This article was originally published in Venable's All About Advertising Law blog on June 5, 2015.
FIFA, the International Federation Soccer Association which is in charge of awarding lucrative World Cup hosting rights and promoting soccer worldwide, has longstanding sponsorship relationships and contracts with some of the largest global corporations. FIFA is supported by hundreds of millions of sponsorship dollars; however, the organization’s sponsorship relationships are being challenged by recent events, and sponsors are making their displeasure with the organization known. The May 27 indictment of nine top FIFA officials by the U.S. Department of Justice for corruption highlights scandals as one of the major risks facing sponsors. Compounding this most recent scandal is the ongoing controversy around conditions in Qatar, the planned site of the 2022 World Cup, where, reportedly, workers helping to build World Cup facilities are dying as a result of unsafe building conditions. After unsuccessfully attempting to distance himself from the scandals, FIFA President, Sepp Blatter, announced his resignation on June 2.
Scandals associated with sports or entertainment properties are a major risk for sponsors because they can decrease the value of the sponsored brand, even a brand as strong as the World Cup. A big enough scandal could harm the sponsor’s reputation directly as well by association. In order to protect against the potential reputational harm resulting from scandals, brands with the bargaining power to do so, are advised to include a morals clause in their sponsorship contracts, similar to how brands typically include a morals clause in spokesperson contracts. Generally, a morals clause in a sponsorship contract allows the sponsor to terminate the sponsorship contract in the event the sponsored organization becomes the subject of a public scandal that either reduces the commercial value of the sponsorship or threatens to tarnish the sponsor’s image. Since millions of dollars are often at stake in sponsorship fees and other payments due to the sponsored organization, as well as additional marketing dollars allocated to activate the sponsorship assets, it is prudent for a sponsor to bake an exit strategy into the deal to (1) allow the sponsor to reallocate the sponsorship dollars to other opportunities instead of continuing to pay for rights that the sponsor cannot use and (2) extricate itself from direct or indirect association with the scandal to immediately start creating distance from the sponsored organization and to minimize potential damage to its own reputation.
There are many variations on morals clause language, and descriptions of the event or events that would trigger a sponsor’s termination right tend to be heavily negotiated. Events that would trigger a termination right could range from an actual felony conviction or indictment of the executives or other key individuals associated with the sponsored organization, to a government investigation or public allegation of such individuals or the organization of an act that brings the sponsored organization or brand into public disrepute, or shocks or offends the community or any group. A sponsor may also negotiate for termination rights based on a pattern or systemic series of events, or based on an event that happened prior to the parties’ relationship, but becomes public during the term of the sponsorship.
When drafting and negotiating a morals clause, it is important to identify any subjective elements of a trigger and try to provide clear parameters to avoid interpretation issues. For example, is the trigger a felony conviction or government investigation, or a conviction or investigation related to fraud, embezzlement, or bribery? What constitutes an act “that shocks or offends the community or any group”? From a sponsor’s perspective, it’s preferable for the sponsor to define the triggering event broadly and have discretion to determine when the trigger has occurred. For example, a provision allowing the sponsor to terminate based on any public allegation of any wrongdoing by the sponsored organization or any key individual associated with the organization or the sponsored brand that could harm the sponsor’s reputation or reduce the commercial value of the sponsorship to the sponsor, as determined by the sponsor in its sole discretion, would be advantageous to a sponsor. The sponsored organization, however, is unlikely to accept such a broad morals clause, and instead will want to negotiate much narrower, pre-defined trigger events with objective standards. Addressing each party’s concerns to achieve a mutually acceptable compromise will often require creative drafting.
In connection with the current FIFA scandal, many of FIFA’s sponsors made statements expressing concern in response to the corruption indictments, and sponsors have expressed support for Sepp Blatter’s resignation; however, it’s unclear whether any of the sponsors would or could take action to terminate their sponsorship pursuant to a morals clause. Visa, one of FIFA’s top global sponsors, expressed the strongest public position thus far, stating that should FIFA fail to make changes, Visa would “reassess” its sponsorship of the World Cup. Visa recognized Sepp Blatter’s resignation as a “significant first step towards rebuilding public trust” but also cautioned that “more work lies ahead” and that Visa expects to see additional reforms in the “very near future.” Visa’s situation illustrates the importance of including a carefully negotiated morals clauses in sponsorship contracts because, just last year, Visa renewed its FIFA sponsorship through the 2022 World Cup. Accordingly, unless Visa has a morals clause in its renewed sponsorship contract, and that morals clause is broad enough to cover the U.S. indictment of top officials and/or the public criticism relating to workers’ deaths in Qatar, the company’s threat of “reassessment” may not have real teeth.