[Editor's Note: The following is a guest column by Tim Cedrone, a third-year law student at Seton Hall Law School in Newark, NJ. Tim is the symposium editor of the Seton Hall Sports & Entertainment Law Journal.]
From the Wall Street Journal, February 6, 2009:
Phelps Loses Endorsement Pact, Faces Suspension over PhotosA myriad of reports have come out over the last few days regarding Michael Phelps and his pot-smoking picture. Many of the stories discuss the repercussions Phelps may face from sponsors. As seen above, one sponsor has already decided to discontinue its relationship with Phelps. Others (Visa, Speedo, Omega, Subway) have expressed support for Phelps. But the question is, if these sponsors wanted to terminate their relationship with Phelps because his behavior is "not consistent with the sponsor's image," how could they do it? The answer lies in the oft-mentioned and little-discussed morals clause.
by Suzanne Vranica & Matthew Futterman
Kellogg Co. is severing its relationship with Michael Phelps after the Olympian was photographed smoking marijuana. . . . The Battle Creek, Mich., packaged-food company, whose brands include Frosted Flakes, Rice Krispies and Pop-Tarts, said Thursday it wouldn't continue its endorsement contract with the gold medalist, which comes up for renewal at the end of the month. . . . "We originally built the relationship with Michael, as well as the other Olympic athletes, to support our association with the U.S. Olympic team," a Kellogg spokeswoman said in a statement. "Michael's most recent behavior is not consistent with the image of Kellogg." (Full article here.)
In an article soon to be published in the Seton Hall Journal of Sports & Entertainment Law, I discuss morals clauses in talent agreements in great detail. (Click here for a copy of the article, co-authored by Fernando Pinguelo.) As stated in the article, a morals clause is a contractual provision that gives a company the unilateral right to terminate an agreement with an individual in the event the individual engages in reprehensible behavior or conduct that may negatively impact his/her public image and, by association, the public image of the company. Companies often use morals clauses to terminate sponsorship agreements, such as with Kate Moss/H&M and Michael Vick/Rawlings. These clauses can be very broad, whereby they allow termination for almost anything; or very narrow, whereby they permit termination for specified conduct like felony convictions. Athletes (and their agents) typically prefer narrow clauses so that they can limit their potential exposure, whereas sponsors prefer broad clauses to ensure flexibility. The ability of an individual to secure a narrow clause often depends on their leverage: the more marketable the athlete, the narrower the clause and vice versa (think Michael Jordan v. Milorad Cavic).
So what does this mean for Phelps? Assuming his contracts have morals clauses, the legal reality is that any of his sponsors may have the ability to terminate the sponsorship agreement. After all, smoking pot is certainly not something companies want associated with them. The more likely situation is that some sponsors may decide to not renew his contract (like Kellogg). This also happened to Kobe Bryant with McDonald's and Nutella in 2004. If the contract is set to expire soon, the sponsor may just not use Phelps in any ads, make their payments to him, and then not renew the contract when the term expires. For longer contracts, the sponsor could just ride out the publicity storm and hope that Phelps restores his image with dominant performances at the 2009 World Championships and 2012 London Olympics. So, while Phelps' sponsors may have the legal right to terminate his contract right now, the companies probably want to remain associated with the greatest Olympian ever despite his folly. Just another example of how economic realities can often take precedence over a party's legal rights.
[Tim Cedone is Symposium Editor of the Journal of Sports & Entertainment Law at Seton Hall Law School, as well as author of the Sports & Business Blawg.]
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