Posted on January 11, 2010 by Steven M. Getzoff

Chilly Reception at the White House

On January 6, 2010, The Weatherproof Garment Company (a division of David Peyser Sportwear) put up a billboard (actually two, a diptych) in New York's Times Square. The advertiser used an Associated Press (AP) licensed photo of President Barack Obama during his visit to China's Great Wall back in autumn wearing a Weatherproof jacket. Legal pundits have long discussed and opined whether the First Amendment trumps the commercial product endorsement (commercial free speech being more limited than free speech per se). One thing is VERY clear--the AP's contract required that "the necessary clearance" be obtained prior to the Weatherproof Garment Company's use of the image. Weatherproof president Freddie Stollmack blandly told the media he had not bothered to obtain the clearance. The White House legal team has already been in contact with both AP and Weatherproof's parent company.

…and what about the Wall? It will be interesting to see if the Chinese Consulate complains about the advertiser's unauthorized use of that country's GI--geographical indication--namely the image of The Great Wall of China. For those who may not be aware, this is a growing and interesting area of international IP law, which extends protection to countries over the commercial use of their cultural icons.

Bottom line, agencies and advertisers alike need to consider which rights (image, voice, video, etc.) need clearance--whether it’s the Chief of Staff in a wind slicker or a protective barrier built in the 7th Century B.C.

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Posted on September 21, 2009 by Adam Snukal

Advertising Fake Drugs May Result in Criminal Liabilities in China

This post was written by Michael Dardzinski.

The Supreme People’s Court and Supreme People’s Procuratorate on May 27, 2009 jointly issued “Interpretations on Several Issues Regarding the Application of Law on Criminal Cases Concerning the Production and/or Sale of Fake and Substandard Drugs” (“Interpretations”) to address the serious crimes of manufacturing and selling counterfeit and/or substandard pharmaceutical products in China. Pursuant to Article 5 of the Interpretations, individuals or companies are considered liable as accomplices for the crimes of creating, manufacturing or selling fake and/or substandard drugs if they know or should have known that the drugs are fake and/or substandard.

There has been extensive media coverage of complaints from the general public against problematic products endorsed by celebrities. A high profile case in 2008 involved endorsements by several movie stars of milk products tainted with melamine. The Chinese government imposed severe penalties on the milk manufacturer, including the imprisonment of its executives which led, in part, to the company’s bankruptcy. However, celebrities that endorsed these milk products were not subject to penalties, due to the lack of any clear legal foundation for litigation. The Interpretations require celebrities and other potential endorsers of medical products to exercise more care when choosing whether to support a particular product.

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Posted on August 28, 2009 by Douglas J. Wood

Allocation Dispute Procedures

We have received some questions on how existing allocation disputes in multi-service celebrity endorsement deals should be resolved in light of the procedures adopted in the new Collective Bargaining Agreement (“CBA”).

As you are fully aware, the determination of appropriate allocations of compensation between covered and non-covered services in multi-service contracts and the process to resolve disputes in that regard have been major issues between the Unions and the Industry for many years. Controversies and disagreements over allocations have resulted in litigation and substantial costs for all the participants, and the previous procedure left Producers at a distinct disadvantage. The prospect of litigation under federal pension laws and the remedies afforded the Pension Plans under those laws created an uneven playing field. The new procedures create a more balanced approach considerably more favorable to Producers.

At the negotiations of the new CBA, the Industry pressed for a more precise methodology to determine allocations and a dispute resolution format that precluded the Plans resorting to litigation under ERISA until such time as the Unions and the Producer either agreed on an allocation or settled a dispute through an expedited arbitration procedure. The Industry took the position that such an approach was mandated by the decision in the arbitration brought by the JPC against SAG over resolving disputes over allocations. The Unions and Industry also agreed on a set of Guidelines that are presumed safe harbors, although that presumption is rebuttable should the Unions show adequate reason to disregard them.

