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COMMENT

10/31/2012

Lance Armstrong's career is now in tatters and there is much media speculation about whether sponsors will seek repayments of their endorsement deals. Given the millions of dollars invested in the cyclist over the years, the presumption would be that the answer is 'yes'. But in this case, the matter is far from
straightforward.

First, there is the question of whether it is in the commercial interests for those companies to seek
repayment. In the USA, Armstrong still has a degree of popular support. The public perception is that doping in cycling was so widespread that he was no worse than anyone else; 'if no one was doping he would have won, so everyone was doping and he still won'. There is also the considerable empathy people have with his fight against cancer and the fact that he set up Livestrong, a foundation dedicated to fighting cancer that had massive popular support for its charitable works.

For a sponsor to take on Amstrong might, therefore, prove to be less than the popular cause it would first appear.

From a legal point of view, there are believed to be sponsors looking at claiming back the bonus payments that they have made. The argument here is that Armstrong has now been stripped of his titles, so the bonuses paid  to him for meeting his targets are no longer valid - he didn't win the Tour de France, so he shouldn't have the sponsorship bonus paid for winning it.

An intriging development here, which could set both legal and commercial precedents, concerns a company that had insured Armstrong's team owners, Tailwind Sports. Tailwind owned the U.S Postal Services team and  offered Armstrong big bonuses to stay with the team including one bonus that would award him $10 million if he won six straight Tours. These were insured by several companies, including SCA which had paid out $4.5 million for Armstrong's wins between 2001 and 2003. It was due to pay a further $5 million following Armstrong's sixth Tour de France win in 2004.

By then rumours of drug taking had surfaced in the book, LA Confidential, and SCA refused to make the
payment. Eventually, with no concrete evidence, it was forced to pay the sum plus interest and other costs in a legally binding settlement agreement. Armstrong won the case because the original contract between SCA and Tailwind Sports did not include any stipulations about doping. He was therefore able to claim that he had met all obligations as he had won the races relating to the bonuses.

The problem now for SCA is that the settlement agreement contains two clauses making a case for return of the money very difficult. The clauses state: "no party shall challenge, appeal or attempt to set aside the
arbitration award," and: "no promise or representation of any kind has been made to any party or to anyone acting for a party, except as is expressly stated in this settlement agreement."

Armstrong will now surely argue that there can be no challenge to the settlement agreement, whereas SCA will have to claim that the new revelations would allow them to re-open the case.

"The bonus that was owed was based on the premise that Lance Armstrong was the winner of the Tour de
France," said SCA's lawyer, Jeffrey Tillotson. "He is no longer the official winner, so it would be improper for him to keep those funds."

This does beg the question as to why the insurer, relcutant to pay out because of rumours concerning doping, agreed to a settlement that didn't allow them to come back should those rumours later to be proven. The only conclusion here is that it was in too weak a position at the time to dictate any terms in the agreement. The case demonstrates the difficulty that sponsors might also have should they seek repayment of monies.

Alastair Cotton, a specialist in sports law at Farrer & Co, told IMR that the sponsors could  have a case for a full repayment:

"The sponsors may face practical difficulties trying to bringing a claim against Armstrong so long after the event and essentially trying to prove allegations that Armstrong doped, notwithstanding the findings of the USADA investigation.  However, it certainly it seems arguable that any bonus payments paid on the basis of success in the Tour de France and other races should be refunded and, if the sponsors can show that they entered the contract on the basis that Armstrong promised he was a clean athlete, they may well be able to set the contract aside and make a claim for the sponsorship fees paid. They may also be able to argue that Armstrong has been unjustifiably enriched. Given the elaborate nature of Armstrong's deception, a court may well have sympathy for both arguments.
 
"The devil may well lie in the detail of the contract, though, and this is a salutary reminder for all sponsors to review what their endorsement contracts say on the topics of doping, corruption and similar issues, as a clear contractual right would certainly assist in making any claim to get their money back".

Armstrong will, therefore, find it difficult to defend any claims from sponsors regarding bonus payments.
But the claim for a full sponsorship refund might be more tricky.

IMR's US representative, Professor David Snyder, a US sports lawyer and lecturer on the subject, says that Armstrong will still be able to mount a defence:

"I'm sure Armstrong's lawyers will say that if sponsors want to try to claim money back because there has
been a breach of contract through misrepresentation, then they would need to ask the courts to effectively put them back to the position they were in prior to the breach. They might even make that argument concerning bonus payments. They will basically state that the reason the sponsors entered into the contract was to get certain benefits and that those benefits were delivered. They'll say 'what deliverables were you hoping to achieve?' to which the answer will be 'a return on investment'. They'll ask whether that happened and state that he did deliver on the contract."

Snyder also points out that during the period in question the issue of doping was so big that the sponsors
knew it was going on in the sport. With rumours about Armstrong having surfaced, they would surely have
stipulated clauses in the contract regarding doping if it was that important to them.

In terms of lessons for the future, Alastair Cotton says that sponsors would be well advised to consider going beyond morality clauses to protect their investments and reputations.

"Morality clauses are important for sponsors in terms of protecting their reputations from scandal or bad publicity in an athlete's personal life. It depends on the wording used but, as a general rule, morality clauses enable sponsors, in appropriate circumstances, to terminate a contract and no longer continue sponsorship payments to the athlete. However, they do not usually trigger a lawsuit to recover past money paid. Sponsors should therefore look to include a specific sporting clause into their sponsorship contracts that deals with issues such as doping and match fixing.  Such clauses should be drafted to enable sponsors to claw back payments retrospectively in cases such as Armstrong’s.

Related content

Report: Sports Sponsorship & the Law
Journal: International Journal of Sports Marketing & Sponsorship : Scandal & Corruption Special Edition - includes research on whether fans care about doping.

IMR specialises in bespoke research reports and commercial advice to rights holders
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