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Nike x Liverpool FC: How a curious Court decision paved the way for the new deal

Posted on 10 January 2020

Background

Liverpool FC and Nike have just confirmed that Nike will be Liverpool's kit sponsors from the start of next season. However, this has been public knowledge since Liverpool maintained their unbeaten Premier League form by defeating its current kit sponsor - New Balance Athletics whose deal with Liverpool ends at the end of this season - in a High Court battle. The Court concluded that New Balance had failed to match the kit sponsorship offer that Liverpool had received from Nike, and could therefore not force Liverpool to enter into a new sponsorship agreement with New Balance instead of Nike.   

To protect an incumbent sponsor's investment during its last year, sponsorship agreements usually include a provision delaying the announcement of a replacement sponsor. This may explain why the Liverpool x Nike deal has only now been officially announced - a few months after the court decision.  However, there is a lot of football left to be played this season, so the timing is still a little surprising. 

The Court's interpretation of the material and matchable terms of Nike's sponsorship offer is somewhat debateable, and certainly highlights the challenges of formulating and exercising effective and reliable matching rights provisions. Equally, New Balance did not help itself by the way it formulated its matching confirmation. 

Champions League winners

As Champions League winners riding high at the top of the Premier League, Liverpool currently represents one of the hottest sponsorship opportunities in global football, a vastly different proposition to when it signed with New Balance in 2011. At this point Liverpool had just finished sixth in the Premier League and exited both the FA and League Cups in the third round, so despite its history and global fan-base, would not have been in a position to attract the best offers from the likes of Adidas or Nike who increasingly focus big spending on the very top teams.  

New Balance had been able to include a first right of negotiation as well as a matching right in its sponsorship agreement with Liverpool. Ironically, these protections were designed to give New Balance the ability to stop a competitor taking over on expiry if, by then, Liverpool was a more attractive proposition. 

The matching right entitled New Balance to match the terms of a third party offer "on terms no less favourable to the Club than (i) the terms of this Agreement and/or (ii) the material, measurable and matchable terms of such third-party offer". This meant that once Liverpool had received an offer capable of acceptance from Nike, it was obliged to offer New Balance the right to match that offer and, if New Balance made an offer that was no less favourable, Liverpool would have to enter into the sponsorship agreement with New Balance and not Nike.

Liverpool and New Balance had failed to agree a deal during New Balance's exclusive negotiation window, so Liverpool was free to negotiate with other suitors. In July 2019 Liverpool completed negotiations for a new sponsorship deal with Nike, and in accordance with the matching provisions before signing it, provided details of the offer to New Balance.  

New Balance analysed Nike's offer and rather than simply responding to confirm it could match Nike's offer, it sent a detailed confirmation repeating almost everything in Nike's contract offer.

Liverpool did not agree that New Balance had matched Nike's offer. Given the imminent deadlines for getting merchandise ready for the following season, this quickly led to an expedited fixture in the English High Court focussing on whether New Balance had matched Nike's promised distribution and marketing initiatives. 

Considerations for rights holders

Matching rights usually do not make good sense for a rights holder. In theory, they provide a mechanism for testing the market and potentially bumping up the renewal deal with an incumbent that the rights holder has no real intention of removing. In practice, the rights holder may spend time and resources negotiating with a potential sponsor that has no intention of engaging fully, knowing that the incumbent can match whatever offer they make. The existence of a matching right can depress the quality and type of competing offers that a rights holder may receive. 

The exercise of matching rights can often push timescales to the limit. In this case, Liverpool and New Balance needed a trial on a tight timescale and an appeal would potentially have meant missing the deadlines for producing next season's kit. 

As Liverpool and New Balance discovered, the drafting and interpretation of matching rights can be fraught with challenges. Determining what might be material in the future is never easy, but Liverpool and New Balance's reference to "material" terms left the door open for disagreement as to what is or is not material.  

To try to avoid uncertainty, specific measurable criteria that must be matched may be identified, for example: the number of stores and countries, the minimum guarantee payments, marketing spend and specific marketing activities. However, that is not as easy as it seems. In 2011, it is unlikely that either Liverpool or New Balance would have foreseen the marketing provision that was New Balance's undoing. It is never possible to predict what terms someone else will offer and which ones should be material. This explains why so many rights holders loathe to agree to include a matching right.

Reported disputes on renewal rights are rare but not uncommon. FIFA and MasterCard had a well-documented battle when FIFA contracted with Visa following the 2006 FIFA World Cup, before offering the terms to MasterCard, as they were obliged to do (the dispute subsequently settled and FIFA and Visa entered into a contract). In addition, in 2018 Rangers Football Club was subject to an injunction after it failed to comply with the matching right clause in its contract with SDI Retail.

Considerations for sponsors

Matching rights are clearly more favourable to sponsors as they provide them with the certainty that any future commercial negotiations with competitors will eventually need to be relayed to them.

However, in order to ensure that sponsors reap the benefits of matching rights, the drafting of such a right is crucial. Considerations must be given to the extent to which a sponsor needs to match the offer (in whole or just in part) and how terms can be compared and measured. In the case of the Liverpool contract, the un-matchable terms related to the power of Nike's influencers, but how do you compare like for like with regard to the calibre of non-footballing influencers in the context of a football kit sponsorship deal? The number of social media followers certainly seems too basic. It is clear from the Liverpool case that the smallest of details can lead to an unmatchable offer.

Sponsors always seek to manage and delay any announcement of a replacement sponsor so that it does not undermine their sales in the final year of a contract. Coming so early in the season and being so well publicised, this dispute was presumably a nightmare for New Balance as the publicity surrounding the fact that New Balance and Liverpool were parting ways has likely depressed this season's sales of New Balance's Liverpool related products. Perhaps the saving grace for New Balance has been Liverpool's success on the pitch which may leave fans desperate to show their affiliation regardless.

Sponsors would be wise to learn from New Balance's fate and ensure that their agreements require any disputes regarding renewal, negotiation rights and matching rights be dealt with by arbitration.  This can ensure they are dealt with confidentially, staying out of the public eye and protecting their activities and sales in the final year of a deal.

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