New Balance v Liverpool Football Club

On Friday, the High Court handed down its judgment in the case of New Balance Athletics, Inc v Liverpool Football Club and Athletic Grounds Limited [2019] EWHC 2837 (Comm) (judgment attached) a case that concerned the matching right clause in New Balance’s (“NB”) existing kit sponsorship agreement with LFC.

Facts

NB are the current kit suppliers of LFC. Within its existing agreement with LFC, NB had a ‘first dealing’ provision in respect of its renewal. In the event no new agreement was reached between LFC and NB and LFC reached agreement with a third party, the contract provided that NB:

“shall then have thirty (30) business days from the date of receipt of such third-party offer to Notify the Club in writing if it will enter into a new agreement with the Club on terms no less favourable to the Club that (i) the terms of this Agreement and/or (ii) the material, measureable and matchable terms of such third- partyoffer.”

If NB so notified LFC

“the Club shall be obliged to enter into a new agreement containing such terms with the Sponsor”.

In December 2018, following unsuccessful negotiations during the first dealing period, NB gave LFC permission to speak with third party sponsors. On 11 July 2019 LFC sent Nike’s offer to New Balance. What was sent was in fact a signed contract which was stated to be a legally binding contract subject to a condition precedent. The condition precedent acknowledged that New Balance had the “opportunity to review and match all the material, measurable and matchable terms” of the contract and that the contract would “automatically terminate” if Nike received notification of “a Valid Match”.

Pursuant to the contract Nike was to pay £30m per season plus 20% of net sales of all licenced products excluding footwear and 5% of all licensed footwear. Of particular importance to thedispute in this case is the Marketing and Distribution clause which provided as follows:

“Nike will produce/sell (including as to SKU ranger and distribution Licensed Products, and market LFC, in a manner that is consistent with Nike’s other top tier UK football clubs eg Tottenham, Chelsea (subject to similar performance). Without limiting the foregoing Nike will:

• produce Licensed Products under at least 2 global Nike- controlled brands (eg Nike and Converse);
• produce Licensed Products in collaboration with third party brand(s), including in association with a major US sports team located in a major US market;
• market LFC and/or Licensed Products through marketing initiatives featuring not less than three (3) non-football global superstar athletes andinfluencers of the calibre of Lebron James, Serena Williams, Drake, etc with such initiatives being used to market certain Licensed Products produced for the start of Season 2020/2021 in Year 1 and for certain Licensed Product produced for each Season as applicable thereafter;
• sell Licensed Product throughout the Term (including, for the avoidance of doubt, Licensed Products produced for the start of the Season 2020/21 as follows: (i) in not less than 6000 stores worldwide, 500 of which shall be NIKE owned or controlled with the potential for sale of Licensed Product in as many as 13000 stores worldwide, and (ii) within not less than 51 countries online through NIKE.com. Nike warrants that, as of the date of this Contract, it can distribute Licensed Product in at least 6000 stores worldwide, 500 of which are Nike owned or controlled.”

On 16 August 2019, NB notified LFC of its intention to match Nike’s offer. LFC rejected NB’s notice on the basis that it did not genuinely match the Nike offer. LFC submitted that NB was

i. unable to match the distribution levels offered by Nike, distribution being a key issue raised by LFC during the currency of the current agreement; and

ii. unable to match the marketing provisions, in particular the three named “non-football global superstar athletes and influencers” = LeBron James, Serena Williams and Drake.

The principal question for the Court was whether NB’s offer was made in ‘good faith’ (LFC argued NB knew, or ought to have known, it could not match Nike’s distribution network) and if so whether it matched the Nike Offer.

Held

Having heard evidence as to the distribution network proposed by NB, the Court held there was nothing to suggest that the offer made by NB in this regard was not made in good faith; it found there was nothing to suggest that “reasonable and honest people would regard the challenged conduct as commercially unacceptable”. It found NB honestly believed they could reach the distribution outlets required (6,000) even if this appeared optimistic. The fact it had sought proposals from all regional managers as to how this was to be achieved was good evidence it wanted to ensure it could match Nike’s distribution. In the circumstances the Court held that NB had match Nike’s distribution obligation in good faith.

The marketing obligation proposed by NB was identical to that proposed by Nike (third bullet point above) with the omission of the words “of the calibre of Lebron James, Serena Williams, Drake, etc”. These missing words appeared to have troubled the Judge greatly who held that their omission materially changed the offer made by NB. The Judge held that the individuals provided a “measurable calibre” of the marketing to be deployed by Nike that couldn’t be matched by NB. In the circumstances its offer did not match that of Nike and therefore LFC was not obliged to enter into a new agreement with NB upon the terms of its offer.

n.b – Also, of note in this case is the fact that the Court agreed with the parties that this case be expedited to ensure it was decided prior to the end of October when investment in kit for the 2020/21 season would be required.