Throughout the history of sports marketing, companies have found themselves facing difficult decisions due to the reckless behavior of their athletes. For example, after Tiger Woods’ infidelity came under public scrutiny, it was difficult for Nike to cut ties with him because of the sheer size of the business deal. Nike put the Kobe Bryant brand on hold until his rape trial was dismissed. Everyone remembers the painful end to Nike’s relationship with Lance Armstrong due to his involvement in a doping scandal.
This is the context for Adidas’s decision to sever its relationship with “Ye,” the rapper-fashion designer also known as Kanye West, due to his repeated and repugnant anti-Semitic comments. Signed in 2016 and set to last until 2026, the agreement with West allowed him to license the Yeezy brand to Adidas in exchange for royalties of approximately 15% of product sales, thereby monetizing his intellectual property. What makes the controversy fascinating is the scale of the terminated deal: it is the largest contractual termination in the history of sports marketing. The cost of the decision to discontinue Yeezy (which accounts for 4 to 8% of Adidas’ annual revenue) results in a loss of $10 billion, in addition to the incalculable digital traffic it drives to the brand. To put it in perspective, only one brand is more expensive: Jordan Brand. As a result, the company’s stock price fell sharply.
Despite the enormous financial cost, Adidas executives realized that, in the long run, being on the right side of history is more important than the balance sheet. The German company has a history marked by ties to the Nazis (Adidas founder Adi Dassler was a member of the Nazi Party, made shoes for the Hitler Youth, and shut down his factory to help Germany during the World Wars). Thus, just as Balenciaga and GAP did, the sportswear giant had no choice but to cut ties. As Kanye once sang: “When it starts to get crazy, then run away.” Adidas quickly took his advice. West is a notoriously misogynistic man, known for disrespecting those around him, and has long been making a remarkable number of shameful comments, both in public and in his lyrics. For Adidas, its reputation is its greatest intangible asset and, consequently, the company takes great care with the morals clauses in its contracts with celebrities and athletes. This was made clear in the company’s statement: “West’s recent comments and actions were unacceptable, hateful, and dangerous, and violate the company’s values of diversity and inclusion, mutual respect, and justice.”
Through so-called “morals clauses,” public figures agree not to become involved in scandals throughout the term of their agreement with the contracting party. Although criminal offenses generally fall under the definition of prohibited acts, behaviors that do not violate criminal law may still breach a morals clause, such as scandalous and offensive conduct.
The legal concept of immorality in contractual agreements derives from Roman law, based on the jurists Gaius and Julianus, who formulated specific examples of agreements that do not create obligations because their purpose is contrary to good morals (contra bonos mores). This concept is linked to what current legal doctrine understands as private autonomy and self-determination, preventing excessive restrictions from violating fundamental rights. It is evident that Roman jurists did not deal with human rights, but rather with pietas (the sense of duty and affection toward the family); existimatio (the respect and esteem enjoyed by a person in society); and verecundia (the innate sense of shame). An immoral act would be one in which a person offended “pietatem, existimationem, verecundiam nostram.”1
Commentaries on Roman law exerted considerable influence on medieval English law. The doctrine of contra bonos mores was used in English courts in the 18th century, when judges refused to enforce contracts that would harm the public good. However, compared to civil law jurisdictions, the concept of immorality as a restraint on contracting played a very limited role.2 In the English tradition, a contract is considered contrary to public policy only if it restricts individual freedom to the point of reducing a person to a state of slavery, as in the precedent Horwood v. Millar’s Timber,3 in which an accountant entered into a loan agreement with a loan shark, and the contract stipulated that the borrower could only reside at his current address and leave his job with the lender’s consent. The contract was deemed illegal, as it constituted an extreme violation of individual liberty.
Precisely because of this clearer distinction between law and morality, the inclusion of morals clauses found its modern origins in the Hollywood industry. They found their place in contracts with wayward actors during the Roaring Twenties, following the Roscoe “Fatty” Arbuckle scandal in 1921.4 The text of the 1921 Universal Studios clause read as follows: “The actor (actress) agrees to conduct himself or herself with due regard for public conventions and morals and agrees that he or she will not do or commit anything that tends to degrade him or her in society or expose him or her to public hatred, contempt, scorn, or ridicule, tending to shock, insult, or offend the community or to outrage public morals or decency, or tending to prejudice the Universal Film Manufacturing Company or the motion picture industry. In the event that the actor (actress) violates any term or provision of this paragraph, Universal Film Manufacturing Company has the right to terminate and rescind this contract, upon five (5) days’ prior notice to the actor (actress) of its intention to do so.”
