December 2, 2019

On 25 October 2019, the High Court handed down its judgment in the case of Liverpool Football Club and New Balance Athletics. Justice Teare concluded that New Balance, LFC’s kit supplier, failed to match the terms of Nike’s offer to LFC, meaning that Nike will be LFC’s new kit supplier for the 2020 league season. New Balance has confirmed that it will not appeal the decision.

LFC is a brand on the rise and has huge commercial pulling power. Nike were so keen that they had committed a rumoured $6m in textile spend for LFC’s kits before the case was even concluded.

At the crux of the case is the issue of “matching rights”, and the importance of getting these clauses right when entering a commercial partnership.

What are matching rights?

A matching right (sometimes called a right of pre-emption), is a benefit that sponsors or other commercial partners look for when entering into high value or important deals for sports events, teams or individuals. If this right is included in a deal, it usually means that the existing partner must be notified if an offer is received to take-over the rights and  that the partner has the right to renew on equivalent terms.

If the terms are successful matched, there are two possible outcomes depending how the agreement is drafted – either:

1. A new agreement is drawn up on the matched terms with the existing commercial partner; or
2. A new offer is put forward to take-over the rights which the commercial partner can try to match again.

Why are they important in this case?

As part of the original agreement made in 2011, New Balance was entitled to renew the agreement at its expiry if it matched the “material, measurable and matchable” terms (MMM terms) of any third-party offer.

On 11 July 2019, LFC notified New Balance that it had received an offer from Nike. The Nike offer was in fact a signed, legally binding contract subject to the acknowledgement that New Balance had the “opportunity to review and match all the material, measurable and matchable terms” of the contract and that the contract would “automatically terminate” if Nike received notification of a “Valid Match”. The Nike offer contained two key commitments that were the focus of the dispute:

• Distribution commitment: The commitment to sell LFC Licensed Products “in not less than 6,000 stores worldwide, of which 500 shall be Nike owned or controlled”.
• Marketing commitment: The commitment to market LFC:
  • “in a manner that is consistent with Nike’s other top tier UK football clubs, e.g. Tottenham, Chelsea (subject to similar performance)“; and
  • through marketing initiatives featuring “not less than three non-football global superstar athletes and influencers of the calibre of LeBron James, Serena Williams, Drake etc“.

New Balance notified LFC it wished to renew their agreement on by sending a signed offer largely replicating verbatim the MMM terms set out in the Nike offer. LFC rejected New Balance’s offer, arguing that it was not a genuine offer to match and because “New Balance cannot deliver on those warranties and terms”.

New Balance consequently issued court proceedings against LFC. The case focused on the following points:

• whether New Balance’s offer to match distribution had been made in good faith;
• whether the marketing commitment was an MMM term; and
• if it was an MMM term, whether New Balance had validly matched the marketing term.

 Was New Balance’s offer made in good faith?

Over the course of their relationship, LFC had raised complaints with New Balance in relation to its failure to achieve distribution commitments in their agreement – commitments that were way below the numbers in the Nike offer. Following a global due diligence report, New Balance concluded that it was indeed able to match Nike’s distribution commitment.

The meaning of good faith was also under dispute. LFC argued that New Balance would be in breach if it did not reasonably believe that it could perform the terms of its offer, whereas New Balance submitted that it would only be in breach if it did not intend to meet, or knew that it could not meet, the terms of the offer made.

New Balance’s offer would require the number of stores in which it sold LFC products to increase from 3063 to 6300 in a very short period of time. However, when it came to the meaning of “good faith” itself, Justice Teare held that if New Balance honestly believed that it could meet the distribution obligation, it would not be acting in breach of the duty of good faith, as its conduct would be innocent (albeit careless or unwise).

When reviewing the various errors in New Balance’s forecasted distribution capabilities, the Justice concluded that “an imprudent failure to carry out the exercise does not amount to a breach of the implied duty of good faith” and further noted that whether New Balance would actually succeed in meeting Nike’s Distribution Commitments was an entirely different matter as to whether the offer was made in good faith.

This is an interesting distinction based on the facts which, to many objective readers, seems to have been a speculative offer by New Balance.

Was Nike’s marketing commitment an MMM term?

New Balance largely replicated Nike’s offer verbatim, however, it omitted the words “of the calibre of Lebron James, Serena Williams, Drake, etc” from its own offer to match the marketing commitment.

