The Journal of The DuPage County Bar Association

Back Issues > Vol. 20 (2007-08)

At the Finish Line:  Drafting Sponsorship Agreements That Won’t Trip You Up
by Sean McCumber and Mary Hutchings Reed

In 2006, Robert Cheruiyot was about to cross the finish line of the LaSalle Bank Chicago Marathon. Marathon staff held the finish line tape and the crowd cheered. Just as he was about to break the tape, Cheruiyot slipped on the very prominent LaSalle Bank Chicago Marathon logo, falling to the ground and bruising his brain. He won the race, but that logo caused him some injury. Sponsorship contracts face similar susceptibilities – the race may be won, but a slip up at the end of the deal could be dangerous. Whether in-house counsel prepares the sponsorship agreement, or outside counsel does, this drafting guide will offer a smooth course for the race to good sponsorship.

Any good sponsorship agreement begins with analyzing the goals of the sponsorship. What rights will the sponsor have? What is the size and placement of corporate logos? How many advertising mentions and credits will the sponsor receive? What give-away and merchandising rights will the sponsor have? Will the sponsor be indemnified against liabilities resulting from the sponsorship, including personal injury? Who will secure clearances and rights to music and video materials? Most sponsors realize that investing in the sponsorship of an event is only the beginning of a major commitment. Therefore, drafting an agreement with an inclusive bundle of rights will likely result in a greater identification with a single sponsor, and thus, a more effective sponsorship.

Exclusivity. The foremost thought should be on the exclusivity provisions of the sponsorship agreement. This provision is somewhat easy to draft: "Promoter will grant no rights similar to those granted to Sponsor herein to another [beer/television/pizza] product." Hopefully, any good drafter will take this a step further. A beer company, for instance, would likely want to ensure that no other alcoholic beverage—wine or spirits— is involved in sponsoring the event. Further, that same beer company may find it beneficial to ensure that no other beverage [milk/orange juice/water] sponsors this event. Exclusivity provides two important benefits. To the promoter it provides strong identity for the event, not merely a place for corporate shilling. A certain amateur international sporting event that occurs every two years (depending on the season) has official candy bars, credit cards, vehicles, shoes, water, nachos, handbags, and so on. The sponsorship can lose its value because the sponsors get lost in the "noise" of sheer numbers. This can translate into less sponsor interest in the event and thus less revenue for the promoter. However, the concerns of the promoter are not the issue. There is one other benefit of exclusivity which goes to the sponsor – brand/product identification. There is a certain college football bowl game with a festive name that is sponsored by certain potato chip and snack company. The name association is great and the sponsor benefits greatly by having exclusivity. A finer point can be put on exclusivity if the drafter understands the overall corporate image of the sponsor and rules out antithetical or incompatible co-sponsorships: a pizza company, for instance, might prohibit an antacid, and an organic food marketer might prohibit tobacco companies. One of the biggest challenges in drafting exclusivity provisions is the potential for ambush marketing. Ambush marketing refers to the direct efforts of a non-sponsor competitor to weaken or attack a sponsor’s official association with event. More broadly, it refers to a company’s attempt to capitalize on the goodwill, reputation, and popularity of a particular event by insinuating an event association, without the authorization or consent of the sponsor or the promoter. For example, American Express bought substantial advertising time on major networks to counter Visa’s official sponsorship of the 1992 Olympic Games in Albertsville, France and Barcelona, Spain. Although American Express did not use (nor could it use) the Olympic five-ring symbol or the word "Olympic," American Express advertisements referred generally to "winter fun and games" and depicted the French Alps. American Express also ran advertisements that stated, "And remember, to visit Spain, you don’t need a visa."1 Some other ambush marketing techniques include sponsoring the broadcasts of events rather than directly sponsoring the event, sponsoring individual teams and athletes, using sporting events tickets in consumer giveaways, sweepstakes, or contests, and buying outdoor space in and around an event venue.2 In drafting exclusivity provisions, control of television spots, or sponsor mentions prior to and after every commercial break, can restrict the ambush marketer’s efforts. Contract provisions should also require promoters to pursue legal challenges to ambushers.

