MARCH 19, 2013

By Oliver Herzfeld, Forbes IP Counsel

Sport and lifestyle brand Oakley recently commenced a lawsuit against Rory McIlroy and Nike, claiming McIlroy entered into a broad “head to toe” equipment, apparel and footwear endorsement agreement with Nike in breach of the right of first refusal provision in his prior endorsement agreement with Oakley that expired on December 31, 2012. The right of first refusal provision granted Oakley the right, but not the obligation, to match any terms offered to McIlroy by a third party “regarding the endorsement of products the same as or substantially similar to the [p]roducts” in his agreement with Oakley (i.e., eyewear, apparel and accessories). The complaint itself raises legitimate questions as to whether Oakley, together with a third party equipment manufacturer, could have possibly matched Nike’s potentially record-breaking terms, rumored to be in the range of $200-$250 million. And Oakley may have waived its first refusal rights when a marketing manager at Oakley named Pat McIlvain sent an email to McIlroy’s agent, Conor Ridge, that stated: “Understood. We are out of the mix. No contract for 2013. Pat Mac.” Nonetheless, assuming for the sake of argument that McIlroy breached his contractual right of first refusal obligations to Oakley, what are Oakley’s available remedies and how challenging would it be for Oakley to enforce its rights?

Injunctive Relief And Specific Performance

The complaint alleges that McIlroy’s breach has caused Oakley to suffer irreparable damages that entitle Oakley to the remedy of an injunction prohibiting McIlroy from endorsing Nike’s products. However, courts are generally hesitant to grant such relief so a plaintiff seeking the remedy of an injunction must do more than simply allege irreparable damages. According to most courts, Oakley must establish that it is likely to succeed on the merits, that it is likely to suffer irreparable harm in the absence of injunctive relief that cannot be properly addressed by monetary damages, that the balance of equities tips in its favor, and that an injunction is in the public interest. Further, one must question what Oakley is seeking to achieve. Is Oakley merely posturing for a more favorable settlement, is it pursuing a conversion of its right of first refusal into the equivalent of a non-compete obligation, or does Oakley have bona fide aspirations to specifically enforce its right of first refusal to have McIlroy (who is now a lawsuit adversary) continue endorsing Oakley’s products? The remedy for a breach of a personal services agreement is usually limited to monetary damages unless the services are unique. Even if Oakley successfully asserts that McIlroy’s services are unique, based on the Thirteenth Amendment to the Constitution that prohibits slavery, courts will never specifically enforce a personal services agreement by ordering an individual to continue performing services. The most state law will permit in the context of specific performance for a breach of a personal services agreement is the equivalent of a non-compete obligation. But by analogy, courts will not enforce a non-compete obligation unless it does not impose an undue hardship on the individual, is not unduly harmful to the public, is subject to reasonable limitations as to time, geographical area and prohibited scope of activity, and is necessary to protect the enforcing party’s legitimate interests (e.g., avoiding the misuse of its trade secrets, confidential information or customer relations). The bottom line is it would be quite challenging for Oakley to meet the burden of all of the foregoing conditions required to receive injunctive relief or the benefits of the equivalent of a non-compete and Oakley cannot legally compel McIlroy to continue performing endorsement services for it.

Monetary Damages And Mitigation Of Damages

In the absence of injunctive relief or specific performance, Oakley’s potential remedy is limited to monetary damages. But what would be the correct measure of such damages? In particular, the law does not permit a recovery of damages that are merely speculative. The non-breaching party must prove its damages providing evidence establishing to a reasonable certainty the nature and extent of the probable loss it has sustained or will in the future sustain. Contractual losses cannot be demonstrated by conjecture, indeterminate estimates or mere assumptions, but must be substantiated by concrete facts. It would be difficult to quantify the benefit Oakley received as a result of its endorsement agreement with McIlroy. How much more so would it be for Oakley to prove with a fair degree of certainty the measure of damages and loss it will incur from McIlroy’s breach.

Further complicating any attempt to measure Oakley’s monetary damages is the well-established legal principle of mitigation of damages. Under the mitigation of damages doctrine, a party that suffers damages as a result of a breach of contract has a legal duty to mitigate those damages by taking reasonable action, wherever practicable, to avoid additional injury and minimize its loss. In other words, in the eyes of the law, it would not be fair or reasonable to increase the amount of monetary damages payable by a breaching party by having it be responsible for losses of the aggrieved party that are reasonably avoidable. In this case, Oakley has already correctly taken steps to mitigate its losses by signing professional golfers Bubba Watson and Zack Johnson as endorsers for its products for the 2013 season. Nevertheless, such actions by Oakley to properly support its business and minimize its losses will only make it more challenging for Oakley to prove with a fair degree of certainty the measure of damages it will incur resulting from McIlroy’s breach as reduced by its mitigation of damages in engaging alternative endorsers.

What Should Brand Owners Do?

Given the serious challenges in enforcing the right of first refusal provision as described above, going forward, Oakley and other brand owners may wish to consider including a liquidated damages provision in their endorsement agreements that specifies a certain dollar amount to be paid in the event of a breach. The provision would constitute the parties’ agreement on reasonable damages in light of the anticipated or actual harm caused by a breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. To determine if a liquidated damages provision is enforceable, courts will usually ask the following two questions:

1. When the agreement was entered into, was it apparent that damages would be difficult to calculate in the event of a breach?

2. Was the amount set in the agreement a reasonable estimate of the damages and not excessive?

If the answers to both these questions are yes, the provision will likely be enforced. A liquidated damages provision does not preclude other relief to the non-breaching party, so the agreement should clearly state such remedy shall not be exclusive of any other remedies available to the brand owner, nor shall it be deemed an election of remedies by the brand owner. Finally, if the agreed sum is excessive, not fair and reasonable, or otherwise not rationally related to the damages that the brand owner might conceivably sustain by reason of a breach, the provision will be considered a penalty and deemed void as against public policy. To prevent this result, brand owners should endeavor to establish and document some reasonable relationship between the anticipated harm caused by a breach and the agreed amount of liquidated damages.