SPONSORSHIP ESSENTIALS: EXCLUSIVITY CONCERNS

(This post is the second on our series on sponsorship considerations. Our first post, on defining expectations and payments, can be found here)

In all sponsorship negotiations, the issue of exclusivity is perhaps the single most important topic of discussion. Exclusivity is significant because it prohibits a sponsee (the company/individual being sponsored) from entering into other sponsorships, whether at large or in specified categories. Sponsors will often push for complete exclusivity over broad sponsorship categories because this protection provides the sponsor with an uninterrupted spotlight for their brand. For example, a drink sponsor like Cola-Cola will not want to pay top dollar for a sponsorship deal if the sponsee can simultaneously enter into an agreement with Pepsi. It is easy to see why a sponsor would want this type of protection, but a sophisticated sponsee should be aware that exclusivity can be tailored to better reflect the desires of both parties to the sponsorship.  
 
Defining Exclusivity
An effective exclusivity provision starts with detailed communication. Both parties need to know what each side expects the exclusive product category to include. Sponsors will want the product category to be as broad as possible in order limit the amount of competitors. For instance, a company that offers nutritional supplements may try to expand its product category to include nutritional bars, protein shakes, and other types of supplements. In response, sponsees should try to limit the scope of the exclusive product category to be as narrow as possible. Using the above example, if a sponsee can limit the category to only include nutritional bars, it will have more flexibility when soliciting additional sponsors for the protein shakes and other supplement categories. This flexibility allows for potentially greater sponsorship revenue.
 
However, newer organizations, players, or influencers, may find it difficult to negotiate the scope of the rights to their advantage. Nonetheless, sponsees should at least make sure the categories and exclusivity are thoroughly defined to curb potential sponsor overreach. A sponsor may believe its deal as a sponsee’s “exclusive camera” would preclude a sponsee from entering into another deal with a company like Panasonic, who sells a variety of products including cameras, headphones, and televisions. A sponsee should insist that any obligation it has to not enter into a deal with a competing sponsor (exclusivity) is limited to the category that the sponsorship is in. Unfortunately for sponsors, a sponsee would still be able to enter into a deal with Panasonic as long as it only agreed to endorse a Panasonic product that did not fall under a protected category. While this may not be ideal for the current camera sponsor, an explicitly defined product category would inform sponsors of any limitations and hopefully clear up any potential confusion or issues that may arise down the line when partnering with multiple sponsors.
 
Reserved Categories
Another matter the parties to a sponsorship should be aware of is whether any restrictions are imposed by third parties.  Frequently in traditional sports and esports, leagues will prevent teams, and teams will prevent players, from entering into sponsorship agreements within its own defined “Reserved Categories.” A Reserved Category is effectively a sponsorship category in which the restricted party is contractually required to not obtain sponsors in. For example, if a league has an exclusive sponsorship with Alienware and it has specified in its league participation agreement that the PC category was protected or reserved from teams, then a team could not enter into a sponsorship which would include PCs. This also occurs between teams and players in their player contracts, with players having certain sponsorship categories closed off to them. Importantly, it is in everyone’s best interest that these Reserved Categories are well defined, so as to avoid any possible confusion and disputes.
 
Conclusion
Negotiating exclusivity rights can be difficult but it is in all parties’ best interests to have a clear picture of what specific products are being protected and the associated rights/obligations. Without this, a number of potential problems can exist, which may ultimately harm the sponsorship relationship.
 
Our next post will discuss the various intellectual property concerns when entering into a sponsorship agreement.