis and whether they matched those of the Nike offer in respect of marketing and distribution.

Distribution points

The parties agreed that the contract was a “relational” agreement, giving rise to an implied duty of good faith. NB’s internal due diligence led to a conclusion that LFC licensed products could be distributed through 6,300 stores, of which 1,302 were owned or controlled by NB. LFC alleged that serious errors in the due diligence meant the offer was not made in good faith. The court summarised the test for a finding of a breach of the duty of implied good faith as “whether reasonable and honest people would regard the challenged conduct as commercially unacceptable”. The court found that NB had acted neither dishonestly nor recklessly when claiming that it could match Nike’s offer,  irrespective of some miscalculations and an aggressive approach to the deal.

The court did not consider that any of the errors on NB’s part in its due diligence exercise amounted to any breach of its duty of good faith as it did not amount to “conduct which was not faithful to the parties’ bargain or conduct which was commercially unacceptable”.

Marketing obligations

In response to the marketing provision, NB did not specifically nominate any of its tennis, athletics or cricket superstars. The omission of the words “of the calibre of Lebron James, Serena Williams, Drake, etc” was fatal for NB, meaning that the offer from NB was less favourable and so did not match the Nike offer. NB attempted to assert that the marketing provision was vague and it is not possible to measure the marketability of global superstars. The judge dismissed this argument swiftly, finding that there are several accepted methods of quantifying social media presence and exposure. The judge did not settle on a particular method - leaving a football boot in the door for further disputes.

The inclusion of “etc” in Nike’s offer allowed NB scope to nominate athletes or influencers of a similar calibre to Nike’s superstars. However, to do so without a reasonable belief that it could deliver the social media presence and exposure offered by Nike would have been a breach of the duty of good faith, thereby invalidating the offer.

NB failed to match the measurable marketing provisions meaning, to its bitter disappointment, LFC was not obliged to renew its sponsorship agreement.

Key takeaways from the ruling

• Greater clarity in the drafting, as ever in a contractual dispute, could have helped both sides.

If NB had determined which specific clauses in an offer from a competitor would be considered material and must be matched, it could have reduced the risk and uncertainty to which it was exposed.

Similarly, LFC could have benefitted from clearer drafting. LFC argued that NB’s calculation for the distribution network included stores selling footwear and not those specifically selling football kit. The judge made clear that Nike’s offer should have specifically stated 6,000 stores selling football kit not footwear, if that was the required distribution network.

• As a customer, when negotiating a sponsorship deal with a matching right, consider:

- is a matching right commercially beneficial – are the terms so advantageous to the customer that they want to be tied to a supplier?

- what the terms of the deal could be measured against – if NB and LFC had agreed in 2011 that the marketing terms under the agreement could only be negotiated on a cash basis then Nike’s knights in shining armour (Lebron James, Serena Williams, Drake) would have been redundant and the result could have been very different.

• As a supplier, when putting forward an offer, consider:

- how will the terms be quantified? Nike put forward quantifiable and measurable terms which had to be addressed by NB. NB’s offer should have named superstars using a method for measuring that was beneficial to NB’s existing superstar roster.

- how can the terms be sufficiently narrowed? As above, the matching right was widely drafted giving room for Nike to put forward narrow terms of a particular superstar calibre – referring to stars such as LeBron challenged NB’s ability to match.

• Costs for the arguments you win

Despite the successful outcome for LFC, the court only awarded it 20% of the £555,000 costs it had incurred in defending the case. The justification for this was that the greater part of the case had been fought on the distribution point, which Liverpool had failed. This highlights the importance of litigants on both sides not only choosing their arguments carefully, but of winning those they choose to fight.

The court refused NB leave to appeal so next season LFC will line up in Nike’s shirts, while we expect to see the likes of LeBron, Serena and Drake modelling the kit on their social media feeds.

This article has been co-written with Richard Price, a trainee solicitor in the commercial, IP and IT team.

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