Drastic Shifts Seen in Endorsement Deals Between Celebrities and Fashion Labels

Manufacturing

As of Thursday, February 15, 2018

Product endorsements from Hollywood stars, professional athletes, pop stars and supermodels have always played a pivotal role in driving sales and generating visibility for fashion brands. In fact, over the past 20 years, the agreements under which celebrities were engaged to endorse brands in the fashion industry have remained rather stagnant in both form and substance.

The industry “template” offered an acceptable range of business and legal terms and conditions that both sides acknowledged as “market” for the space—from compensation structure and must-wear requirements to non-disparagement and conduct clauses. Deviations from the status quo were infrequent in these deals, particularly in those involving established celebrities.

Welcome to the new world. Over the last five years, the industry template has been upended on a variety of key fronts. In fact, some of the most“market” terms in these deals have been re-engineered to accommodate a new economic and technological reality in the fashion industry.

The factors driving the swift change have ranged from the utterly obvious to the mildly intriguing. The decline of bricks and mortar, e-commerce’s unstoppable rise, social-media platform dominance, depressed marketing budgets and evolved content-consumption habits in key demographics have all played a role in prompting the sea change. Put simply, the deals no longer look like they did even two years ago. Here are some of the material business terms most profoundly affected:

Talent Compensation: As a general matter, the nature and amount of compensation paid celebrities for their endorsements has always been a moving target. The level of fame coupled with deal specifics—such as territory, exclusivity, commitment length and personal-appearance demands—dictated the price-tag analysis. However, in the last few years alone, there has been a demonstrable shift in the thinking employed to assess the true value of these celebrity engagements.

Brands are now more actively engaging in detailed analysis to ascertain the short- and long-term value of celebrity endorsements. The “Moneyball” approach—a return-on-investment analysis—has made its way from Major League Baseball to celebrity endorsement deals.

Brands are beginning to use predictive analysis through the use of tech-driven data analysis, social listening and measurement to determine not only projected sales but reach and strength of celebrity influence. Ultimately, the goal is to determine how best to structure the financial terms of these deals to comport with a longer-term view of how much value they actually deliver.

While this analysis forms part of a larger cognitive shift on both sides of these deals from a branding perspective, both brands and celebrities are subjecting these deals to heightened scrutiny to ensure compatibility with their own brand-building goals.

One need look no further than the recent decline in deals offering large upfront payments and the corresponding increase in deals containing stock and performance payments. In other words, payday marketing splashes anchored by celebrity pitches are giving way to more complex arrangements.

These deals smack of joint ventures or strategic corporate initiatives where each party makes a contribution to the project and agrees to shoulder more upfront risk in exchange for a larger potential upside later.

Particularly at a time when brands are motivated by a heightened desire to preserve as much cash as possible for brand growth, brands have become more willing to experiment with compensation structures in these deals. As a result, celebrities are now receiving stock awards, phantom stock grants, product royalties and performance-based compensation in exchange for less upfront cash.

Among these new forms of compensation, the one that holds the most upside potential for celebrities is company stock. In other words, many brands will offer actual equity in the company through the provision of an agreed-upon number of shares in a designated class based on a current valuation or other agreed-upon metric.

Other brands have been less willing to provide equity and, as an alternative, have begun to provide “shadow equity” or “phantom stock” using a similar valuation metric. This type of compensation provides the talent with many of the benefits of stock ownership without actually granting any ownership in the company. Another compensation structure employed by brands involves paying the talent a percentage royalty based on the sales of products bearing or sold under the talent’s name or likeness.

Ultimately, though, the largest evolution on the compensation front in these deals has been the use of incentive payments based on media mentions and promotional activities engaged in by the talent for the brand. Yes, the anecdotal stories about brands buying a single Tweet or Instagram post or paying per mention of their brand on reality TV programs are absolutely true and now more commonplace than ever.

