April 7, 2020
On March 11, 2020, the massive and worldwide business of professional sports began to shut down because of the COVID-19 pandemic. First it was the National Basketball Association shutting down “until further notice.” The next day it was the Professional Golf Association Tour and Formula 1, and by months-end, March Madness, Major League Baseball, the Premier League, Champions League, the 2020 Tokyo Olympic Games, the National Hockey League, and every other prominent sporting event was suspended, postponed, or canceled. That has sent ripples through the entire inter-connected business of sport:
With all this upheaval across a multi-billion dollar industry that is not just a business but a passion for many, it is not all doom and gloom. Just as companies, leagues, teams, and event organizers must consider potential obligations and liabilities, there are also opportunities. All stakeholders may wish to renegotiate or modify existing deals, as additional opportunities and risks unfold. It might also be the right time to adjust to a changing landscape and prepare for the possibility that the demand for sports may diminish, or that pent up demand brings additional sponsorship opportunities on the horizon.
So stakeholders need to consider the short-, medium-, and long-term impacts of this abrupt shutdown of professional sports and worldwide health crisis. In the short-term, stakeholders should be focused on an analysis of their rights and liabilities and any opportunity to restructure unfavorable deal terms. It also requires monitoring of the changing landscape and patchwork of federal, state, and local regulations to respond to COVID-19 (e.g., bans on gatherings). In the medium- and long-term, stakeholders should evaluate their goals and strategies, with attention to the economic climate since spending on sports is discretionary, and the industry may be vulnerable in a prolonged stoppage and worldwide recession or depression. Further, stakeholders need to identify new contractual protections for future non-traditional events that may result in the cancellation of events.
The analysis for all stakeholders will often start, and sometimes end, with the contract. Whether it is the relationship between the network and the league, the cable/satellite providers and the networks, advertisers and the networks, the sponsors and the league or teams, or the players associations and the league, the fundamentals of the original deals have likely changed or merit change. Now is the time to identify and clear possible contractual roadblocks by considering the common contractual terms and issues below.
For example, sponsors of sporting events, leagues, and teams will want to examine common provisions that permit the sponsor or media company to reduce the fees it pays, require the parties to renegotiate key terms like price, or that permit the parties to terminate the agreement:
The express language of the contract provision will govern. Review your force majeure clause to determine (1) whether the COVID-19 pandemic may trigger the clause; (2) what the force majeure clause excuses; (3) what the contract requires when giving notice; and (4) whether the contract requires a specific form of notice. A more detailed discussion of force majeure provisions and a helpful flowchart are available at https://www.gibsondunn.com/force-majeure-clauses-a-4-step-checklist-and-flowchart/.
While the contract terms are critical, even if the contract does not address this current situation, there are equitable common law defenses to any breach of contract action that will need to be analyzed. The most common equitable defenses are frustration of purpose and impossibility (a.k.a., impracticability). Both require an unforeseen event that affects performance of the contract. But frustration of purpose is available when that event makes one party’s performance virtually worthless to the other while impossibility generally requires performance to be objectively impossible.
In addition, stakeholders should conduct a comprehensive analysis to determine whether an efficient breach exists. For instance, to the extent the contract contains provisions on the available damages, the cost of performance may be more than the worst case exposure if there were a breach. It is important, however, that this analysis take into account both economic and non-economic factors, such as loss of goodwill or damage to a stakeholder’s brand.
In sum, the current situation likely requires consideration of a stakeholder’s current contractual obligations. Stakeholders should then leverage that knowledge to consider whether to terminate contracts, ask for relief, renegotiate certain terms, enforce rights, or proceed as business as usual. Now may be the time to engage in formal or informal discussions with contractual counterparties regarding their plans or to send a reservation of rights letter along with sponsorship payments.
In addition to examining existing contractual obligations, many will need to negotiate and draft new contracts and address emerging issues against the backdrop of great uncertainty ahead. For instance, those stakeholders planning marketing and promotional events in connection with NBA playoffs will need to enter into new contracts with vendors and others associated with the playoffs. But it is not clear when the playoffs may occur, if at all.
It is important to consider how the current fluid and dynamic situation, including further government orders and policies, can be addressed in contracts drafted today. For example, parties may wish to address discretionary, rather than mandatory, cancellations or delays as well. Likewise, when events are rescheduled or employees are hard at work addressing new challenges, parties will want to consider the allocation of risks for workers, contractors, and guests who may be exposed to the virus.
Throughout all of this, you will also want to keep in mind that when times are tumultuous, email communication may be rapid-fire, and usual precautions for internal communications can slip. Remember that communications may be discoverable in future litigation and remind your employees of policies regarding confidentiality and privacy.
The COVID-19 crisis is already affecting the financial solvency of global businesses in unprecedented ways. Even if bankruptcy is not anticipated, it is critical that companies understand the triggers and thresholds for financial stress for their own businesses and also for material contract counterparties. Early forecasting and flexibility, as well as understanding how your contractual rights in sponsorship and other contracts may be impacted in bankruptcy, can allow companies to react in this fast-changing economic environment. Here are some steps you can take now:
Gibson Dunn’s restructuring professionals have a wealth of experience navigating complex restructuring scenarios, and can assist in developing a value-maximizing game-plan.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors in Gibson Dunn’s Sports Law Practice.
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.