The recent Liverpool and New Balance case has offered some interesting conclusions on the issue of matching rights...
Outside of the Premier League’s £5bn television rights deal, kit deals are often the biggest annual earner for many football clubs, particularly for those clubs who aren’t renowned for selling their top footballing talents for premium transfer fees. For obvious reasons, we are now seeing football clubs becoming more revenue focused with a specific emphasis being placed on the need to maximise commercial income, particularly from sponsorship and kit deals. An increase in revenue streams, from a variety of sources, enables a football club to bolster its transfer kitty; a fundamental trait, especially in an already hyper inflated transfer market.
European Champions, Liverpool, have dominated sporting headlines in recent weeks for their impressive footballing performances. However, Liverpool’s success continued off the field last week when the club won a high-profile legal battle over a multi-million-pound kit supply and sponsorship deal with its current partner New Balance, paving the way for the club to sign a highly lucrative deal with a new kit supplier and sponsor partner.
Liverpool were taken to the high court by New Balance after it was alleged that the Merseyside club was looking to switch to a new deal with New Balance’s sportswear competitors Nike, once their existing contract, believed to be worth in the region of £40m per year, expired in May 2020. Nike’s offer, which is due to commence from the start of the 2020/2021 season, is rumoured to provide Liverpool with the scope to earn close to £70m per year.
New Balance, who have been Liverpool’s official kit supplier since the 2015/2016 season, alleged that Liverpool had committed a breach of contract by failing to comply with the terms of a matching right clause set out in its sponsorship agreement with the club. In essence, New Balance were of the view that they should have been allowed to match the “material, measurable and matchable terms” of the offer put forward by Nike.
Matching rights: What are they?
A common provision included in sporting commercial rights agreements is a “matching right”, which permits a rights-holder (e.g. a football club) to negotiate with third parties towards the end of the term of a current deal, on the proviso that the existing partner has the right to renew the existing deal on terms equivalent to that offered by the third party partner; thereby allowing the current partner to extend the term of its existing sponsorship agreement with the club.
Matching rights clauses are often weighted in favour of the commercial partner.The matching rights provision provides a kit supplier and sponsor (for example) with a certain degree of comfort that they will be presented with the opportunity to renew the terms of a deal, once the contractual term expires, provided that they have the ability to ‘match’ the terms of an offer received from a third party.
In addition, a matching right often includes a requirement that any and all offers made by a third party must be relayed to the existing sponsor, as to enable them the opportunity to see if they have the ability to match the offer that has been made. A caveat of this type clearly affords the sponsor an element of control over the club in its commercial dealings with a sponsor’s competitors.
Notwithstanding the above, many clubs view matching rights clauses as diminishing the commercial value that they may be able to achieve in the open market, as potential partners may be unwilling to undertake a lengthy negotiation process if a competitor is able to swoop in to trump them, especially after terms have already been agreed with a club.
To put this into context, the Court heard that Liverpool had already agreed on a design for next season’s shirt with Nike, with plans for the 2021/2022 season almost finalised too. The Court heard that Nike have spent around £6m on fabrics for the potential new kit and that Nike have received pre orders from around 8,000 stores globally, with factory space for £2.9m units being reserved. It is clear then that Nike had already spent an enormous amount of time, and resources, sketching together the terms of a sponsorship with Liverpool, which all could have been wasted had the Court ruled in favour of New Balance.
In an attempt to avoid any dispute over the nuances of a matching rights clause, a compromise position often reached is for the parties to agree an exclusive negotiation period prior to expiry of the current sponsorship agreement after which, if agreement has not been reached, the club is at liberty to conclude commercial sponsorship arrangements with third parties.
The devil is in the detail
Despite the presence of a matching right in the agreement between New Balance and Liverpool, the Court concluded last week that Liverpool is not obliged to enter into a new agreement with New Balance upon the terms of Nike’s offer. The Court ruled that New Balance’s offer on marketing was less favourable to Liverpool than the Nike offer, but how did the Court come to this decision?
The Court heard that when matching the offer put forward by Nike, New Balance offered to market “LFC and/or licensed products through marketing initiatives featuring not less than three non-football global superstar athletes and influencers with such initiatives being used to market certain Licensed Products for the start of season 2020/2021”.