Since the Industry and Unions did not address whether the new procedures should be retroactive, they are not binding on either Producers or the Unions with respect to disputes that arose prior to adoption of the new CBA. That said, however, it seems logical that the new provisions should apply to existing allocation disputes, including the agreed-upon Guidelines, for the following reasons:

  1. The decision of the arbitrator and the U.S. District Court in the action between the JPC and SAG clearly provides that arbitration is the method to resolve disputes. The arbitrator held and the U.S. District Court confirmed the arbitrator’s opinion that such a conclusion was mandated by the language contained in the then current CBA. Since this holding interprets the language contained in the previous CBA (and, by extension, the same language in prior CBAs), the requirement to arbitrate disputes applies to all pending allocation cases. While one could argue that the expedited process agreed upon under the CBA is not retroactive, I believe that process is fair and reasonable and ought to be the approach taken by the parties. Otherwise, any arbitration will be complicated and expensive, as well as subject to appeal if the Unions feel they didn’t get enough.
     
  2. Whether the old, unpublished, allocation guidelines or the new formal Guidelines should apply in such disputes is unclear. What is clear, however, is that the Industry never agreed to the old guidelines. The formal Guidelines in the new CBA, however, reflect an agreement arrived at through the collective bargaining process and, as such, represent a set of mutually acceptable criteria between the Unions and the Industry. As such, it seems abundantly logical that they ought to apply to existing disputes. Also note that the new Guidelines recognize that there may be disputes that do not fall under any of the specific guidelines. In those instances, the parties are free to either agree to an alternative solution or to submit a dispute to arbitration.
     
  3. All future disputes will be governed by the new provisions and the Guidelines. Positions contrary to the new provisions taken in the future by either the Industry or Unions will set no precedent. As such, is makes sense to take advantage of the efficiencies and economics now embodied in the CBA and resolve old cases with due consideration of the newly bargained for procedures.

Of course, no one is in a position to bind any Producer to adopting the new procedures with regard to existing disputes. Each Producer must make a decision under the facts and circumstances of their specific case.

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Posted on February 19, 2009 by Douglas J. Wood

Celebrity Endorsements - The Devil Really is in the Detail

This post was written by Douglas J. Wood and Keri Bruce.

Recent headlines about celebrities raise important issues that advertisers and advertising agencies need to think about in negotiating endorsement deals – an early exit strategy, a meaningful morals clause, and a well-defined exclusivity provision. These issues are often thought of as mere boilerplate that are easily deleted or compromised. And while such clauses are rarely used to terminate an agreement, when an advertiser is faced with the situation, the financial cost and impact on brand reputation highlights why such clauses, despite an agent’s protestations, should not be taken lightly in negotiations.

As we closed 2008 and began 2009, we saw Buick drop Tiger Woods and Pepsi-Cola drop David Beckham. According to press reports, the parting of ways was by mutual agreement, but one can assume the economics were most certainly a core issue. In November, it was reported that Charlize Theron settled a $20 million lawsuit brought by watchmaker Raymond Weil, alleging she breached her endorsement contract by doing an ad for Montblanc watches and wearing a Christine Dior watch at a press event. The amount of the settlement remains undisclosed. Nor have celebrities fared well recently on the behavior side. In early February, Kellogg’s dropped Michael Phelps in the wake of accusations that he smoked marijuana. Wrigley has suspended its campaign featuring Chris Brown, pending resolution of the allegations that Mr. Brown made criminal threats against his girlfriend, Rihanna. The recent publicity over Christian Bale’s four-letter tirade won’t exactly enamor him with advertisers. And the latest revelations on Alex Rodriguez’s alleged steroid use will undoubtedly chill the air over his endorsements. 

How can an advertiser protect itself when economics change, or when celebrities behave in ways that undermine the integrity of a brand? 

The solution requires a change in attitude among advertisers to take a more aggressive approach with agents by demanding better terms in contracts that have real consequences should a celebrity cross the line, including: a right to terminate early with an “exit fee”; a strong morals clause; and an exclusivity provision that addresses the damages an advertiser might suffer, including consideration of a provision for liquidated damages. Let’s review each option.