Duration of Sponsorship/Right of First Refusal. Product association with an event is one of the primary reasons for sponsorships. When establishing new events, such as music festivals and marathons and food events, the promoter and the sponsor may have competing interests. The promoter may fear that the sponsor will steal the event and create an in-house version. The sponsor is putting money on the line for an unknown event. If the event fails, the sponsor is left with some bad publicity and marketing. If the event takes off, the promoter may seek to cut the sponsor out for a bigger, better sponsor next year. As with any contract, a narrowly drafted ownership clause can address these concerns. The promoter may want the agreement to include a non-competing sponsorship clause. Such a clause might: 1) limit the sponsor’s ability to sponsor other events, competing or not, at the same time as the event; 2) prohibit a sponsor who withdraws its sponsorship from sponsoring a similar event, or creating its own event, for a period of time; 3) include a liquidated damages clause for competing with the event through sponsorship or in-house events, or 4) provide the sponsor with consecutive options to renew. When reviewing contracts, it is important to ensure that such limitations are minimal in both time and geography. As a sponsor, to guard against being replaced, the agreement should include either a sponsorship duration clause or a right-of-first-refusal before the promoter may seek a new sponsor. The duration should be long enough to protect the sponsor when the event is strong, but short enough to prevent the sponsor from paying for a lousy event. To address this latter concern, some sponsorship contracts incorporate performance criteria such as attendance.

Visibility. One of the primary reasons for sponsoring an event is for the sponsor’s name to be seen. The agreement should spell out the number of billboards, posters, and flyers that will bear the sponsor’s name/logos. The placement of these advertising pieces must also be clearly spelled out. The sponsor might be dismayed if its logos for the event sponsorship are placed out of sight or at bathrooms. The sponsor must also identify television and radio visibility, and ensure that the sponsor’s name is mentioned in the advertisements for the event. When drafting visibility provisions, it is critical to be aware of venue sponsorships. An event may be held at a venue that is itself sponsored by another company. If the venue sponsor is a competitor to the event sponsor, carefully drafted agreements should maximize the event sponsor’s signage and logo placement that will avoid conflicts with the venue’s existing sponsor’s signage and logo placement. The promoter may face liability with the venue sponsor if the venue sponsor’s agreement prohibits competitor signage. Knowing the venue sponsorship agreement provisions is critical to avoiding these problems. As always, diligence can help prevent damage to reputation. If the conflict with venue sponsorship cannot be avoided, an event sponsorship at this venue may not be appropriate.

Force Majeure/Non-performance Issues. No one can control the weather, or union strikes, or traffic and shipping delays. Provisions must be carefully drafted to address problems that may arise which could frustrate the sponsor’s or the promoter’s expectations. For instance, outdoor concert contracts must deal with the possibility of cancellation due to rain or inclement weather. Professional sports sponsorship agreements must consider the possibility of lock-outs or strikes. Festivals and fairs must consider the failure to attract anticipated crowds or media coverage. Although some risks can be insured against, these contingencies should be addressed with a view towards saving the value of the sponsorship, either through rescheduling the event or through a rebate of sponsorship fees, as appropriate. In some cases, it may be better for the sponsor to dole out the sponsorship fee at set intervals during a series of sponsored events, based upon the promoter’s ongoing performance of its obligations.

In other instances, the promoter incurs significant up-front costs in anticipation of an event, such as automobile racing, and the sponsor’s retail tie-ins may constitute the major value of the sponsorship. Thus, the timing of an interruption of full performance of the sponsorship agreement may have a great deal to do with how much the sponsorship has been worth to the sponsor. For instance, it may not be enough that the promoter eventually obtains television coverage for the event or that the event later occurs. The ability to promote that event or television coverage to the retail trade may be critical to the overall promotional plan of which the sponsorship is the centerpiece. Therefore, dates should be established by which the promoter will have provided adequate assurances of performance of its various responsibilities, be they signing up key personnel, arranging for key venues, obtaining other sponsorship money, or arranging for appropriate media coverage. Mere reliance on traditional law of damages and remedies for failed events is problematic, given the somewhat speculative nature of events in general, as well the lack of consensus on how to measure an event’s worth in terms of public exposure and good will.

Security Concerns. The possibility of an event turning ugly is a very real one. Sporting events can turn ugly when fan obsession leads to rioting, or when the event is threatened. During the first Gulf War, some promoters learned, to their dismay, that acts or threats of terrorism were not covered by the boilerplate "acts of God" clauses. A specific riot or public safety clause, protecting the sponsor and/or the promoter, is now a necessity. Further, the sponsorship agreement should include a provision that requires the promoter to provide a safe venue, as well as adequate security, for any event. For music concerts, this may mean a reserved seating, a "no-bottle" policy (which can be awkward when the sponsor is a beverage company), and even liquor monitoring (carding, dram shop insurance, and so on). The sponsor should also include a provision that permits the sponsor to request postponement of an event for security concerns, or at a minimum, a provision that requires the promoter to consult with the sponsor on security issues.

Indemnification and Liability Insurance. Who should pay for Robert Cheruiyot’s injuries resulting from slipping at the finish line on the sponsor’s logo? Without an insurance and indemnification provision, the promoter and the sponsor may point the finger at each other when injuries occur at an event. Although a court may hold both liable— a possibility which strikes fear in the hearts of corporate sponsors—there is little case law on sponsor liability and the cases on sponsor liability usually turn on the sponsor’s involvement as an active promoter rather than a passive sponsor. Safety and security are professional concerns and the sponsor can protect itself by requiring the promoter to hire insured industry professionals to provide these services.

