Athletes Behaving Badly and Endorsement Insurance

Celebrity endorsements are a high-risk, high-reward venture. A successful spokesman can turn an unknown product into a best seller (think the George Foreman Grill), while a spokesperson mired in scandal can destroy billions in shareholder wealth.

After the Tiger Woods scandal, advertisers have increasingly inquired about insurance for their ad campaigns in case their athletic spokesperson comes under media fire (NYT). But agreeing on what constitutes bad behavior is easier said than done.

In theory, if athletes could guarantee advertisers that they won't do harm to the underlying brands by making bad decisions, they would be rewarded with more lucrative deals. In the real world, advertisers have to factor in how the athlete's image may deteriorate, making the advertisements ineffective or even harmful in promoting their brands. Given the risk, the expected value of an endorsement is lower.

But how should a contract be worded to ensure that an athlete remains on good behavior? Who gets to decide whether the athlete's actions constitute a breach? Logically, the two sides have polarized visions:

Athletes usually prefer that a morals clause gives the company the right to terminate their agreement only when the player is convicted of a felony involving “moral turpitude” or worse, because a conviction could take years and the risk of conviction is relatively low.

Companies, by contrast, want the broadest rights possible to cover “any occurrence” that involves “moral turpitude, or makes any statement or commits any act disparaging of, or reflecting unfavorably upon, the company’s reputation or the company’s products and services,” according to one type of morals clause.

Had Michael Vick been under the former arrangement, he could not have been dropped by advertisers until his dogfighting conviction, which came several months after the news was first released. Had Michael Jordan been under the latter arrangement, he could have been dropped for various controversies over the years (divorce, gambling, Hall of Fame speech), even though he remains one of the world's most marketable people.