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Reading Between the Lines

With his trial on rape charges looming, Kobe Bryant's freedom is in jeopardy.  But his conduct has already jeopardized something else - his endorsement income.  The case has highlighted morality clauses in endorsement and employment contracts and how they can, and are, invoked by companies when athlete-endorsers become involved in a scandal.  A number of athlete-endorsers and coaches have learned recently that morality, or morals, clauses - which generally allow a sponsor or employer to terminate an agreement for criminal or immoral behavior - are more than just boilerplate language.

In fact, morals clauses can be extremely powerful tools. And that's why parties on both sides of the deal need to understand what the clause allows and what triggers it.  So here are some things to keep in mind when negotiating an endorsement or employment agreement, and when figuring out what to do if an athlete-endorser or employee becomes the subject of scandal or unfavorable news reports.

Spell It Out
A morals clause allows a company or employer to cut loose a spokesperson or employee who is indirectly tarnishing the reputation of a company or employer.  This seems reasonable when you consider the purpose of endorsement agreements and what the company invests.  A company might pay an athlete millions of dollars in a multi-year deal to be the public face for the company's products.  The company builds its advertising and marketing campaign around the athlete so that their talents and achievements become associated with the company's products.  But problems arise when these talents and achievements are overshalison_dowed by scandal or criminal conduct.  When a company is in danger of being damaged by its association with an athlete-endorser, it understandably wants to part ways.

Companies generally want a very broad morals clause that lets them determine what kind of conduct will trigger the right to terminate.  In the past, many agreements allowed a company or employer to end an agreement if the endorser or employee engaged in "moral turpitude."  Employment agreements for university coaches often permit termination for behavior that "brings the employee into public disrepute, contempt, scandal, or ridicule or that reflects unfavorably upon the reputation or the high moral or ethical standards of the university."  This kind of clause allows termination based on behavior that is not necessarily criminal, but would be considered inappropriate for a college coach, such as visiting a topless bar.  That act led to former University of Alabama football coach Mike Price's dismissal before he ever coached a game for the Crimson Tide.  However, morals clauses that are too broad might not be enforceable in court if it is not clear what kind of behavior is prohibited.

The athlete-endorser usually wants a narrow morals clause so that the company can terminate the agreement only in extreme, well-defined circumstances.  These days a morals clause might allow a company or employer to terminate an agreement in the endorser or employee is convicted of specific crimes, such as driving under the influence of alcohol or using drugs.  The agreement may also be triggered by poor sportsmanship, suspension from a team, or public criticism of the sponsor's product.

Whatever the language, it should be clear and the parties should understand it.  For example, an arrest is not the same as a conviction for a crime or a plea of no contest.  A company can't invoke a morals clause unless the specific activity occurs.  This is illustrated by Fila's attempt several years ago to terminate Chris Webber's endorsement deal after Webber was charged with marijuana possession.  Webber filed suit against Fila for breach of contract because the morals clause was only triggered by a conviction, not just a charge, of drug possession.  Fila was reportedly ordered by the court to pay Webber $2.6 million.

A morals clause can also reference team or league rules, and specify that a violation of the rules triggers the clause.  The University of Washington invoked the morals clause in its agreement with its former football coach Rick Neuheisel.  The agreement allowed the university to terminate Neuheisel's employment agreement for "serious or intentional violation of any law, rule, regulation, constitutional provision, by-law of … the university, state of Washington … or the NCAA."  Someone had tipped off the university that Neuheisel won several thousand dollars in a gambling pool based on NCAA tournaments.  NCAA by-law 10.3 prohibits gambling on intercollegiate athletics by athletic department staff members and athletes.

Alternatives to Termination
When companies and employers invest a lot of time and resources in an endorser or employee, they may want remedies that are less severe than termination.  Some agreements allow a company or employer to levy fines and/or recoup payments rather than terminate for a morals-based contractual violation.  For example, Home Depot reportedly fined Nascar racer Tony Stewart $50,000 for fighting with a photographer.  Under the terms of Stewart's endorsement agreement with Home Depot, it had that option.  Fines can be an effective way to encourage endorsers to be on their best behavior.  Whatever the remedies, they should be spelled out clearly in the agreement.

Another alternative to termination is to wait and see.  For companies with multi-year, million dollar endorsement deals with an athlete, the best response to a scandal or a criminal charge may be to wait and see what happens.  Rumors are refuted, scandals blow over, criminal charges are dropped, and juries declare defendants not guilty.  A company that has spent millions producing commercials and other advertising and marketing materials may continue its endorsement deal, but delay broadcast of commercials until there is some resolution of charges or rumors and it can assess the endorser's continued effectiveness as a spokesperson.  A scandal may also present an opportunity for a company to renegotiate an endorsement deal.
There is no such thing as a garden variety morals clause for top athletes and coaches, but all those involved should think long and hard about what kind of behavior is unacceptable and what the best remedies are to discourage such behavior and protect the company or employer.  Like other contracts, there are definite benefits of clarity and specificity in listing the precise behavior that it covered and remedies afforded.  The fine print really does matter.