About to ink that lucrative sponsorship contract with a giant beverage maker? Or maybe you work for a sneaker brand and are negotiating an endorsement deal with a promising electronic sports team to help market those sneakers.
Sponsors of esports teams and tournaments used to only be esports equipment makers like Logitech or Razer but mainstream brands such as Visa, Gillette, Red Bull, Mcdonald’s, Audi, Coca-Cola and Intel are now entering into product placement deals with esports teams, event owners and players. Amidst the gold rush, sponsors, teams and players should not rush into sponsorship deals without first understanding the key terms of the sponsorship agreement.
Why care about the terms of sponsorship contracts?
Teams, event owners and players that want to give away valuable intellectual property rights, get sued, and be locked into horribly one-sided contracts, and sponsors that do not want maximum value-ROI from a sponsorship or endorsement deal and do not care if your brand or reputation is destroyed, stop reading here. For everyone else, here are the 5 most important things to watch out for in an esports sponsorship agreement.
This should not be the first or most important aspect of a sponsorship deal, but we can talk all day about how strategic considerations are more important, but at the end of the day, money’s money!
Start by focusing on the “who”, “how much”, “how is it paid” and “when” elements of a payment clause: Who is paying and how creditworthy is it, how much is paid, and when is it payable.
Payment may be in cash or “in-kind” payments. For cash, this may be an initial amount, followed by periodic amounts; teams and players will want as much paid upfront as possible while commercial partners will want clear milestones to be achieved to unlock payments. Savvy negotiators may negotiate for bonuses to be paid if the player or team meets performance milestones, such as winning or placing well in major tournaments.
Where a royalty or other fee is payable based on revenue or profit, care should be taken in reviewing the revenue or profit-share provisions as there is no fixed legal definition of “revenue” or “profit” and you will want this as widely or narrowly defined depending on whether you are paying or receiving.
For sponsorships where goods or services of the sponsor are provided, such as equipment (e.g. computers, keyboards, mice), appropriate income and GST tax advice should be taken.
What are the sponsor’s rights, and the team’s or players’ obligations?
This is the contract provision that parties to a sponsorship contract often spend the most time negotiating, after the financial terms. Sponsors will expect the team and players to do certain things to help endorse their brand, products or services, in exchange for their payments.
For example, a sponsor may expect the team to wear jerseys that prominently display the sponsor’s logo, or that the players have to appear at a certain number of events of a certain viewership size, or even to require the players to behave in a certain way, such as having to ensure that they are not seen using or consuming the sponsor’s competitors’ products, or not criticizing the sponsor’s products publicly, and to refrain from immoral behavior.
Team managers will want to ensure that your employment contracts with the players are water-tight so that you can take preventive or remedial action against players ensure compliance with your sponsorship obligations.
What intellectual property rights are there, and how to protect them?
Esports sponsorship contracts are similar to traditional sports sponsorships in that intellectual property rights play a big role in them. Does your team own the intellectual property in the team logo and a player’s likeness? Have you secured trade marks for the team logo in the applicable territories and are you sure that the freelance designer you paid for that logo assigned the intellectual property in the design to your team?
Did your players assign to the team their personality rights under their employment agreements (did you even get them to sign an employment agreement), so that the team can confidently agree to let sponsors use these personality rights for product endorsements?
As so much of the team’s and the sponsor’s respective reputations are wrapped up in their respective brands, it is essential that the agreement includes provisions preventing the other party from engaging in activities that may diminish your brand values and control the exact way your intellectual property can be used.
As a sponsor, you will have to provide permission to the team and players to use your house and product trade marks and other intellectual property rights. To protect your brand, you will want to control the way your trade marks are applied to manage intellectual property ownership and reputational risks.
Likewise, teams should have the right to demand the prompt withdrawal of any of the sponsor’s materials featuring the team’s logo and marks which do not comply with the terms of the sponsorship agreement or the team’s brand guidelines.
What sort of exclusivity is attached to the sponsorship, if any?
It is important to stipulate exactly what level of exclusivity is attached to the sponsorship relationship. The sponsor’s rights under the agreement will be linked to a “brand sector”, i.e. the field of activity that encompasses its goods and services. For example, if the sponsor is in the beverage industry, they will require the team or player to not enter into sponsorship deals other beverage manufacturers, while allowing sponsorships from outside that industry.
As such, the “brand sector” of the sponsor should be clearly defined in the agreement, and while a team owner or player will want to define the brand sector as narrowly as possible (to exploit as wide a range of brand sectors as possible), a sponsor will obviously want this extended as widely as possible.
Duration, Renewal and Termination
The duration, renewal and termination provisions of esports sponsorship agreements are often overlooked by parties too busy fussing over payment terms. The duration of sponsorship agreements is important, emerging teams or players may not wish to be locked in for too long on contracts that were entered into when the team or player was at a more nascent stage and had less bargaining power, and should therefore look carefully at the renewal and termination clauses, while sponsors will want to make sure that they are rewarded for taking a risk on a relatively unknown team or player and not cast off for bigger sponsors later.
Renewal rights or options, if carefully drafted, especially on the conditions for renewal, allow for a mutually beneficial arrangement whereby if another sponsor offers more money or other benefits, the current sponsor can choose to match the competing offer and keep the contract. This way, the sponsor gets to evaluate if the team, event or player is worth its expense, while the team manager or player or event owner gets the chance to improve its terms as its stature grows.
How I.R.B. Can Help
The esports law specialists at I.R.B. Law LLP are experienced in advising on esports law matters, including advising on an preparing player contracts, sponsorship contracts, fund-raising contracts and other esports legal matters. And we really want to see the esports scene flourish!
Whether you are a sponsor, esports team founder, manager or owner, or an agent or representative of a player, please reach out to our esports lawyer, Bernard Chung, at [email protected] to see how we can help.