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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS
Contract Corner

With many sports, music, and other events returning to in-person attendance after a prolonged hiatus for pandemic-related reasons, and others continuing to be conducted in front of huge virtual audiences, we think it’s a good time to run through some of the most common issues we encounter in sponsorship agreements.

Set forth below is the first part of a quick overview of issues that sponsors should be mindful of when entering into any sponsorship agreement, particularly for team, event, venue, individual influencer or player, or similar sponsorship arrangements. Today’s items all relate to the core value proposition underlying any sponsorship arrangement: defining the scope of the benefits the sponsor is entitled to receive, the fees the sponsor will be paying for those benefits, and what happens if those benefits can no longer be delivered as expected.

  1. Entitlements and Exclusions: It may seem obvious, but clear definition of the specific sponsorship benefits, typically referred to as entitlements, that the sponsor is receiving in exchange for its sponsorship fee is one of the key commercial factors in these types of sponsorship agreements. Yet it commonly isn’t given sufficient time and consideration by the parties when preparing the agreement. Far too often we see sponsorship agreements that indicate the sponsorship will pay some large sum of money in exchange for being a “top tier sponsor” of an event or “the official [XX] provider” of the individual, team, or event, without much if any detail as to the specific entitlements that are included with such a title. We typically recommend a detailed exhibit or schedule to the sponsorship agreement, similar to that which you would have to describe the services for a typical development or similar services agreement, that clearly lays out the entitlements the sponsor is receiving, and anything that is excluded from the benefits the sponsor is receiving. The sponsor should review these entitlements in detail and ensure that they meet the sponsor’s expectations and are sufficient to achieve the anticipated benefits from the relationship.
  2. Fees and Allocation to Entitlements: The other key commercial factor for sponsorship agreements is even more obvious – the sponsorship fee. In straightforward arrangements, it may be sufficient and appropriate to provide for a single lump sum sponsorship fee in exchange for a single, or a small set, of entitlements. However, as the number and/or complexity of the entitlements increases, sponsors should consider allocating portions of the sponsorship fees to specific entitlements in a way that reflects, or approximates, the value that the parties are placing on the specific benefits being provided to the sponsor. This allocation doesn’t need to alter the timing or nature of the actual payments of those fees, which can still reflect a simple payment schedule, e.g., quarterly, annually, etc., if the parties so desire. However, allocating fees to specific entitlements can help the sponsor quantify the value of those entitlements in the event that they are not provided, or if any issues arise around unavailability or proposed modifications of benefits, as we discuss in item #4 below.
  3. Exclusivity: Similar to the entitlements and exclusions issues outlined above, the parties to a sponsorship agreement often don’t spend enough time defining and describing the parameters of any exclusivity that applies to the relationship. Generally stating that the sponsor is the exclusive sponsor of the team, event, etc. in a particular field is nice, and it is certainly valuable to the sponsor to be able to identify itself with such a title. However, the boundaries of the exclusivity should be described in as much detail as possible in the agreement. Is the exclusivity limited by territory or worldwide? If the exclusivity is tied to specific products or lines of business, is the sponsored team, event, etc. allowed to offer or promote its own competing products or business directly as long as it doesn’t enter into an agreement with a competitive third party to do so? In team sports and similar contexts, the nature of the industry and relationships can create additional layers to the exclusivity issue. If a team grants exclusivity to a sponsor, but the relevant league or association enters into a sponsorship arrangement with a competitor of the sponsor, the team typically can’t be held responsible even if that arrangement would have violated the exclusivity had the team entered into it directly. In these more complex situations, the sponsor should at minimum get commitments from the sponsored individual or entity that it is not aware of any such conflicting arrangements at a league or association level (or, if applicable, that it has made the sponsor aware of all such arrangements of which it is aware), and if any conflicting arrangement arises during the term of the agreement the parties will address the situation through the procedures we describe in the next item regarding modified or replacement entitlements.
  4. Unavailable Events or Entitlements and Proposed Modifications or Replacements: In addition to general pandemic-related force majeure issues that we have previously discussed, situations involving proposed modified or replacement entitlements as a result of cancelled, rescheduled, or modified events resulting from the pandemic have also been common. Two of the more prevalent issues have been changes from in-person to virtual events and reduction in attendance for in-person events due to governmental restrictions. At minimum, we recommend that your sponsorship agreements contain a provision describing the processes and procedures for addressing proposed changes or modifications to events and/or entitlements, similar to a change management provision you may find in a typical services agreement, and requiring mutual agreement of the parties for any material modifications or replacements. Some of the preferred terms described in the prior items – detailed entitlement descriptions and allocation of fees to entitlements – will typically be very useful in determining whether a proposed modification or alternative entitlement provides equivalent benefit to the sponsor. Certain entitlements – for example, logos on jerseys – may provide at least arguably similar benefits for in-person or virtual events; other entitlements – for example, signage in common areas of a facility – may have no utility to the sponsor in a virtual event and require cooperation between the parties to determine an appropriate equivalent. While the parties will often be able to agree upon modifications or alternatives, sponsorship agreements should also account for the possibility that the parties ultimately do not agree and provide for termination and a corresponding refund for any sponsorship fees attributable to the entitlements that were not provided as required.

Our next post in this Contract Corner series will continue this discussion with additional sponsorship agreement considerations for sponsors looking to maximize value while protecting their brands.