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“Force Majeure” or “Follow the Money”?
What’s really behind Under Armour’s attempt to terminate its 15-year, $280 million contract with UCLA?
(Photo Credit: UCLA Athletics/uclabruins.com)
Martin Jarmond has certainly had an eventful first month in Westwood. First, there was the threatened football player revolt regarding not only the program’s plan to address Covid-19 concerns, but also the alleged mismanagement of football-related injuries over the last few years. While I am sure Jarmond knew the Athletic Department was running an $18 million budget shortfall when he took the UCLA job (his fundraising prowess at Boston College was obviously a major factor in Jarmond getting the job), he must must now address those financial concerns under the growing threat of not only losing all that Under Armour money, but also a significant amount of the Athletic Department’s revenue stream if football-related revenues such as ticket-sales and television rights are impacted by the virus.
Will Under Armour successfully terminate their current contract with UCLA? The answer is it’s too early to tell because there has been no public release of any specific facts to support claims made by the apparel manufacturer in the notice of termination it sent UCLA last week stating that the “[w]e have been paying for marketing benefits that we have not received for an extended time period.” However, by reviewing the contract between UCLA and Under Armour, one can get a better understanding of: 1) what “marketing benefits” were bargained for (as opposed to expected or anticipated) by the company; and 2) whether UCLA has failed to hold up its end of the bargain.
The general intentions of both parties in entering into the agreement are set out at the beginning of the contract. Under Armour’s stated intention is to be the exclusive provider of certain (but not all) athletic apparel and equipment used by UCLA, as well as to obtain recognition for its support of Bruin athletics “among other rights set forth herein [in the contract].” To date, there is no indication the university has diverged from its obligation of partial exclusivity. Moreover, the contract further obligates UCLA to annually provide Under Armour with 12 “best available” season football tickets, plus an additional two season seats in the Wooden Fund hospitality suite, six football parking permits, and eight bowl game tickets “should” the Bruins qualify for a bowl. The school must further provide the company with additional 100 reserve seat tickets and a hospitality area for one football game per season, as well as the opportunity for the company to acquire at a discounted rate up to 5,000 season seats, as well as 5,000 seats for one home game.
In regard to the current dispute, it is important to note the contract specifically provides that the 5,000 season seats and 5,000 seats for one football game are to be used by the company “as a premium giveaway to consumers and as a sales incentive for company personnel or retail clients.” While I do not have any proof, I highly doubt UCLA failed to provide the ticketing and tailgate opportunities to which Under Armour is entitled under the contract. Moreover, if the university did fail to substantially perform those obligations, then the Athletic Department is in a lot more trouble then any of us could have ever imagined.
Similarly, the contract obligates UCLA to annually provide eight “best available” season tickets to both men’s and women’s basketball games, two parking passes, and eight ticket books for all post-season, neutral site, or other “exempt games”. The university must also provide 100 reserve level seats for two men’s basketball games, as well as give the company the opportunity to buy up to 50 season basketball tickets, and up to 100 single-game basketball tickets at a mutually agreed upon discount. Importantly, the basketball-related contract provision contains the same “to be used by the company as a premium giveaway to consumers and as a sales incentive for company personnel or retail clients” language applied to football ticketing. Lastly, UCLA must provide eight “Olympic Sports” cards, entitling the bearer to free admission to other UCLA sporting events. Again, I highly doubt the university failed to provide those items and opportunities to Under Armour.
Finally, for the stated purpose of promoting Under Armour as the the official outfitter of UCLA athletics, the contract further requires: 1) UCLA coaches, players, and athletic staff to wear Under Armour-branded products at all Athletic Department-related events; 2) rebranding, signage, and advertising opportunities; and 3) that UCLA-related youth sports camps use only Under Armour apparel. I believe we would have been aware beforehand of any failure to perform on the part of UCLA, and to the extent any of these opportunities were temporarily postponed due to Covid-19, that postponement was neither UCLA’s fault, nor impress me as rising to the level of “marketing benefits that we have not received for an extended time period”.Thus the only reason I see at the present time which would allow Under Armour to terminate the agreement is if the contract’s “force majeure” clause is successfully invoked.
