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Companies Seek Protection in Post-Tiger Woods World of Scandal




by:
Manatt, Phelps & Phillips, LLP - Los Angeles Office

 
March 26, 2010

Previously published on March 11, 2010

Companies who use celebrity endorsers are trying to protect their brands in the wake of the Tiger Woods scandal.

In addition to updating their morals clauses, companies are purchasing insurance against the loss of sales if their endorser suffers a public embarrassment.

Before his dalliances became extremely public, Tiger Woods was one of the highest-paid celebrity endorsers with a family man image.

But one study, performed by Chris Knittel, a professor of economics at the University of California, Davis, found that the stock prices of the seven publicly held companies that still have or did have sponsorship deals with Woods lost $12 billion in market value in the month after his statement that he was taking a leave from golf.

While companies routinely take out disability or death insurance to cover themselves if an endorser - typically an athlete - is injured while under contract, the Woods scandal has companies looking for even greater protection.

More companies are now trying to insure against the loss of sales if their product endorsers become involved in a scandal, although calculating the cost of such an insurance policy is difficult and varies depending on the product, the endorser, and the revenue generated by him or her.

Insurance covering losses as a result of a scandal could also include the cost of the company’s advertisements using the scandal-plagued endorser as well as the costs of finding a replacement athlete and producing and filming new commercials.

Companies may also seek to make their morals clauses more stringent. Morals clauses often give a company the right to terminate only once a player has been convicted of a crime, not just charged or investigated, even though the negative publicity can have the same impact.

The Woods scandal could also cause companies to conduct more detailed investigations before signing a potential endorser, to rely on contracts with shorter terms, or to try to incentivize endorsers with payments based upon specific goals or targets.

Why it matters: A celebrity or athlete endorser is the face of a product, in good times or bad. With the speed of today’s celebrity news cycle, companies should consider protecting themselves as best as possible against a potential scandal through more detailed investigations, carefully crafted morals clauses, and insurance policies.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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