What differed in Nike’s offer, however, was that Nike had suggested that it would offer marketing initiatives involving three non-football global superstar athletes and influencers “of the calibre of LeBron James, Serena Williams, Drake etc”. The reason as to why New Balance had omitted the words “of the calibre of” after global superstar athletes and influencers was not, in the court’s view, made clear.
Liverpool’s argument was that the omission of the above wording clearly meant that Nike’s offer had not been matched, whereas New Balance argued that “unspecified marketing initiatives” are too vague to be a material, measureable and matchable term.
Initially, the court considered that the omission of the words in question was irrelevant as 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 and that, ultimately, despite not containing the same wording as Nike’s offer, the New Balance offer is no less favourable to Liverpool. However, upon further scrutiny of the wording of the offers, the court found that the missing words must have been agreed for a purpose and that purpose must have been to indicate that Nike’s promise was to use athletes and influencers who were not only global superstars, but were of the calibre of the above mentioned global superstars. It was for that reason that the court held that New Balance’s offer was therefore less favourable to Liverpool.
Interestingly, Liverpool’s global fan base stretches across huge parts of South Asia, North America and Australia, but China is viewed by the club as an unconquered area that has limitless potential. As such, the court heard that Liverpool saw the chance to work with Basketball mega star LeBron James as a major boost in their efforts to tap into the Chinese market, with the US’ National Basketball Association (NBA) being very popular in China.
The court also considered New Balance’s argument that Nike’s offer to use global superstars ‘of the calibre of LeBron James, Serena Williams, Drake etc’ was not a measurable calibre. The court held that evidence provided in the trial clearly suggested that the calibre of the named athletes and influencers could be valued in a number of different ways and, thus, concluded that the New Balance offer on marketing was again less favourable to Liverpool than the Nike offer.
Conclusion
It is clear from the Liverpool and New Balance case that matching rights are still common in some of the world’s most lucrative sports supply and sponsorship agreements. Many commercial partners are alive to the fact that football clubs have, in recent times, devoted fundamental attentions to their marketing strategies and the need to maximise their commercial revenues, with transfer budgets factoring into those considerations. With that in mind, many commercial partners feel that they hold the bargaining chips during the lengthy and costly negotiations. Ultimately, before a commercial partner is to make substantial investments into clubs, they may seek, and insist upon, a matching right being inserted into the agreement.
What is evident from the outcome of the above case is that both sponsors and clubs must be fully aware of the legal and commercial ramifications of negotiating the scope, and eventually drafting the technicalities of a matching right provision, which includes paying close attention to the ‘product or service category’ definition of the commercial partner’s business. Careful consideration needs to be given to what initially constitutes an offer from a third party and, subsequently, what will establish a ‘match’. It is important to establish the clear parameters of a match; will the financial terms of an offer only be taken into account or can other factors such as marketing initiatives be considered? The Liverpool case provides for a stark reminder that drafting these clauses with room for interpretation could be commercially dangerous for a sponsor, given the fact that the court will scrutinise every last-minute detail of a matching right.
The decision in the Liverpool case also begs the question as to whether this now automatically places Nike in an immovable position as far as their own future matching right is concerned, on the basis that no other kit supplier or sponsor will be able to match the power and value of its celebrity endorsement portfolio and its ability to access and endorse products through its stable of superstar athletes and influencers, of the calibre of LeBron James, Serena Williams, Drake etc. Time will certainly tell on that one.
New Balance remain unhappy with the verdict reached last week and, as such, they have filed an appeal against the decision to the court of Appeal, which now has the task of deciding whether there are sufficient grounds to reopen the case. New Balance, Nike and Liverpool now wait in suspense to hear whether the court of Appeal will grant New Balance’s request.
Our Sport sector team regularly advises clubs, players and brands on the content, drafting and negotiation of commercial agreements, including matching right provisions, with commercial partners – covering kit supply and sponsorship deals, advertising deals and boot and kit endorsement deals. Please do not hesitate to contact us should you have a query relating to this important part of your business.