Cal. Civ. Code §3526 codifies the underlying principle behind the force majeure doctrine. That section provides: “No man is responsible for that which no man can control.” Additionally, Cal. Civ. Code § 1511(2), provides that the performance of an obligation is excused “when it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.” Generally, a force majeure clause is triggered when a force majeure event renders performance of a contact so impracticable that it is excused.
Here, however, the contract entered between UCLA and Under Armour contains a specific “force majeure” clause, setting out a number of events which could trigger its operation. That clause defines “force majeure” as:
“any cause or event which is beyond the commercially reasonable control or the Company (or the reasonable control of UCLA) and which renders the performance of this Agreement by the affected Party either impossible or impracticable, including without limitation, flood, earthquake, fire, labor actions, or work stoppages, natural calamities, national emergencies, declarations of war, riot, civil disturbance, sabotage, explosions, acts of God, acts of any regulatory, governmental body and/or agency, having jurisdiction over the affected Party, including without limitation any Laws, orders, ordinances, acts, or mandates, which prohibit, restrict, or regulate the affected Party’s performance of its obligations under this Agreement.”
Noticeably, the contract uses the term “without limitation” in reference to a “force majeure” event. Thus, the absence of the word “pandemic” or similar language from the contract language should not be seen as restricting enforcement of that clause to only those the events specifically enumerated. Moreover, although Under Armour is a Maryland corporation with its principal offices in Baltimore, and UCLA is a California public entity, the contract provides that its terms “be construed under the laws of the State of California.” This is important because California is in the minority of states that interpret force majeure provisions expansively. Thus, a California court may still find an unenumerated event to trigger “force majeure” notwithstanding a written force majeure provision. As long as the event is “unforeseeable at the time of contracting” such that “one party’s contractual performance is made impossible or impractical by intervening and unforeseeable events” that “could not have been prevented by the exercise of due diligence.”
Based on my analysis of publicly available documents, it is obvious to me that Under Armour got themselves into a bad deal and simply wants to get out of it. There was a reason why the UCLA apparel deal was “record setting.” The company way overpaid. The contract dwarfs those of Michigan and Texas, athletic programs which, and it pains me to say this, are currently better assets to an apparel company than UCLA. Nike’s deal with Ohio State was signed the same year as UCLA’s, but is worth $252 million, or more than 10% less than what Under Armour paid the Bruins. Adidas is paying Kansas $14 million per year for the next 14 years, and other than men’s basketball, the Jayhawks football and women’s basketball programs, the two other “core sports” emphasized in both contracts are pretty mediocre to bad.
According to Forbes, Under Armour has performed poorly since 2016. In 2019, Under Armour reported a net loss of $589.7 million, or $1.30 per share, compared with a profit of 5 cents per share, a year earlier. Overall, net revenue fell about 23% in the first quarter ending March 31, 2020 In May, 2020 the company forecast a 50% to 60% drop in second-quarter revenue. Shareholders have seen their investment drop precipitously from its all-time high of $52.05/share set on September 17, 2015. On June 30, 2020 the stock closed at $9.74. I know the market’s been down recently but if your 401(K) has not done substantially better, and I mean SUBSTANTIALLY better, than that over the last five years, my advice is to get yourself a new financial advisor, pronto.
What we’re seeing here from Under Armour is a lesson straight out of business school texts. It’s the American way. Invite litigation by unilaterally terminating an agreement without just cause, and then settle at a significant financial savings to the company. To understand that, you don’t have to know anything about “marketing opportunities”, or be an expert in “force majeure.” You just have to follow the money.
Mark Devore was a freshman at UCLA when the Bruins last won the Rose Bowl. He is a six-time California SuperLawyer. He can be followed on Twitter @DevoreOnSports.
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