Endorsements and sponsorship deals provide an additional source of revenue for athletes on top of any base salary or earnings tied to their respective sport. Many athletes make more from sponsorships than their pro athlete salary. But only if they have a favorable agreement. There are hundreds of horror stories in the news of athletes entering into bad deals and being taken advantage of.
Athletes seeking sponsorship should familiarize themselves with the main terms of these agreements so when they are approached by brands they know what to look out for. Below is a summary of provisions found in endorsement and sponsorship deals which frequently are the most heavily negotiated. This list is not exhaustive; instead, it highlights some of the most important sponsorship items an athlete should consider prior to entering into an agreement.
Compensation Structure: How Endorsements Works
The most common endorsement and sponsorship deals involve an athlete promoting a product in exchange for a certain amount of cash, either lump sum or in a series of payments. There are other forms of compensation that an athlete should consider, however. There is now a growing trend where athletes receive a share of the product’s sales revenue or equity in the company. In these arrangements, the company’s success is also the athlete’s success. But the opposite is also true: if the company underperforms the athlete is on the hook and may not take home anything.
Exclusivity Clauses
Athletes should pay special attention to exclusivity provisions in endorsement deals, as they may not be permitted to promote other companies they may want to align themselves with. Contractual language could identify specific brands the athlete is precluded from signing with or involving themselves with in any capacity. The contract could name entire industries the athlete cannot work with—for instance, a Nike deal may say an athlete cannot promote any other sort of athletic apparel.
It is in the athlete’s best interest to narrow the scope of the exclusivity as much as possible or if they do concede on this point that they get additional renumeration for it. For example, if an athlete signs a shoe deal with Nike they should make sure they have the option of reaching a different deal with, say, Reebok for shirts if they so desire. Similarly, the athlete should be selective in choosing which brands they would like to endorse as any deals they agree to could close the door to other and potentially better opportunities down the road. Leagues or other athletic organizations may have their own rules which forbid athletes from making deals with companies that conflict with league / athletic organization sponsors.
New developments have created additional wrinkles for exclusivity clauses. The Federal Trade Commission (FTC) recently proposed a rule that would significantly limit employers’ ability to enforce non-competes. Non-compete agreements typically prevent an employee from working with a competitor of the employer for some duration of time after their employment ends.
Many states restrict the use of non-competes and some states such as California ban them outright. The FTC rule in essence would impose a nationwide ban on all non-competes for workers other than senior executives.
What does this have to do with endorsement deals? The language in the FTC rule states the ban would not just protect employees but also “workers”. While admittedly it’s a gray area, an athlete sponsoring a company or a company’s product could in theory be construed as doing “work” for the company. Under that interpretation—which to be clear is up for debate—the FTC rule would also prohibit non-compete language in endorsement / sponsorship deals.
However, what exactly is and is not subject to the ban has at least for the time-being been rendered moot—on August 20, 2024 a federal court in the Northern District of Texas ruled in Ryan, LLC v. FTC that the FTC’s proposed non-compete rule was unlawful. Further legal challenges including appeals could ensue. Yet, as of now, the ban has been blocked and is not in effect. This is an area of the law that is particularly fluid and could rapidly change. That’s why it’s so important that whenever an athlete or their representative reviews a contract they check that the contract adheres to the existing laws.
Morality Clauses: Not Making the Brand Look Bad
Companies are extremely protective of their brand image. They want to make sure anyone who is the face of their product(s) is upstanding. If they are not, the relationship is quickly severed.
Athletes should pay close attention to morality clauses before signing. A fairly standard morality clause would state the company can suspend or end the deal if the athlete engages in various forms of wrongdoing like a crime, even minor. An admission of guilt or a guilty verdict is not necessarily required. Acts of “moral turpitude”—a very ambiguous term—likewise apply. Here it is imperative for the athlete to narrowly define what exactly constitutes wrongdoing. The athlete and their lawyer should ask and receive a clear answer. Really make sure you understand exactly what is wrongdoing and what is not.
We live in an age where the ‘court of public opinion’ has enormous sway on our livelihood; what could be deemed permissible one moment may be viewed as impermissible the next, which can affect the bottom dollar. After signing a deal, athletes should be extremely conscious of what they do not only in public, but online as well. Social media postings deemed hateful, threatening, or promoting the ‘wrong ideas’ could trigger this provision. Be sure you understand what the company could deem as inappropriate.
Termination: Ending the Endorsement
Endorsement deals usually include a force majeure clause, which would release parties from their contractual obligations under extraordinary unforeseen events. The notion here is there are some events that are so extreme it would be incredibly difficult or outright impossible for a party to fulfill their contractual duties. Examples include, but are not limited to, natural disasters, outbreaks of war, terrorism, and certain government interventions. Pandemics likewise could apply here. Considerable litigation has occurred in the past several years, particularly in the finance industry over whether COVID-19 would constitute a force majeure—the outcomes here are on a case-by-case basis.
The main takeaway is: if a company wants to get out of a deal, they may try to cite force majure. This would allow them to end the contract without being subject to any liability. For example, if the company is unhappy with their arrangement with the athlete and they think they are paying them too much—they could cite force majeure in the hopes of ending the endoresment. However, there is a very high standard of proof. It’s not easy to prove a force majeure is in effect and courts are not likely to entertain it. But from a practical standpoint, if the company knew the athlete didn’t have the financial resources to take them to court, the company could turn to this provision to terminate a deal they are not keen on. Thus, what is and is not part of a contract’s force majeure definition is quite important.
Endorsement deals may also include provisions which terminate the deal if the athlete were to sustain a significant injury that prevented them from competing for a certain duration of time. The injury typically would have to be fairly severe. That being said, the injury does not necessarily need to be career-ending in order to trigger termination. The athlete should try to get terms as favorable as possible here, so if the injury bug does hit, they know they are not at risk of losing a source of income.
Endorsements can be Challenging… Work with an Expert
Endorsements and sponsorship deals are a great way for athletes to supplement their existing income and potentially diversify their portfolios. Whether an athlete will be able to procure more favorable terms will be dependent upon whether they or the company have the leverage on that particular negotiating point. The stronger an athlete’s stardom is, the more negotiating power they will have—the key is to use this advantage to secure terms most beneficial to the athlete, be it money, flexibility, or protections.
Numerous pitfalls exist for the athlete in these agreements. The company invariably will seek what is in its own best interests. An athlete therefore should always consider referring to any agent and/or lawyer specialized in this field prior to signing any endorsement or sponsorship deal.
You can follow @JakeAKline on Twitter, or reach him by email at jake.a.kline@gmail.com for support. For help understanding sponsorships and your path to financial freedom, or any other path to financial freedom, join The Players Company newsletter.
