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Stricter endorsement contracts protect against celebrity snafus

Endorsements by high profile athletes are the bread and butter for many companies. Unfortunately though, celebrities are constantly under the watchful eye of the paparazzi and fans. If they do something that draws negative attention to themselves, undesirable consequences can arise for not only the celebrity but also their sponsor. If that occurs, the celebrity can lose their endorsement contract and the income that goes along with it, and the sponsors can lose millions of dollars.

If a celebrity endorsement goes wrong, there are a couple options that companies may consider. First, they can opt to distance themselves from the athlete by finding a way to cancel the contract or second, “ride out the storm” and hope that the public soon forgets any transgressions.

The latter option is the route Nike took with Tiger Woods after his 2009 infidelity scandal. Actually, last July Nike even offered a contract extension to the golfer.

However, not all companies are willing to gamble against negative media attention, as seen with AT&T, General Motors, and Gatorade. They decided to not take a chance after Woods’ scandal and cancelled their endorsements with him. In fact, researchers from the University of California at Davis estimate that Woods’ scandal cost sponsors’ shareholders somewhere between $5 and $12 billion.

Woods isn’t alone with his brush with notoriety. Because of this growing trend, many companies are inserting morality clauses in their contracts with athletes and other celebrities. The clause permits the sponsor to cancel their agreement with the celebrity if he or she does something to draw negative attention to the brand.

In addition to stricter contracts, another form of protection that companies are using involves insurance policies. According to some sports insurance attorneys, not having such coverage can lead to “a big loss on your books,” particularly when businesses consider the millions of dollars invested into ad campaigns driven by celebrity endorsements.

Source: Financial Times, “A sporting chance of shedding celebrity endorsement problems,” Jason Abbruzzese, Aug. 23, 2013