With the “Red Scare”5, these clauses became popular as a form of “witch hunt” when McCarthyism reached Hollywood. Precisely because of this authoritarian nature of the blacklists, morals clauses were banned by collective bargaining agreements starting in the 1960s. However, they have recently resurfaced in the context of the “#MeToo” movement, as an attempt to curb misconduct by actors, screenwriters, and directors. To make matters worse, they are generally not explicitly labeled as morals clauses. Instead, they are incorporated into the text in fine print using standardized language as an appendix to the main contract. In the case of athletes, sponsorships remain extremely lucrative, but the explosion of social media and public scrutiny has made it much harder for them to misbehave without getting caught. Add to this a reduced social tolerance for misbehavior by idols, and companies are well aware that certain lucrative relationships can quickly turn toxic.
Under current laws in New York and California, it is possible to terminate the contract of an actor who violates an express morals clause, the content of which requires compliance with public conventions and decency. Such conduct goes beyond the duty to obey the law, but rather the duty to refrain from behavior that tends to “shock, insult, and offend the community and public morals,” bringing the artist into “disrepute, contempt, scorn, and ridicule,” or reflecting unfavorably on the artist’s employer or the industry in general. Determining whether an express morals clause has in fact been breached is a question of fact, depending on the wording of the morals clause and the conduct in question.6
The fact is that, originating in the U.S., such clauses have spread worldwide, becoming a clear business trend for brand and reputation protection; after all, a celebrity who engages in questionable behavior may mistakenly lead the public to believe that the brand they represent endorses such behavior, which causes so-called “reputational harm.” Large companies can terminate business relationships with relative ease if they have issues with a contractor’s behavior, without facing claims for breach of contract, thanks to the morals clause.
In fact, under common law, the remedy of “termination” allows the party that is the victim of a breach of contract to be released from its contractual obligations as of that moment, which commonly occurs when there is a breach of a clause in which a specific circumstance was stipulated, and the consequences of termination were set forth in detail. The innocent contracting party decides to notify the other contracting party of its intention to immediately and irrevocably rescind the agreement, without the need to resort to a court or grant the breaching party an opportunity to remedy the breach before exercising the “right to terminate.”7
It is not our objective to address the morals clause in the Brazilian context.8 However, unlike civil law jurisdictions—which, due to the principle of good faith, are cautious about allowing the automatic termination of agreements—English law does not have a general rule requiring parties to civil contracts to exercise their rights reasonably. Particularly in commercial contracts, the courts generally interpret and apply the clauses strictly as agreed. Any action contrary to the enforceability of the clauses creates legal uncertainty.
However, it’s not all roses… the “termination clause” raises some specific economic issues in the West case: What can Adidas do with the designs going forward? Although the company emphasizes its ownership of the product design rights, it runs the risk of liability for trademark infringement if it uses the name “Yeezy” without West’s authorization to sell shoes (even if it owns the designs). Although Adidas’s statement definitively closes the door on the sale of Yeezy-branded products, it opens another door to a strategy of renaming the designs. Adidas will not be able to use individual trademarks; however, the designs can be reused because they are its property. Simply put, “Yeezy” may be owned by Ye. But the designs of the Yeezy shoes are Adidas’s intellectual property. However, cutting ties with Kanye while continuing to sell the same shoes—the same styles previously offered under the Yeezy name—under the generic “adidas” brand may not sit well with consumers.
Clearly, the major legal debate revolves around the interpretation of the precise meaning and scope of morals clauses, particularly when companies keep the language defining reprehensible conduct vague and imprecise, so as to cover a range of behaviors that would violate the agreement. The clauses rely on subjective terms such as “public discredit, humiliation, contempt, scandal, or ridicule,” essentially meaning that anything that makes a company look bad can be grounds for immediate termination. In short: “If you don’t behave, we can fire you.” The clause’s discretion applies not only to the work covered by the contract but also to anything the employee has done in their life that comes to light. For example, is a credible allegation of prohibited conduct sufficient to terminate the contract, or must the brand bear the burden of proving that the prohibited conduct actually occurred?”
Therefore, it is very important that the clause be specific regarding unacceptable behaviors. Thus, in the case of Nadar v. ABC, 330 F. Supp.2d 345 (SDNY 2004), the Court upheld ABC’s termination of a soap opera star’s contract for selling cocaine to an undercover police officer based on a morals clause that prohibited conduct that “might tend to reflect unfavorably on ABC.” However, the lack of specificity in a morals clause led another court to reject the dismissal of an employee of the archdiocese who became pregnant through artificial insemination. Dias v. Archdiocese of Cincinnati, 2012 WL 1068165 (SD Ohio 2012). The court held that artificial insemination was not expressly mentioned in the clause.
