Lessons from Lance – Recovering Sponsorship and Endorsement Monies

James Segan discusses the difficult issue of how sponsors can recover endorsement payments when the sponsored athlete confesses to inappropriate or unlawful behaviour.

In July 2005, the cyclist Lance Armstrong won the last of his seven consecutive Tour de France titles.  He retired, an American sporting hero, best-selling author, and multi-millionaire.

On August 24, 2012, the United States Anti-Doping Agency (“USADA”) imposed on Armstrong a sanction of lifetime ineligibility and disqualification of competitive results since August 1, 1998.  The sanction was imposed for a series of anti-doping violations which it found he had committed during “…a massive team doping scheme, more extensive than any previously revealed in professional sports history”.  USADA published a 200 page Reasoned Decision in October 2012, which was accepted by the world governing body of cycling, the UCI.

In January 2013, Armstrong confessed, in two television interviews with Oprah Winfrey, to having taken banned substances including EPO, testosterone, cortisone and human growth hormone to improve his cycling performance.  The precise terms of his confession can be found in a transcript of the interview which has been much analysed across the world.

The sponsorship monies issue

When asked by Oprah Winfrey what was “the most humbling moment” in the whole affair, Mr Armstrong’s answer began by referring to a day in late 2012 when all of his sponsors cancelled their contracts, adding later in the interview:

“I don’t like thinking about it but that was … a $75 million day.”

He was there referring to the value of future sponsorship which he had lost.  But what about past sponsorship deals and other payments already paid?  Much of Armstrong’s wealth will not have come from prize money or salaries but rather from endorsements and sponsorship deals.  There must now be a serious prospect of these deals being unwound, and substantial damages or repayments being sought.  This could arise in a number of different ways.

(i) Express contractual protection

First, express clauses.  Certain of Mr Armstrong’s sponsors, alive to the rumours which surrounded him, appear to have sought and obtained express contractual protection in the form of warranties that Mr Armstrong was not a drug cheat.  The USADA report quotes testimony by Mr Armstrong’s longstanding agent, Bill Stapleton, as to a meeting with Coca-Cola in 2001 at which (pp79-80):

“…the senior guy at Coke asked me: I need you to look me in the eye; I need you to tell me that I don’t have anything to worry about here, and I need you to give me what I need in terms of your word. And I said, I’ll do better than that. I’ll give you a contractual provision that gives you a total and complete out, and I’ll offer to refund the money you’ve paid us if this investigation ever turns anything up in terms of a positive test or if it ever happens in any other setting.”

If it is true that Mr Armstrong was offering “…a contractual provision that gives you a total and complete out” to his sponsors as early as 2001, then past sponsors will presumably now be considering invoking these clauses.

(ii) Implied term/representation arguments

The second way in which an attempt could be made to claw back monies is by way of implied term or implied representation arguments.  It may well be possible, under whichever body of law governs the relevant sponsorship contracts, for sponsors to argue that it was an implied term thereof, or at the very least that there was an implied representation, that Mr Armstrong was not a drug cheat.

This would raise an interesting and important question – where an athlete enters an endorsement deal without giving any express warranty, is there an implied term that he is a clean athlete?  The answer to that question is not settled, in English law at least.  On one view, if the officious bystander were asked whether by putting himself forward for millions of pounds of sponsorship an athlete is impliedly promising he is not a cheat, the bystander might well say “yes, of course”.  On a more considered analysis, however, the answer under English law is that there probably is no such implied term, for essentially three reasons:

1. If a sponsor wants that kind of protection then it can well provide for it expressly.  It is a regrettable fact that certain      sports are notorious for doping, or certainly were at various points in the past.  No-one sponsoring cycling or cyclists in the 1990s and 2000s can sensibly claim to have been ignorant of the rumours.  If they chose not to insist on an express clause then arguably the Court should not help them after the event.
2. An implied term or representation that the athlete is not a cheat cannot actually be said to be necessary to give the contract business efficacy.  A sponsorship contract works perfectly well with an athlete who is doping, as Armstrong in fact himself proved.  It is the discovery of the doping which causes the problem.  And a company can hardly contend for an implied term requiring the athlete to evade discovery - that would be extraordinary.
3. It is, further, almost impossible to frame any such duty in a manner consistent with legal certainty and practical justice.  How far does the implied duty actually go?  Was John Terry under an implied contractual duty to his sponsors not to say that which he has been found by the FA Panel to have said?  What if an athlete was doping but with no significant fault or negligence?  There is a strong argument that any implied duty is so difficult to formulate that it should not be implied at all.

(iii) The False Claims Act

A third way in which sponsorship monies may be clawed back is the US False Claims Act.  This Act entitles the US Government to recover against any person who knowingly submits a false claim through a government agency, contractor or grantee.

The key sponsor of Mr Armstrong’s team for many years was, of course, the United States Postal Service (“USPS”).  The US False Claims Act allows any private citizen with knowledge not possessed by others to bring an “ex relator qui tam” claim (effectively on behalf of the US Government).  Mr Armstrong’s former teammate Floyd Landis has brought such a claim against him, and the US Department of Justice has now chosen to intervene in the claim.  If successful, this claim could result in Mr Armstrong being required personally to make good amounts lost or wasted by the USPS in its sponsorship of the team.