Trump and Contractual Morals Clauses

Forbes Finance 3 days ago

Contributing Author: Bryan Sullivan

Launch of Trump Steaks at The Sharper Image
The launch of Trump Steaks at The Sharper Image in New York City, New York, United States.

It is well known that Donald Trump, as a licensor of his name, has made, and is continuing to make, millions of dollars by allowing hotels, golf courses, and numerous other products with varying degrees of success (steaks, ties, and an allegedly fraudulent university that was the subject of a class action settlement) to use his name and image. It is common for most license agreements to contain a morals clause that permits the licensee (in this case those using Trump’s name) to terminate the license agreement based on the licensor’s bad conduct. Given Trump’s behavior over the course of his life, including the 2016 election and his presidential term, it begs the question of whether the morals clauses (assuming they are present) in his license agreements give Trump’s licensees grounds to terminate the agreements with Trump. Considering the multiple incidents of alleged misconduct (abuse of power, cooperating with foreign governments, violations of the Constitution’s Emoluments Clause, bizarre and erratic behavior, and sexual assault), one would think there is sufficient grounds for Trump’s licensee’s to terminate their license agreements with him or the Trump Organization. 

Companies invest significant money in license agreements to build a brand through endorsement deals or other ways of exploiting the licensor’s name. The payments to the licensor and advertising and marketing campaigns are expensive, and the licensor often becomes synonymous with the product, or at least sufficiently connected to it such that the licensee will suffer lost revenue or public embarrassment as a result of the actions of the licensor. To protect themselves, companies utilize moral clauses that permit the termination of the license agreement in the event of a scandal or misconduct involving the licensor. This allows the company to cease paying the licensor and end its relationship with them, which helps protect the brand. 

There have been several examples of this. Every company terminated their license or endorsement agreements with Lance Armstrong after his illegal doping scandal. Tiger Woods lost several endorsement deals, including two of his biggest with Gatorade and AT&T, after a 2009 sex scandal, although Nike did not terminate its deal with him even though it probably had the rights to. As a final example, Subway terminated its longtime spokesperson, Jared Fogle, following allegations of pedophilia for which he was eventually convicted.

The issue of termination for morals clause violations turns on the specific language of the clause. The licensee wants the clause to be as broad as possible to encompass any possible situation, while the licensor wants it to be as limited as possible to prevent termination so they can continue to collect payments under the license agreement. A typical, broad, morals clause provision that licensees seek to include is “any conduct that adversely reflects on the licensee.” On the other hand, the licensor usually wants to limit the morals clause to a felony conviction (which Trump has not faced…yet). One famous example of this comes from the late 1990s when Fila, a clothing manufacturer, pursuant to a morals clause, terminated its agreement with NBA star Chris Webber for his marijuana possession arrest (at a time when such a crime was far more serious than today). Chris Webber sued Fila and won over $2 million dollars because the morals clause required a conviction of a crime and not just an arrest for a crime. 

In the case of Trump, there are many examples of his conduct that can be used to terminate a license agreement under a typical licensee-friendly morals clause. The numerous accusations of sexual misconduct, including his own statements about grabbing women by their “p——-,” his racist comments about Mexicans, his erratic and bizarre behavior on Twitter, his unabashed profiting off the presidency of the United States, the allegations of conspiring with Russia to interfere in the 2016 election, the allegations of obstruction of justice during the investigation into Russia’s interference in our elections, the impeachment hearings and its allegations and, of course, impeachment if that were to occur. Lawyers in the Trump Organization (like his admittedly unethical fixer, Michael Cohen), who likely more intimately know the Trump’s immoral, unethical, and even potentially criminal behavior, perhaps negotiated very restrictive morals clauses to prevent termination.

Even with them, some companies may decide not to exercise their termination rights under the morals clause since the clauses are usually vague enough to allow various factual scenarios to fall under its rubric. Or, they may decide to “work it out” if the agreement is still financially beneficial to both parties. As we have seen over the past three years, although there are people who loathe what is happening in the White House, there are still some who laud the crass indecency of the current occupant. Perhaps those in bed with Trump are making a huge profit from foreigners seeking to gain influence with the Trump administration, or they are aligning with pro Trump forces that will bring revenue under their license agreements with him.

However, for any licensee of Trump looking to terminate the relationship, assessment and analysis of the agreements will probably expose an out or will give them leverage to negotiate a termination of the agreement. 

Tags: Business

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