In fact, a vague behavioral clause imposing a penalty without any corresponding benefit falls into a category quite distinct from so-called “ethical clauses,” which are in fact performance-based bonus clauses, intended to encourage the athlete to avoid harmful publicity that could tarnish the company’s image. For example, the aforementioned clause in Neymar’s contract with PSG prohibits him from making negative public comments about the club, requiring exemplary behavior from the player. Neymar must be “courteous, punctual, friendly, and approachable to fans.” If he avoids any controversy, he receives an additional payment of approximately £5.5 million per year. As legal scholars have noted, “When the contractual value is intrinsically linked to the ‘spokesperson’ and their social standing, it is legitimate for the contracting party to expect that the individual holding the image rights will meet certain expectations, or, at the very least, not cause any harm to the sponsoring brand due to events beyond their control.” In other words, drawing a parallel with the right of personality regarding one’s image—an attribute—the concept applies to image licensing agreements that the contracted individual must project their personality in the social sphere as predetermined in the contractual agreement, as a necessary condition for receiving the agreed-upon payments.9
The problems with the application of morals clauses are not limited to vagueness and the unequal bargaining power of the contracting parties; they also extend to freedom of expression and privacy. The famous baseball star Babe Ruth was subject to a morals clause in his 1922 contract that prohibited him, among other things, from staying awake past 1 a.m. on the night before a game. Fundamental rights enter the debate as an argument for the invalidity of such clauses. Can contracts restrict the creative freedom of artists?
Under Disney’s terms, the “termination clause” can be triggered by any act or omission that, in theory, “could” cause Disney to incur public discredit or cause offense to the community or any substantial segment thereof. The company’s reputation acts as a control mechanism in economic relations, and reputational incentives require something akin to monitoring—close observation of employees’ behavior—to be successful.10 However, this aggressive compliance is particularly strict for politically active artists who engage in behavior that may be offensive to certain groups. Asking someone to sign a contract allowing Disney to act as the arbiter of morality is problematic for obvious reasons.
__________
- ZIMMERMAN, Reinhard. The law of obligations. Clarendon press, Oxford 1996, p. 706/15.
- MANSOOR, Zeeshan; CHANTAL MAK, Aurelia Colombi; Immoral contracts in Europe, p. 9/14. Cambridge: Intersentia, 2022
- Horwood v. Millar's Timber and trading co (1917) 1 KB 305
- In 1921, Roscoe “Fatty” Arbuckle was accused of the murder of a young actress named Virginia Rappe. He stood trial three times, which destroyed his reputation and his career as one of the highest-paid stars of the silent film era. Most writers over the following 100 years have argued that Arbuckle was a victim and innocent of the charges.
- “Red Scare” refers to a widespread fear of the potential rise of communism or other left-wing ideologies. It is often characterized as political propaganda. The term is associated with two periods in U.S. history. The first Red Scare, which occurred immediately after World War I, centered on a perceived threat from the American labor movement, the anarchist revolution, and political radicalism. The second Red Scare, which occurred immediately after World War II, centered on the perception that domestic or foreign communists were infiltrating or subverting American society and the federal government. The name refers to the red flag as a common symbol of communism.
- Kressler, Noah B., Using the Morals Clause in Talent Agreements: A Historical, Legal, and Practical Guide. Columbia Journal of Law & the Arts, Vol. 29, Available at SSRN.
- CARTWRIGHT, John. An introduction to the English law, p. 283.
- We recommend reading the article by Ana Paula Parra Leite and Zilda Consalter, titled O caso Ryan Lochte e a aplicação da cláusula moral no direito negocial brasileiro. The authors argue: “In view of the application of the principle of contractual freedom that underlies Brazilian contract law, it would be perfectly possible to expressly include a morals clause such as that used in U.S. law, specifying which behaviors by the contracting party would violate the morals clause, as well as the consequences thereof. Furthermore, in light of the freedom to contract, and to avoid gaps and potential disputes, it would be ideal for the parties themselves to stipulate which behaviors would constitute a breach of the morals clause, as well as what the consequences of such a breach would be, since there are several factors that can influence its application,28 such as who the parties involved are,29 what the potential risks of the relationship between them are, and what the potential damages would be should a reprehensible event occur.” Revista Brasileira de Direito Civil V. 12 | Abr-Jun 2017.
- OLIVEIRA ALMEIDA, Jonathan de; PIRES, Caio Ribeiro; FERNANDES, Micaela Barros Barcelos. O caso Neymar Jr. e as 'cláusulas morais'.
- Langevoort, Donald C., Monitoring: The Behavioral Economics of Inducing Agents' Compliance with Legal Rules (June 26, 2001). Available at SSRN.