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.