‘Morality clauses’ in contracts enable companies to drop Woods, others; started with Hollywood

‘Bad boy’ clauses can sink Woods, other endorsers

As Tiger Woods’ personal life continues to get heavy public scrutiny, “morality clauses” presumed to be in his multimillion-dollar marketing contracts are now the topic of discussion too.

The clauses allow sponsors to pull the plug on endorsement deals in the event of poor personal conduct. Depending on their wording, they may allow corporations to cut ties with the golfer without having to pay a break-up fee.

Typically included in major sponsorship pacts, morality clauses go by many names: behavioral, good conduct, moral turpitude, personal conduct and public image clauses — even “bad boy” clauses. Companies’ decisions on whether to invoke them start with the contract wording and the immediate cost of firing the celebrity.

“It’s a hard call because sponsors ideally want to be associated with the No. 1 golfer,” says David Ervin, who drafts endorsement agreements for companies as a partner in the Washington, D.C. office of law firm Kelley Drye & Warren.

Here are some questions and answers about morality clauses.

Q: What are morality clauses and what do they stipulate?

A: They are provisions in contracts that prohibit certain behavior in a person’s private life. They’re included in the contracts of many public figures such as athletes, actors and other celebrities and increasingly for top business executives as well — anyone whose misbehavior could easily tarnish a company’s image.

Sometimes the behavior is spelled out, such as being charged with a crime. But most clauses are written generally because they couldn’t possibly foresee every potential offense, according to Marc Edelman, who teaches contract and sports law at Barry University in Orlando, Fla. For example, who would have thought to ban running a dogfighting ring in the case of NFL quarterback Michael Vick?

Wording from one typical contract requires that the person “refrain from conduct which would bring him into public hatred, contempt, scorn or ridicule, or shock, insult or offend the community, or offend public morals or decency.”

Q: Where did the clauses originate?

A: They date to the early days of Hollywood when stars’ wild parties and drug use resulted in bad publicity. Universal Film Co. started inserting them in contracts in 1921 after actor Fatty Arbuckle was arrested on suspicion of manslaughter in a starlet’s death. Arbuckle was ultimately acquitted but the clauses became standard.

Film studios used them as an excuse in the 1950s to fire suspected communists, according to Fernando Pinguelo, a partner at New York law firm Norris McLaughlin & Marcus who writes morality clauses for athletes and musicians. The clauses then proliferated in contracts for sports figures and others in the ’70s with the growth of big-dollar marketing deals.

Q: Has Woods specifically violated his endorsement contracts through the infidelities he has now admitted?

A: For contacts of this size they’re standard, though his sponsors have not disclosed the contract language or even acknowledged that they contain morality clauses. Consulting firm Accenture, the first major sponsor to end its association with Woods, declined to comment beyond saying it had determined he was no longer the right representative for its advertising.

But the issue of whether or how much a company has to pay Woods when it walks away is not at all clear.

“Usually a morals clause is an on-off switch” to any financial arrangement, says Jonathan Segal, a partner with Duane Morris, a law firm based in Philadelphia. “But a party with strong bargaining power might have a walk-away payment negotiated into the contract.”

Q: So how are companies evaluating their relationships with Woods?

A: Woods’ sponsors are no doubt ordering research to quantify the effect of all the bad publicity, says Rick Burton, former chief marketing officer of the United States Olympic Committee and now a sports marketing professor at Syracuse University. They want to see how their consumers perceive their brand, how they perceive Woods, and whether the public’s perception of Woods is dragging down the brand.

Woods has long been seen as a winner, but now it’s likely people will think of his infidelity when they hear his name, Burton says, and that will give reason for companies to cut ties.

Q: What other stars have been dropped by companies because of a morality clause?

A: Vick, who served 18 months in prison on his 2007 dogfighting conviction, lost millions in sponsorship deals with Nike Inc. and others. Kellogg Co. dumped Michael Phelps almost immediately after publication of a photo showing the swimming great using a marijuana pipe last February.

The situation isn’t always so clear-cut.

Sporting goods company Fila U.S.A. severed the endorsement contract of NBA star Chris Webber in 1998 after he was charged with a variety of offenses, including assaulting a police officer, resisting arrest and possession of marijuana. But he ultimately was found guilty in an administrative hearing of willfully disobeying a police officer and two minor traffic violations, not criminally convicted. An arbitration panel determined that Fila had wrongfully terminated the contract and ordered it to pay Webber $2.61 million.

Q: Isn’t there something else companies can do to protect their image from a star’s missteps?

A: Companies recognize the need to protect their advertising investments behind their endorsers. But not all take steps to do so.

A 2008 study found that 30 percent of advertisers in Britain always recommend companies take out policies for “death and disgrace insurance” for stars. These policies, also available in the United States, can cover everything from the cost of an advertisement’s production to air time and they make it easier for companies to get out of contracts, says Tonya Drollinger, an associate professor of marketing at the University of Lethbridge in Alberta, Canada, who co-authored the study.

“I think a lot of advertisers and people in creative are just thinking, ‘Wow, how can this celebrity really launch our brand?” she says. “They’re not necessarily always thinking ‘Uh oh, what if something goes wrong?”