How Sponsors Can Reevaluate Contracts For Return Of Sports

By Jay Fee and Katherine DeStefano
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Law360 (June 8, 2020, 5:42 PM EDT) --
Jay Fee
Jay Fee
Katherine DeStefano
Katherine DeStefano
"Nobody comes to the stadium," said Dr. Anthony Fauci, director of the National Institutes of Health's National Institute of Allergy and Infectious Diseases, when mapping out the new normal way of bringing back sports in the U.S. in the wake of the COVID-19 pandemic.

There is no dispute the COVID-19 pandemic has had a profound effect upon the sports industry throughout the world. Recently, Two Circles Ltd., an international sports marketing agency, concluded a study and projected that global sponsorship fees in 2020 would decline by $17.2 billion from the 2019 spending level of $46.1 billion.

However, in recent weeks, we are starting to see the return of live sports without fans. In some states, team training facilities are permitted to open and sports such as NASCAR, Ultimate Fighting Championship, professional golf and Germany's Bundesliga soccer league have all successfully presented competitive events.

In addition, each week, there are numerous media reports describing return-to-play scenarios under consideration by Major League Baseball, the National Basketball Association, the National Hockey League, Major League Soccer, the National Collegiate Athletic Association, the PGA Tour and the National Football League.

Each of these sports entities will continue working with its respective players' associations and other stakeholders to plan for the resumption of games and tournaments under protocols that address comprehensive testing and the safety of players, coaches, officials, trainers, security and media production personnel, all of whom are necessary to conduct competitive games and tournaments.

Further, given current state and local government orders in place, it is all but certain that all forms of sports competitions in the U.S. will be taking place without spectators present in stadiums, arenas and other venues for the balance of 2020. With the expectation of both recommended and mandatory health and safety procedures continuing, league executives are now looking at various ways to resume the balance of regular season schedules and playoffs.

Options under consideration might include extending league calendar years far beyond traditional end dates, shortened seasons, truncated playoff formats, delaying the start of 2021 regular seasons, temporary league and/or division realignments, and changes to playing rules.

In view of the unprecedented number of sporting events and games already cancelled or postponed, and expectations for radically different regular season and playoff schedules played in empty venues, corporate sponsors must take a hard look at every sponsorship agreement now in place and ask two basic questions:

1. What sponsorship assets and benefits originally included will still be available and valuable to our business once play resumes? 

2. Can this agreement, as structured, still materially assist our business in achieving its objectives and generate the return on investment envisioned when the sponsorship began?

Answering these inquiries will depend on the outcome of a joint legal and business analysis. From a legal perspective, it would be useful to review provisions such as grounds for termination, force majeure, suspension of performance, substitution for unavailable benefits and adverse material change, to determine if such clauses still reflect the intent of the parties going forward for the balance of the term.

From a business perspective, determining if certain types of rights and benefits granted to the sponsor still remain available pursuant to new return-to-play protocols, and how much earned media value and brand building exposure the sponsor has lost or will lose, due to the cancellation of games and expected shortened seasons, are important inquiries to pursue.

Further, sponsors should determine whether leagues and teams will be offering more digital content, enhanced social media and in-game promotions on various media platforms where live competitions and highlights will appear.

Finally, sponsors should inquire whether leagues and/or teams will be accelerating the development of new asset offerings such as virtual signage, placement of logos on uniforms and equipment, broadcast visible branding on playing surfaces, and presenting sponsorships of individual games.

The more common safeguards for sponsors in sports sponsorship agreements, in many respects, may not be effective during and after the COVID-19 global pandemic. In times of zero, or greatly reduced attendance, and the instability of league schedules moving forward, the common contractual remedies used by parties such as credits, term extensions, prorated fees and substitute benefits can fail to adequately protect a sponsor throughout the term of a contract.

By way of example, the inability to attend sports events effectively eliminates a whole set of very unique benefits, such as on-field pregame experiences, professional-amateur golf tournaments and corporate suite entertainment, resulting in little or no value to sponsors seeking to drive and enhance business-to-business relationships using these benefits.

In expectation of ongoing health and safety protocols established by local and state governments affecting regular season games, playoff games and game attendance, the parties, as a form of protection, should work to delineate their respective obligations in view of such anticipated impacts.

For example, the parties might consider establishing a sliding-fee schedule tied to the number of regular season and playoff games actually played and the portion of sponsorship fees attributed to the sponsor's game-related rights and benefits.

Also, the same sliding-fee concept could be applied to those attendance-dependent benefits once large gatherings are permitted and fans begin returning to sports venues. Should attendance be permitted, but capacity limitations be imposed and/or fans are unwilling to watch their teams in crowded venues, the ability of sponsors to fully utilize in-venue signage and advertising, activate promotional programs, or access entertainment and hospitality assets will be diminished.

The portion of sponsorship fees associated with these types of benefits could be tied to agreed-upon percentage drops in attendance from the prior year's average per game attendance.

In addition, it would be prudent for sponsors to seek new contractual protection should sports seasons once resumed, be suspended or cancelled again, due to new widespread outbreaks of COVID-19.

Rather than working within the constraints of an existing and traditionally structured sponsorship agreement containing a limited array of remedies, there is an opportunity for the sponsor's business and legal teams to pursue meaningful, good-faith discussions with their counterparts and renegotiate agreements. The terms of newly renegotiated contracts will appropriately reflect the current realities and downside protection for the parties going forward.

Both parties working together can ensure that a mutually beneficial relationship will continue to generate revenue for the organization while delivering a fair return on the sponsor's investment. A reconfiguration of the existing rights and benefits provided to the sponsor and, perhaps, the addition of newly developed offerings would presumably be welcomed by sponsors.

The challenges of this global pandemic remain formidable; however, stakeholders in the sports industry now have an opportunity to adapt sports sponsorships to the new normal in creative and meaningful ways.

Jay W. Fee is a partner and chair of the sports law group at Nelson Mullins Riley & Scarborough LLP

Katherine DeStefano is an associate at the firm.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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