Authored By Richard L. Brand, partner, Arent Fox LLP
The importance and utility of the Naming Rights Agreement as a marketing platform for consumer brands has been demonstrated time and again. Nevertheless, public reaction to high profile naming rights transactions during the most recent recession has suggested some concerns surrounding a Sponsors investment in naming rights. A naming rights agreement embodies more rights than just the “name.” It includes sponsorships, ads, television spots, and other promotions. A naming rights agreement is essentially a sponsorship agreement “on steroids” and depending on the magnitude of the deal, the line between sponsorships agreements and naming rights transactions can blur. Below are ten key issues involved in a naming rights transaction:
1. Contracting Party and Sublicensing.
From the Rights Holder’s perspective, depending on the creditworthiness of the Partner, the Partner may be required to have its parent company serve as a “guarantor” or may need to provide some other credit enhancement. The Rights Holder needs to be assured that there is (and will be) a solid financial backstop of the Partner’s obligations.
It is important to match up the entitlements to be received by the Partner with the subsidiary that has (or should have) the right to receive them. This “matching” is often achieved by permitting the pass-through of rights to affiliates and sometimes partners. In such event, the Partner needs to secure “Pass-Through Rights” to those affiliates and partners/3rd parties.
2. Name Changes.
Although in virtually all name change situations, the Partner will be responsible for all costs and expenses, the Rights Holders still has a legitimate interest in not wanting to have frequent name changes because it may “cheapen” the stadium/arena and also may require the stadium/arena and the owner/team to “rebrand” the stadium/arena too often than would be desirable. As a practical matter, the lawyers want to limit the name changes but the business people recognize that the likelihood is that a partner has little interest in changing the name for a reason that is not compelling. Although the Rights Holder owns the stadium/arena, the Partner nevertheless has a legitimate interest in controlling use of the stadium/arena name because it is typically a derivative of the Partner’s name and it has a real stake in the popularity, or notoriety, as applicable, which results from the naming.
3. Extensions / Renewals.
Having a right to extend the Rights Holder/Partner relationship is important to many partners. Some prefer to call it a “renewal” right rather than an “extension” right. What you call it is less important than the specific details. The most important terms of any extension/renewal are the fees and the type of promotional, marketing, advertising and sponsorship rights which will be included in the renewal/extension. The key to any extension/renewal is whether the Partner has a right to merely discuss extension/renewal or, instead, an absolute right to extend/ renew (or somewhere in between). Examples of different types of extension/renewal rights include:
- An absolute extension/renewal right.
- An extension/renewal right subject to mutual agreement.
- A fair market value extension/renewal right.
4. Incumbency Rights.
In addition to extension/renewal rights, the right to have some control over the post-term relationship is important to the Partner and takes different forms:
- Right of First Offer: There are two key varieties of a Right of First Offer. First, the Agreement could have a “soft” right, which provides that if the parties are unable to negotiate mutually acceptable terms, the Rights Holder is free to negotiate with third parties on any terms. Alternatively, the Agreement could have a “hard” right, which provides that the Rights Holder may not offer a third party more favorable terms than those offered to the Partner.
- Right of First Refusal/Right to Match: When compared to a “Right of First Offer,” the principal advantage of a Right of First Refusal/Right to Match (from the recipient’s perspective) is that it enables the party to make a decision based on the complete information derived from the other parties negotiations with a third party. The Rights Holder generally disfavors a Right of First Refusal/Right to Match because of the chilling effect it has on third parties to negotiate with the Rights Holders.
Exclusivity may be the most difficult issue to deal with because each party has very good reasons to want to either expand or limit this right. Typically, in a naming right transaction, the Partner is buying exclusivity more than anything else and any dilution, confusion or presence of competitors could reduce the value of the deal to the Partner. However, the Rights Holder has every interest in keeping open as many of the categories as possible because if the exclusivity precludes significant sponsorship opportunities it reduces overall Contractually Obligated Income and limits the number of potential partners/ sponsors. Adding to this complexity is the fact that both parties must deal with the possibility of changes/ expansions in the Partner’s business and the Partner’s interest in expanding the category and the Rights Holder’s interest in protecting future/existing deals / partners.
Even in a carefully constructed agreement with a well defined exclusivity, the Rights Holder will need to make sure that it has included exceptions which enable the Rights Holder to sell sponsorships to partners who would otherwise be precluded. This can be one of the most heavily negotiated items in the Naming Rights Agreement because the Rights Holders simply need to be able to take advantage of unique opportunities (Olympics, All-Star Games, Sponsored Teams, etc.) but, at the same time, the Partner needs to know its rights will be protected.
6. Ambush Marketing.
Ambush marketing is a way for a non-sponsor to affiliate with the goodwill of an event and create ambiguity as to who is the official sponsor. This issue is hard to contract away. Typically, the most a sponsor gets is some level of effort to prevent it from occurring, but it is always a lingering concern.
7. Professional Leagues.
If the sponsorship element of a naming rights deal involves a professional sports team, the professional league typically has the right to control the use of the team name/logos, etc. and in fact could even be the owner of such rights. It is sometimes difficult to get the Partner to understand this dynamic particularly when the Partner is paying a significant fee for some of these rights. But the league nevertheless will have the right to exercise significant control.
8. Sponsorship Defaults and Remedies.
Negotiation of defaults and remedies is sometimes a difficult process. A tension exists between the need for the Rights Holder to have the Partner bound for the term in order to facilitate financing, versus, the Partner’s interest in having the right to terminate if it does not get what it believes it is entitled to receive (or if fair market value fees go down).
Remedies usually fall within three main categories:
- Make Goods: This is the most prevalent remedy and is used to preclude/avoid more onerous remedies. It is a very popular remedy both in terms of legal drafting and reality because even if the Agreement does not provide for make-goods, the parties typically try to “work it out” anyway.
- Termination Rights: In many situations, this is often considered a “last resort” and is often heavily negotiated in the contract stage to prevent it from occurring except in extremely serious circumstances. The actual termination of the Agreement could have a catastrophic effect on the stadium/arena owner (and its financing partners) and is therefore a hotly contested item.
- Liquidated Damages / Activation Costs: If the Partner has the right to terminate and either receives a pro rata refund of sponsorship fees previously paid or a full refund of all sponsorship fees paid, this would often be the most the Partner would be able to receive.
9. Trademark Issues.
Trademark issues can be difficult issues to work through. The Rights Holder has a legitimate interest in having a broad right to use the Partner’s name in order to promote the Partner and doesn’t want to be bogged down in a complex notice and approval process. However, the Partner also has a legitimate interest in the name since it typically is a derivative of the Partner’s name. If the sponsorship involves a professional sports team, the league also has the absolute right to control the use of the team name/logos, etc.
Although both sides readily understand the need for flexibility in the event of a sale or merger of either side, it still becomes difficult for both sides to negotiate a satisfactory result. Issues such as mergers or acquisitions with a competitor, change of control, restructuring and maintenance of a minimum net worth level are always a part of the discussion.
These are just some of the issue which a Rights Holder or Partner will likely face in connection with a naming rights transaction. However each deal is unique and concepts such as leverage and market conditions will dictate the process much more than general concepts.