Early Exit Fee. For many years, endorsement deals were generally for one year, followed by successive options for a number of additional years, exercised at the discretion of the advertiser. So an advertiser’s financial risk was somewhat measured. In recent years, however, we’ve seen an increase in multi-year initial terms, for as long as three to five years, coupled with substantial guarantees. While committing to a multi-year guarantee can lower annual costs, compared with a series of one-year terms, such contracts lock an advertiser in for a substantial period of time, during which risks associated with the celebrity’s behavior must be carefully considered. One remedy is to consider an early exit fee to terminate the contract. For example, assume an advertiser enters into a three-year deal with a celebrity with a $6 million guarantee, payable $2 million per year. In such a contract, the advertiser might try to negotiate an exit fee at the end of year one of, e.g., $3 million, saving itself $1 million overall, and another exit fee of $1 million at the end of year two, again saving $1 million. 

Morals Clause. Over the past 10 years, the “morals clause” has morphed into what is now most often called the “behavior clause.” The change is more than superficial. Years ago, advertisers seemed to care more about the morality of their endorsers than just their behavior. And agents got a lot tougher with morals clauses, stripping them of much of the protection intended in the first place. There was once a time when an advertiser could get an agent to agree to the following clause: “If [Celebrity] has committed any act that offends the community or any segment thereof and/or public morals and decency, such behavior shall be considered a material breach of this Agreement incapable of cure, and if in [Advertiser’s] sole judgment such breach is likely to cause a diminution in the value of the [Advertiser’s] commercial association with [Celebrity], then [Advertiser] shall have the right, in addition to any other rights [Advertiser] may have as a result of such breach, to immediately terminate this Agreement on written notice to [Celebrity]. In such event, there shall be no further compensation payable to [Celebrity] and such termination shall not limit or effect any other rights [Advertiser] may have against [Celebrity] under this Agreement on account of such termination.” Today, such a clause would be virtually impossible to obtain. More likely, particularly for an “A-List” celebrity, a clause might be as narrow as, “If [Celebrity] has been convicted of a felony or a misdemeanor of moral turpitude that is likely to cause a diminution in the value of [Advertiser’s] commercial association with [Celebrity], then [Advertiser] shall have the right to terminate this Agreement on sixty (60) days’ written notice to [Celebrity]. In such event, there shall be no further compensation payable to [Celebrity] hereunder, except with respect to any sums that may be due [Celebrity] for services then already rendered or for authorized expenses incurred by [Celebrity], or payments due prior to the date of termination.” There is a big difference. Take, for example, the latest news about Michael Phelps and Alex Rodriguez. Neither of them has been formally accused of anything. And both are a long way from being convicted of anything even assuming the accusations are true. But in many ways, the mere accusations and evidence that raises legitimate concerns is enough to damage brand integrity, and substantially diminish, or perhaps even destroy, the underpinning of the endorsement’s value to the advertiser. Yet without a strong morals clause, the advertiser is left with continuing to pay the celebrity, and either electing to stop running ads or working out a potentially expensive termination deal with the celebrity. In light of today’s headlines, it’s obvious that being tough in early negotiations on this key clause is far more important than one might assume.

Exclusivity. Defining exclusivity in an endorsement contract is something an advertiser should thoroughly consider in negotiations. It’s not enough to simply leave exclusivity to “competitive” products and services. An advertiser must also think about specific companies with which the advertiser does not want the celebrity associated. An advertiser needs to think about antithetical products or services. For example, it would not do a chicken company any good to have its celebrity spokesperson do an ad for PETA – People for Ethical Treatment of Animals. Moreover, if the advertiser does not want a celebrity to do certain things in public, e.g., wear a competitor’s product or pose nude for a magazine, then it needs to cover that in the exclusivity clause. These kinds of restrictions must then be coupled with a clear provision on the consequences of breach, and what damages can be recovered by the advertiser. Broad clauses that best protect the advertiser are difficult to negotiate in most contracts; but where millions are being paid and a celebrity becomes associated with a particular brand, even the slightest breach of exclusivity can destroy years of brand equity, including any built through an endorsement.

