The risks and rewards of sports endorsement deals

Michael Jordan and Nike

As a general rule, sports fans want to wear the shoes that their heroes wear, and truly great athletes can eventually transcend their sport to bring untold riches for both them and product manufacturers. The phenomenal potential value of products endorsed by sports stars is most clearly demonstrated by the deal between Michael Jordan and Nike.

In 1984, the then-basketball rookie Jordan signed up to an unprecedented endorsement deal with Nike, at the time when the company still lagged well behind Adidas and Converse in the basketball market. But the five-year endorsement deal, worth $2.5 million for Jordan, created waves that would transcend generations of footwear fans the world over.

In the first year of the deal, Nike made more than $100,000 in sales of the new ‘Air Jordan’ trainer. Now the Jordan brand is a multi-billion-dollar business with a wholesale revenue in the year ending May 2019 of $3.1 billion, taking Nike from having a 17% share of the basketball market in 1984 to 86% of the basketball performance shoe market, and 96% of the lifestyle basketball market.

The Nike-Jordan partnership, portrayed on screen in the recent film Air, changed the way that brands worked with individual athletes on a marketing level, and transformed the way that athletes were remunerated for their image rights – allowing athletes around the world to capitalise on their likeness for decades to come. As part of the deal, Jordan received a percentage cut of all shoes sold under the brand. Jordan, having had an incredibly successful career as an NBA star, and been endorsed by brands, was able to build up a net worth of $2.1 billion.

Yeezy and Adidas

The long-running success of the Jordan story stands in stark contrast to another enormous sports-shoe partnership deal: the Yeezy collaboration between Ye and Adidas. In 2015, Ye, formerly known as Kanye West, paired up with Adidas to produce a line of lifestyle trainers. The ensuing Yeezy brand was, initially, a huge success, bringing in around €1.2 billion in annual revenue for Adidas, and €500 million in operating profit.

However, in October 2022, following a series of highly controversial public outbursts made by Ye – including antisemitic comments – Adidas decided to end the partnership. Some reports suggested that the termination of the relationship with Ye led the company to its first annual loss in three decades.

In addition, Adidas now finds itself left with around €1.2 billion-worth of unsold Yeezy trainers. The company has recently suggested that, rather than burn the unsold stock, it could sell the shoes and donate part of the revenue to charity. Ye, however, is likely to benefit from the sale of the shoes in any case, due to the royalty provisions of his contract with Adidas.

Royalty and termination contract provisions

Brand owners need to think carefully about how the royalty and termination provisions work under the contract governing any sports or other endorsement deal.

In particular, they need to consider what happens in the event that the celebrity endorser causes, or might cause, damage to their goodwill or reputation. The Yeezy deal is of particular interest because the inclusion of a clause in a contract stating that royalty provisions do not apply to stock sold after termination where the contract is terminated for breach would be unusual. Amid the fallout of the breakup between Ye and Adidas, the inclusion of these kinds of clauses could well become the norm in the high-profile endorsement deals of the future.

More generally, parties need to think carefully about royalty provisions, and how they apply to sales. When it comes to royalties, clarity is key to ensuring that there are no unanswered questions which could lead to disputes and even litigation between the parties.

Co-written by Rebecca O'Donnell and Cisel Ozbay of Pinsent Masons.