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.
Nike's offer stated that it would be able to distribute Liverpool's merchandise "in no less than 6000 stores worldwide, 500 of which will be Nike owned or controlled, with the potential for sale of Licensed Product in as many as 1300 stores worldwide". Liverpool did not believe that New Balance could match that scale of distribution and argued it was acting in bad faith when it said it could.
In addition, Nike's offer stated that it would be able to "market LFC and/or Licensed Products through marketing initiatives featuring not less than three (3) non-football global superstars and influencers of the calibre of Lebron James, Serena Williams, Drake, etc." However, New Balance omitted the final ten words in its offer, which Liverpool argued indicated that New Balance had not agreed to match the level of promotion promised by Nike.
New Balance and Liverpool's agreement did not include a general obligation to act in good faith. However, the parties appear to have accepted that this sponsorship arrangement is a relational contract and therefore one in which English law now implies a good faith obligation. However, they disagreed over what this meant in practice.
The Court heard how, before responding to Liverpool, New Balance had conducted a due diligence exercise across its global store portfolio to establish whether it could distribute Club-related products to 6,000 stores worldwide.
Liverpool argued that the due diligence process was error-strewn and dismissed New Balance's matching claim as "a myth", and that it had "grossly overstated" the number of stores to which it could distribute. Liverpool argued that New Balance had breached the good faith duty because it had no reasonable grounds to believe it could meet Nike's offer or was reckless about whether it could.
Mr Justice Teare ruled in favour of New Balance on this point, stating that "New Balance matched the distribution obligation in the Nike offer in good faith." The Court held that New Balance had not been dishonest or acted in bad faith, nor had they acted in a way that reasonable and honest people would believe to be commercially unacceptable. Whilst the Court stated that whether New Balance would actually be able to match the offer in practice was "another matter", this was of no consequence as the Court determined that New Balance honestly believed it could match the offer. This is an interesting clarification as to how the implied duty of good faith will operate in practice.
New Balance offered to "market LFC and/or Licensed Products through marketing initiatives featuring not less than three (3) non-football global superstars and influencers" but omitted the words "of the calibre of LeBron James, Serena Williams, Drake etc."
Because of this omission, New Balance lost the case. The Court determined that without these words, New Balance's offer was less favourable than Nike's.
The Court decided that the value of LeBron James, Serena Williams, Drake is measurable through, for example, their social media following.
This makes sense, however the actual obligation in Nike's offer is almost meaningless. It had none of the specific details of number and type of initiatives that lawyers always tell their clients they need to include because otherwise they simply do not have easily enforceable obligations. It could be that was because this was 'only' an offer and not a final executable agreement. It is therefore possible to see that, as formulated, this part of the offer might not have qualified as being material.
The marketing initiatives provision contrasts sharply with the distribution terms mentioned above. These set out specific store numbers in which Liverpool products had to be distributed and was therefore clearly material and matchable. It would seem that New Balance's ill-fated decision to omit the wording that sign-posted the calibre of the global superstars invited the judge to find that the omitted term was material, measurable and not matched.
The courts are not usually ahead of the curve. Whilst we can measure the huge popularity, exposure and share of voice value of these superstars which dwarfs Liverpool's social media numbers, that alone does not prove that content connecting Nike superstars LeBron James, Serena Williams, Drake to Liverpool – which based on the wording of the offer could have been interpreted as a few images being posted on Instagram - will have a material impact on Liverpool's popularity in the US or elsewhere and drive sales of products.
This type of collaborative indirect marketing initiative has not historically been at the epicentre of football kit sponsorship deals and, as mentioned, the one set out in Nike's offer certainly lacked the detail to put it there, even if that was the intention. As an aside, it would not have been in New Balance or Liverpool's minds when they entered their agreement in 2011 to think about what might be the material terms in 2019.
It seems as though Liverpool is trying to move the needle commercially as it continues to play catch up with Manchester United. Maybe they believe that Nike's global influencers will make the difference. It is a far from certain outcome and, as mentioned, Nike's offer did not include enough detail to suggest that this was the crux of the deal. Rights owners would usually push for specific details and an idea of the number and value of proposed initiatives in a deal of this type. Therefore, one could conclude that the extent and impact of these initiatives as formulated in Nike's offer was uncertain which brings into question whether it was truly material and matchable.
Even if the initiatives had been articulated in a contractually enforceable manner with specific obligations, their effectiveness and materiality may still be questioned. These types of initiatives might usually be considered of lesser importance than the general marketing capabilities, plans and spending commitments of a sponsor. Although perhaps the significance of marketing initiatives with global icons is particular to a focus by Liverpool on driving its international positioning.
Given the uncertainty about the materiality of these global icons and the fact New Balance was still prepared to use global icons (but would not commit that its icons would be "of the calibre of LeBron James, Serena Williams and Drake"), this decision seems like a harsh one for New Balance, albeit one New Balance may have brought on itself with the way it articulated its willingness to match Nike's offer. The outcome might have been different if New Balance had simply written back to Liverpool offering to match Nike's offer. It is a shame that the Court of Appeal will not get the opportunity to revisit these issues as New Balance's attempts to appeal the decision failed.
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.