So the bottom line is to pay more attention to the boilerplate. It’s far more important than you might think.
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Posted on December 2, 2008 by Douglas J. Wood

Actress Charlize Theron Settles With Watchmaker

Actress Charlize Theron has settled a lawsuit brought against her by watchmaker Raymond Weil (RW) for breaching a contract to exclusively promote its watches. The terms of the settlement were undisclosed, but it came just more than a month after a federal judge in New York concluded that Theron had breached her agreement, and that Raymond Weil was entitled to prove to a jury that it sustained damages.

In 2005, Theron, who was named by Esquire Magazine as “The Sexiest Woman Alive,” signed an agreement to promote Raymond Weil’s “Shine” collection through advertising and by wearing the watches exclusively. However, during the contract term, she was photographed at a screening of a film produced by her production company wearing a Dior watch.

A photograph of Theron wearing the Dior watch made its way to Tourneau LLC, a major watch retailer and manufacturer, which published the photo in Tourneau Times, a publication the company distributes to high-spending customers. The caption under the photo read, “Charlize Theron wears Dior.”

‘Regrettable’

Theron later expressed regret regarding the incident, and New York Federal District Court Judge Colleen McMahon agreed in a Sept. 30 opinion that the wardrobe choice was the wrong call.

“By wearing a … Dior watch at a film festival, Theron breached her covenant not to ‘wear publicly any other watches than RW,’” the judge stated, citing language from the agreement. “Theron recognizes as much, calling her decision to wear the watch ‘regrettable.’ It was more than ‘regrettable’; it was a clear breach of the Agreement.”

Judge McMahon also rejected Theron’s attempt to skirt personal liability.

Theron had argued that since her management company, Denver & Delilah Films, Inc., had struck the deal, she only signed as an agent of the company and therefore should not be held personally liable.

The judge disagreed. “Theron is the owner of DDF and therefore exercised considerable control over its corporate decisions. The agreement was only ten pages long, and Theron marked every page with her initials,” the judge stated. “Indeed, Theron even testified that she personally participated in the negotiations for the contract.”

Judge McMahon did throw out a number of Raymond Weil’s other claims, including claims that Theron breached their agreement by wearing other jewelry at public events and by accepting payment to do so.

The agreement forbade Theron from endorsing or advertising watches or jewelry for any other companies during its duration. The court noted, however, that the agreement also provided that Theron was “permitted to wear jewelry of her choice in public and to awards shows.” The fact that she was paid to do so did not nullify this exception, the court ruled.

Damages Issue

Just how much Theron’s single breach cost her is a matter of speculation because the terms of the settlement reached after Judge McMahon’s decision were not disclosed. However, some form of payment seems likely to pass from Theron to Raymond Weil. The order dismissing the case notes that the case will be dismissed only if the settlement is “consummated” within 30 days.

Raymond Weil initially had sought $20 million in damages, but likely settled for less. The court threw out a number of its claims, including a claim for fraud, leaving the company with one proven incident where the agreement was breached. The company then sought, based upon that single incident of breach, to recover the $3 million originally paid to Theron under the agreement, as well as interest and money spent to promote her.

But the court noted that these damages would be equivalent to the amount that would be awarded if the entire contract were rescinded—a remedy to which Raymond Weil was not entitled.

“Theron loaned her image to RW, which realized substantial benefits of an indisputably successful advertising campaign featuring Theron,” the court stated. “Theron’s brief appearance wearing a Dior watch[…], which led to her image’s being published in the Tourneau magazine in the thirteenth month of the Agreement’s fifteen month term, was a material breach, but it was not so substantial and fundamental as to defeat the object of the parties making the contract.”

Why This Matters:  The case, which was widely covered in the mainstream, entertainment and business media, sends a message to the market that celebrities, who often receive large sums of money to endorse products, should take their commitments seriously, and will be held responsible for their actions should they choose to disregard their agreements.
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