New Balance claimed that the marketing commitment was not an MMM term as it was too vague to be capable of objective measurement, but that if it was an MMM term, New Balance had indeed matched it.

It was (surprisingly to both parties) on this point that the entire Case turned. Justice Teare found that:

• The marketing commitment was an MMM term as the “calibre of the named athletes or influencers can be measured“. Justice Teare used New Balance’s supporting documentation in which a value was assigned to LFC players based on “repeatable methodologies”, including social media exposure and promotional quality scores to evidence how the calibre of the named individuals can indeed be measured.
• Whilst there may be many forms of “marketing initiatives”, there was “no doubt as to the meaning of the phrase“ in this case.
• Although New Balance had offered to feature “not less than three non-football global superstar athletes and influencers”, it had failed to name any relevant individuals in its offer.
• Therefore, the Nike Offer had not been matched by New Balance.

Could this have been avoided? Getting matching clauses right.

The case further highlights how crucial it is to ensure that the terms of a matching right are drafted meticulously to avoid costly disputes.

An effective matching rights clause should detail:

• How the matching right operates.
  • In which circumstances does the matching right apply? Can it be exercised multiple times? What information must be provided? Does the matching right only last for a specified time period? Be specific! Vaguely defining when, how and for how long the right operates, raises the likelihood of disputes.
  • The commercial environment within which rights holders and their commercial partners operate is often incredibly time-sensitive or calendar-dependent – for example, ahead of a major tournament, event or sporting season – and so protracted negotiations or overly long time periods during which a matching right subsists can be prejudicial to all. It was against this backdrop that Justice Teare tried the case via an expedited process.
• The material terms; those terms that must be ‘matched’.
  • Consider whether this should be restricted to purely financial terms or also include other ‘material, measurable and matchable’ terms? If the latter, outline or provide guidance as to what is/is not to be considered an MMM term in the context of the contract.
  • Consider including a contractual mechanism for resolving disputes. Be clear on the steps to be taken, who has the power to make the final decision and the timeframes that apply to this process.
• Certainty of terms. 
  • It is generally the case that a contract’s terms must be sufficiently certain to be enforceable. This is especially important to bear in mind for matching terms where a commitment by the rights holder to conclude a contract with the relevant commercial partner is likely to be an “agreement to agree”.
  • Parties must ensure that the matching clause is:
    • complete, i.e. not lacking any essential terms. There is precedent that even the inclusion of “mutually acceptable terms and conditions” is not too uncertain to be acceptable legally.
    • not otherwise uncertain, for example, vague or ambiguous.
• Confidentiality.
  • There is a legal requirement that the contractual offer “must contain at least the salient terms proposed, including most importantly terms as to remuneration”  which raises obvious confidentiality issues.
  • Usually the rights holder will be required to give a confidentiality undertaking to the third party with whom it has been in discussions (usually an NDA), which can lead to the risk of breaching either that confidentiality obligation or the matching clause. Care should be taken include the ability for the rights holder to share the terms of the offer if required to do so under a matching rights clause in any NDA.
• Exclusion of liability.
  • Consider how exclusion of liability provisions apply to a breach of a matching right.
  • Often parties seek to limit their liability for loss of profit. If you are the grantee of a matching rights clause, care should be taken to ensure that the rights holder will be liable for any loss of profit suffered by the grantee as a result of the rights holder breaching the matching rights clause. A failure to do so may reduce the matching right to little more than a statement of intent.
• Which side are you on?
  • A commercial partner will want an unconditional matching right with an ability to match every offer and counter offer from a third party and will likely want the must-match terms to be purely financial and clearly quantifiable.
  • A rights holder may:
    • look to broaden the must-match terms so that a commercial partner must match the overall benefit and commercial value of an offer. If a rights holder reserves the right to look at the value of any offer as a whole – as in this case where LFC looked at the commercial and brand value of the wider marketing commitments that Nike offered – this will usually give a rights holder more wiggle-room and restrict a matching right’s ability to limit a rights holders’ actions.
    • seek to reserve a right to withdraw the commercial partner’s matching right if the commercial partner acts, or fails to act, in such a way. This could be for poor performance, failure to meet minimum revenues or other KPIs or for breach of the relevant contract. This would have been particularly useful for LFC in this case where New Balance had consistently failed to meet its distribution obligations set out in their agreement.
• Consequences.
  • What are the consequences of a third party offer being matched?
  • Outline when (including timeframes) and how the new commercial arrangement will be concluded.