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Sponsorship: good faith and measuring the value of influencers

When comparing offers of sponsorship, how can you measure and compare marketing initiatives, particularly if celebrities and influencers are involved?

This was one of the interesting questions posed in the recent case of New Balance Athletics, Inc v The Liverpool Football Club [2019] which also considered the issue of good faith in the context of matching a sponsorship deal with Liverpool football club.

The matching right

New Balance had entered into an agreement in 2011 to sponsor Liverpool FC and to manufacture and sell replica football shirts of the club’s players. The agreement provided that during the “first dealing period”, the parties were required to negotiate renewal of the agreement in good faith. If agreement was not reached, Liverpool was able to enter into negotiations with third party competitors. Upon notification of a competing offer, New Balance had 30 business days to match such third party offer.

It was agreed by the parties that Liverpool could seek third party offers before the expiry of the first dealing period and an offer was subsequently received from Nike. This offer was sent to New Balance on 11 July 2019 who responded on 16 August 2019 with what it considered to be a matching offer. Liverpool responded to say that it did not believe the offer to be a genuine one and it did not therefore consider the offer to be a “bona fide attempt” to match the terms of the Nike offer.

On an expedited basis, the Commercial Court agreed to consider the following two principal issues:

  1. had the offer to match Nike’s distribution term been made in good faith?
  2. was the marketing term a “material, measurable and matchable” term that New Balance had to match? 

Good faith and the distribution obligation

Interestingly, both parties agreed that there was an implied obligation of good faith to match the third party offer, even though it was not expressly mentioned in the contract. The dispute lay in what this meant in practice. Liverpool FC submitted that New Balance was in breach of the implied term because it either knew or did not care that it could not match the obligation to distribute the licensed products in at least 6000 stores worldwide.

Mr. Justice Teare stated that it was now clear from a number of decisions that the duty of good faith can be breached not only by dishonesty but also by conduct which lacks fidelity to the parties’ bargain. Referring to the case of Bates v Post Office Ltd (No.3) [2019] (see our previous update here), the judge explained that ultimately, the question for the court is whether reasonable and honest people would regard the challenged conduct as commercially acceptable. 

In this case, the judge found that New Balance had been prudent in undertaking a due diligence exercise and its decision to match Nike’s offer was supported with estimates of numbers of stores by regional managers (despite a number of errors and bold estimates). As a result, none of the individuals involved could be found to be reckless as to whether or not New Balance could meet the distribution obligation and the offer was matched in good faith. 

The marketing obligation

Nike’s marketing obligation included a term to market the club and licensed products “through marketing initiatives featuring not less than three (3) non-football global superstar athletes and influencers of the calibre of Lebron James, Serena Williams, Drake etc…..”

The New Balance offer mirrored the terms of the marketing clause in the Nike offer but omitted the words “of the calibre of Lebron James, Serena Williams, Drake etc.”.

The question for the court was whether or not the omission had the effect that New Balance had not matched Nike’s offer. New Balance claimed that the marketing term as a whole was not measurable as it was too vague and it was therefore not obliged to match it.

Although it could be argued that an offer to use “global superstar” athletes and influencers is an offer to use athletes and influencers of the highest calibre, the judge considered that the missing words must have been agreed for a purpose.  This purpose must have been to indicate Nike’s obligation to use the particular calibre of the mentioned global superstars. Similarly, the judge considered that there must have been a reason for New Balance to omit the words, possibly because the athletes and influencers with whom New Balance had a contract were not comparable to the named persons.

Rejecting the submission that calibre of such athletes and influencers cannot be measured, the judge considered the value of social media exposure and agreed with evidence that value can be attributed to each exposure by reference to a variety of values such as “max add value” or “share of voice value”.

Since New Balance had failed to match the terms of the Nike’s offer on marketing, Liverpool was not obliged to enter into a new agreement with New Balance.  

Comment

Although this case does not create any new law, it is interesting that the judge considered that is now clear (following the case of Bates v Post Office Ltd (No.3) [2019]) that the duty of good faith can be breached not only by dishonesty but also by conduct which lacks fidelity to the parties’ bargain. It is also settled that in judging a party’s conduct, it is necessary to consider the nature of the bargain, the terms of the contract and the context in which the matter arises.

In this case, the parties clearly expected the decision to rest on good faith in view of their lengthy submissions on this issue, rather than the marketing commitment.  The actions taken by New Balance after receiving notification of Nike’s offer were examined at length as were the alleged errors in estimates from the regional managers. The judge was impressed by the efforts made by New Balance in such a short space of time which led him to conclude that the individuals involved had acted in good faith in gathering the information. 

Although each case on good faith will turn on the specific facts, parties should remember the requirement to conduct themselves in a manner likely to be regarded as “commercially acceptable” throughout the contract. In the case of matching rights, this could involve substantial due diligence by the party seeking to match a third party offer of sponsorship, particularly in relation to distribution obligations.

As for measuring marketing initiatives, it is perhaps unsurprising that the judge decided that these should be measurable in an era where influencers have a significant impact on brands. However, he was not required to settle on a method of assessment in this case. It would be advisable for parties to consider whether specific metrics could be added into their contracts in relation to influencer commitments to avoid any disputes in the future.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.

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