The sponsorship agreement should address liability and indemnification issues; specifically that the promoter shall indemnify and hold the sponsor harmless against any and all liability arising from the sponsorship of the event. Further, the agreement should include a requirement that the promoter secure insurance for all liabilities in a specific amount, naming the sponsor as an insured. The insurance coverage should include workers compensation, commercial general liability, personal injury, commercial automobile liability, state disability, errors and omissions, cancellation of event, weather and catastrophe, television and media interruption, travel, and third-party property damage. Also, the agreement should address who pays for the cost of said insurance.

"Sponsownership." In the typical sponsorship contract, the sponsor merely agrees to pay the promoter a sum of money, or to provide a certain amount of goods. However, as sponsorship becomes increasingly expensive and elaborate, some sponsors demand a better return on their investment. A growing trend is "sponsownership," where the sponsor owns all or part of an event. One concern of ownership is the aforementioned liability issue, which can be addressed through insurance coverage. Another concern is accounting of profits and losses. Accounting provisions should include: quarterly accounting, definition of gross versus net profits, and independent accountant review of the books. Another concern is disassociation. When a sponsor and promoter become partners, the sponsor has a vested interest in the event. If the event is a failure, it becomes rather difficult for the sponsor to simply "walk away." The sponsor should carefully consider the viability and popularity of an event before entering into a "sponsownership" agreement. Additionally, tax considerations, whether the sponsor owns the event or not, should be addressed by the agreement. Is a partnership return to be filed? Who claims what percentage of profits? How are losses allocated for tax purposes?

Rather than owning the event, some sponsors simply seek a cut of the event’s profits, if any. In this situation, the sponsorship becomes a joint venture. The agreement needs to specify how the sponsor will participate: 1) from gross dollars, 2) from gross dollars in excess of budgeted expenditures, 3) from net dollars after expenditures and a set return to the promoter, or 4) from net dollars after expenditures, payment of a promotion fees, and repayment of the sponsorship fee. Expenditures should be limited to those which have been budgeted with the approval of the sponsor. This means that the sponsor will have a much greater role in reviewing the budget than most promoters would like. More likely, it will also mean that the sponsor will need to bargain with the promoter to discover and trim the fat at the outset of the sponsorship agreement.

Other Provisions. Other standard contract provisions should not be overlooked when drafting a sponsorship agreement. Termination clauses and termination events must be defined. Choice of law provisions are crucial, as promoters, sponsors, and the event may all be tied to different states. The same is true for court jurisdiction, which may result in disputes ending up in federal court. Notice provisions to the sponsor and the promoter should be clearly spelled out so that all parties involved know to whom and to where communications should go. Lastly, it goes without saying that all modifications to sponsorship agreements must be in writing.

Conclusion. Drafting sponsorship agreements is not difficult, but it requires careful review of all the possible issues. Thorough and thoughtful drafting can contribute to a profitable event sponsorship, even when the unforeseen happens, and can help the corporate sponsor to a smooth crossing of the sponsorship finish line.n

1 Cf. MasterCard Int’l, Inc. v. Sprint Communications Co., 1994 WL 97097 (S.D.N.Y. 1994), aff’d, 23 F.3d 397 (2d Cir. 1994). In the 1994 Winter Olympics, Visa countered ambush efforts with its "Bring your [item] and your Visa, because [item’s purpose] and they don’t take American Express."

2 Section 43(a) of the Lanham Act does offer some protection, such as when a marketing tactic "is likely to cause confusion. . . or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person." 15 U.S.C. §1125(a).

Sean McCumber is an associate with Sullivan Taylor & Gumina in Wheaton.  Prior to that, he practiced with Winston & Strawn LLP, concentrating in commercial litigation and marketing, advertising, and music law. Although his practice now focuses on family law and juvenile law, he often represents musicians and filmmakers in transactional matters as a volunteer lawyer with Lawyers for the Creative Arts.   He also had a background extra role in the movie, “National Treasure.”

Mary Hutchings Reed is Of Counsel with Winston & Strawn LLP in Chicago, where she practices marketing, advertising, trademark, copyright, and entertainment law. Ms. Reed represents various clients in the sponsorship of NFL, NASCAR, and other events and properties, as well as past representation of celebrities such as Muhammad Ali and Don King in sponsorship, trademark licensing, and entertainment law matters. In addition to serving as Vice President of Lawyers for the Creative Arts, she is an accomplished playwright and has recently published a novel entitled, “Courting Kathleen Hannigan.”


 
 
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