The way this works typically is that during the negotiation phase of the deal, the parties mutually agree upon a menu-style list of activities across all forms and levels of media that, if delivered by talent, will trigger a predetermined lump-sum payment. These provisions have become extremely complex and even contain escalating kickers based on end-user consumption (e.g., every 5,000 views costs another $20,000). Among the most frequently compensated activities on this front are broadcast interviews, print editorial interviews, radio interviews, Instagram posts, tweets, social-networking mentions, television and film mentions, photo postings, blog postings, and email blasts to followers.

Public Appearances The cornerstone of an endorsement deal is the talent’s commitment to actually use or wear the product. The timing, place, frequency and other aspects of that commitment vary from deal to deal, but the underlying principle essentially remains unchanged: Talent must not wear any competing product and should wear the endorsed product during those public appearances specified in the deal.

From promotional events arranged by the brand (e.g., fashion shows, launch parties, exclusive performances, etc.) to other high-profile events (e.g., the Oscars, Grammys, Golden Globes, etc.), the requirement has not departed the scope of endorsement deals. The most frequently used list of events and activities in endorsement deals usually includes press conferences, movie premieres and screenings, sporting and cultural events, fashion shows, planned public appearances, and any other designated events the talent is best known for or associated with (e.g., concerts for musicians).

A problem that has emerged over the past few years, however, relates to technology and its impact on the evolving nature of celebrity. New content-consumption habits and the 24/7 accessibility to celebrity photos, videos and media from all sources and outlets has served to upend the import of a “public appearance.”

A celebrity’s visibility and voice are no longer dictated to such a degree by these photo opportunities. A compelling photo from TMZ or a solitary tweet may do more for the brand than a seasonal launch party.

Moreover, brands have begun to recoil at the costs, resources and logistics of celebrity engagements, as the visibility achieved no longer correlates to the same degree with the bump in product sales and brand awareness as it previously did.

Accordingly, these deals are increasingly requiring that the product be worn and otherwise tied to the celebrity almost always, from going to a restaurant to visiting the local grocery store, and negotiations on this front have been difficult, requiring brands to balance their objectives with the talent’s privacy and an inadvertent photo mishap where the celebrity is caught wearing the competitor’s brand.

As a result, many agreements are now reflecting a comprehensive approach to mapping out in excruciating detail every possible activity in an individual’s life and determining whether the obligation to wear applies.

Talent Approvals: The traditional endorsement deal has always provided talent with approval rights over the particular use of their name and likeness. Talent needed this lever to actively police exploitation of their name and to help ensure a brand complied with the terms of the likeness license granted. This provision was also rarely a contentious aspect of any endorsement deal negotiation.

As a general matter, a brand was typically required to obtain talent’s approval and was willing to grant these approval rights. But the core advertising medium has shifted to digital platforms, and talent approval over forthcoming print and magazine advertisements and other pre-planned promotional activities no longer serves the brand’s strategic marketing plans.

In other words, providing talent a 30-day period to approve every single image and corresponding word of every advertisement or post has become a major point of dispute between the parties to these deals, requiring serious negotiation and legal positioning for both parties.

For brands, the ability to message its followers across social-networking platforms on a real-time basis has become paramount from a marketing and revenue-generation perspective—last-minute sales, short-term discounts, event announcements and other brand-related messaging involving the celebrity provide the bang for your marketing buck that brands are seeking.

As a result, these deals are increasingly requiring that the celebrity’s approval rights be drastically scaled back to, among other things, allow for the immediacy of Internet-based marketing initiatives. Talent still typically retain the ability to pre-approve images on physical packaging and physical marketing materials (e.g., in-store displays), but the use of that image and any corresponding marketing messaging on social-media platforms has, in many cases, been removed entirely from the deals or become subject to a 24-hour approval period.

Matthew Syrkin, Esq., is a partner and chair of the Media, Technology and Commercial Transactions Group at Hughes Hubbard & Reed LLP. He provides strategic counsel and transaction support on business and legal matters to clients in the fashion, technology, marketing, retail and media industries and was named by Variety magazine as one of the top 50 impact dealmakers in the media and entertainment industry.