Tech & Sourcing @ Morgan Lewis

Last week, we started to take a look at key issues sponsors should be mindful of when entering into a sponsorship agreement, particularly for sponsorship of a team, event, venue, individual influencer or player, or similar arrangements.

Part 1 described considerations for defining the scope of the sponsor’s benefits, the relevant fees, and how to handle changes in the sponsored events and/or the market. We’ll continue our discussion in this Part 2, focusing on ways for sponsors to maximize value while protecting their brands in the context of these types of sponsorship agreements.

1. Promotional Channels and Use Rights: In addition to clearly defining the entitlements as described in Part 1, detailed descriptions of the sponsor’s use rights are also an important component of any sponsorship agreement that involves sponsored content, media, or similar entitlements. For example, the sponsored individual or entity displaying the sponsor’s marks in its social media content is valuable to a sponsor, but the ability for the sponsor to repost and redistribute that content to its own customers may be equally, or more, valuable. Common considerations for use rights are territory (worldwide or limited?), duration (perpetual or only during the term or some other defined period?), and promotional channels (e.g., social media, online, or traditional print or electronic advertising, press releases, etc.). Where the duration of use rights are limited, we recommend that sponsors include specific provisions in the sponsorship agreement that provide that while a sponsor is not permitted to create new sponsored content (or, if applicable, intentionally enter into new campaigns or distribution of prior content) after such period, the sponsor will not be required to take down prior social media posts, website content, or similar materials that contain sponsored content that was created and posted during the term of the sponsorship. Also, to the extent appropriate based on the nature of the entitlements, the sponsorship agreement may need to include a license grant by the individual or entity to the sponsor providing the right for the sponsor to utilize the relevant content.
2. Parity with Other Sponsors: Sponsors should also consider how important they view parity with similarly situated sponsors, whether that means similar products or industries, entities paying similar sponsorship fees or otherwise, and whether the sponsorship agreement should specifically address any parity concerns. This is typically closely related to two topics we discussed in Part 1, the clear definition of entitlements and any exclusivity granted to the sponsor. In certain situations, as long as the entitlements include the requisite specificity, parity may be less concerning to the sponsor. For example, if the sponsor is receiving a certain number of sponsored social media posts per month, a logo of a specified size in a specified location on jerseys or apparel, signage of a specified size in identified locations in a particular venue, or “above the fold” logo display of a certain size on identified websites, that may be sufficient for the sponsor. Likewise, if the sponsor is comfortable that the exclusivity it is receiving protects it from competitors encroaching on the entitlements and effectively reducing the value of those entitlements, parity may be of less concern. But the sponsor should also consider if it cares that a similarly situated sponsor receives preferential treatment, such as more prominent or higher value “real estate” (either physical or digital) or more frequent sponsored social media content. If this type of parity is part of the value proposition to the sponsor, the sponsorship agreement should include protections, which often take the form of either express restrictions on granting more favorable entitlements in certain areas or to certain sponsors and/or a requirement to modify or increase the entitlements granted to the sponsor to remain on par with any such later preferential entitlements that are granted.
3. Brand Guidelines/Approval Rights: If the sponsor has a standard company branding guide or similar document outlining its logos and other marks and the manner in which the company permits them to be used, the sponsorship agreement should specifically require compliance with those brand guidelines any time the sponsored individual or entity is using the sponsor’s marks. If no such brand guidelines exist, we recommend that the sponsor consider developing them as they are a crucial tool in maintaining a company’s brand image and protecting its intellectual property rights. Alternatively, the parties could specifically agree to the form and manner in which the sponsor’s marks may be used by the sponsored individual or entity and attach the agreed specifications to the sponsorship agreement. And, in any event, it is preferrable for the sponsor that the sponsorship agreement requires the sponsored individual or entity to obtain the sponsor’s prior approval of any use of the sponsor’s marks, although often the agreement provides that subsequent uses that are substantially similar to the initial approved use (and that comply with the brand guidelines or agreed specifications) do not require additional approval.
4. Term Length and Extension or Renewal Rights: Another key commercial consideration in sponsorship agreements is duration and whether the sponsor should have unilateral extension or renewal rights. Typically, a sponsor is entering into a sponsorship agreement because it holds the event/team/product/etc., being sponsored in high regard, and believes that there is excess value in the sponsorship. If the sponsor has the leverage to do so at the time of entering into the initial sponsorship agreement, it should consider negotiating a term length that doesn’t lock the sponsor in for longer than it is comfortable but includes a unilateral right to extend or renew the term of the agreement for some specified period of time. Once the sponsor becomes associated with a team, event, or other sponsorship vehicle, there is often pressure to remain a sponsor and an extension right allows the sponsor the ability to remain affiliated with the underlying vehicle without the risk of the commercial terms being significantly changed due to increased popularity of the team, event, etc., as the sponsor had anticipated at the outset of the relationship. A similar effect can be achieved by including a longer term for the agreement but allowing opt-out rights during the term either for any reason (essentially termination for convenience rights) or if certain defined goals or metrics relating to the sponsored individual or entity, which typically attempt to approximate the success of the sponsored individual or entity and therefore the commercial value of the sponsorship, are not achieved.
5. Unique Termination Rights – Reputational or Compliance Issues: While many of the topics we’ve discussed in these entries deal with ways to obtain and protect the incremental value of sponsorship arrangements, brand image and reputational issues represent arguably the biggest risk to sponsors in negating the value of a sponsorship and causing actual harm to the sponsor. For that reason, termination rights tied to adverse compliance or reputational incidents are not uncommon in these agreements. Termination as a result of regulatory compliance issues, particularly situations where a sponsor is no longer permitted to sponsor or otherwise be associated with an individual/entity as a result of changes in laws or regulations, are not usually that controversial. However, termination for other adverse events or reputational issues are some of the most contested and heavily negotiated terms we see in these agreements, and for good reason. Reputational or brand image concerns necessarily involve at least some degree of subjectivity, something that lawyers are always reluctant to introduce to contracts. However, due to the potentially significant detriment to a sponsor by remaining associated with an individual, entity, or event after these types of issues arise, we recommend pushing hard to include some form of this concept in sponsorship agreements. Where included in an agreement, the sponsor will typically look for the ability to exercise the termination right for as many potentially detrimental situations as possible, such as investigations, significant negative PR events, or other material changes in the sponsored individual, entity or event that result in a diminution in value of the entitlements the sponsor is receiving. In contrast, the sponsored individual or entity will likely want to narrowly tailor the right to specified situations, such as criminal or regulatory action resulting in an adverse judgment against them; and require that such situation also can reasonably be shown to materially impair the value of the sponsorship, and/or will want reciprocal termination rights to apply for situations involving the sponsor.