By: Uyen Nguyen
While celebrity businesses often generate more profit due to their larger customer base and influence in the market, these businesses face more significant risks if their founders lose popularity or get “canceled.”
For example, Hip Hop mogul Sean “Diddy” Combs’s business venture lost its partnership with eighteen companies when he faced sexual assault allegations. Meanwhile, numerous athletes have lost their million-dollar endorsement deals with companies due to their own scandals. For instance, Pittsburgh Steelers running back, Rashard Mendenhall, tried to remedy his loss of an endorsement deal with Hanesbrand, Inc., by filing a lawsuit alleging the company’s termination of his endorsement as a breach of contract and a violation of his First Amendment right. The endorsement agreement that Mendenhall signed with Hanesbrand contained a “moral clause” that permits the company to terminate the endorsement deal if the athlete is caught in “public disrepute, contempt, scandal, or ridicule, or tending to shock, insult or offend the majority of the consuming public or any protected class or group thereof.” The legal issue is whether Mendehall’s tweet that Osama bin Laden’s death should not be celebrated violates this moral clause. A federal North Carolina District Court judge refused to dismiss the lawsuit and was going to answer this question; however, Mendenhall and Hanesbrand ended up settling the case outside of court.
In reality, most celebrities, when negotiating their deals with brands, often overlook the “moral clause” despite the fact that a violation of the clause could cost them million-dollar endorsement deals. A broad and arbitrary “moral clause” could place celebrity entrepreneurs at a disadvantage because they lack an understanding of the circumstances that would trigger the clause. Under a broad “moral clause,” any allegations of wrongdoings could lead to the termination of endorsement deals. Because we live in a “cancel culture,” celebrity entrepreneurs should spend the same effort in negotiating and drafting the terms of the “moral clause” as they would in negotiating the “salary clause.”
While it is paramount that we set a standard for celebrities and hold them accountable for criminal activities or sexual assault allegations, a celebrity entrepreneur should not face the risk of losing brand sponsorship or retail contracts for their social justice activism. Huda Kattan, the founder of Huda Beauty a cosmetic company worth $1.2 billion, faces backlash for her views on the humanitarian crisis happening in Palestine. As an Iraqi makeup artist, beauty blogger, and entrepreneur, Kattan gained international recognition for setting beauty trends and incorporating Middle Eastern makeup style into her products. Because of her views, she has been ridiculed and called out for being “Anti-Semitic.” Currently, there is a Change.org petition demanding that Sephora, a French retailer of cosmetic products, remove Huda Beauty products from US stores. 31,038 individuals have signed the petition as of today. Although Sephora has not responded, it is not uncommon for retailers to cut ties with influencers amid scandal. In 2020, Cosmetic company Morphe cut ties with Jeffree Star and his cosmetic brand when he was “canceled” for his relationship with another controversial YouTuber.
Celebrity entrepreneurs should leverage their bargaining proposition, such as past endorsement deals and the profit they will generate, when negotiating contracts. They should pay close attention to what kind of behaviors and circumstances will trigger a violation of the “moral clause.” A narrower “moral clause,” such as the contract will be terminated if the celebrity faces criminal charges, is typically preferred by companies. Defining what kind of criminal charges and level of punishment would suffice a violation of the “moral clause” might put the celebrity in a better position. Celebrity entrepreneurs can also negotiate for “Due Process” protection as a part of the morals clause for which they are entitled to defend themselves if a company tries to terminate endorsement deals. In addition, celebrity entrepreneurs could require a company to show a credible finding or incorporate the burden of proof requirement of misconduct when a violation of the “moral clause” is triggered. By carefully drafting the terms of the “moral clause,” celebrity entrepreneurs could protect their economic interests when their reputation is damaged.
In the case of Huda Beauty, if Sephora finds that her support to Palestine is against their points of view, Sephora could terminate the retail contract if it contains a non-disparagement clause. A violation of a non-disparagement clause allows companies to address the actions of celebrities toward their companies. In negotiating the retail contract, celebrity entrepreneurs should pay attention to such a clause, as this clause typically benefits the company.
Entrepreneurs can also prevent the termination of retail contracts with an indemnification clause. The indemnification clause protects a party from losses incurred from another party’s breach, negligence, or misconduct. This clause can function as a tool for damage control when an entrepreneur’s reputation is attacked and prevent the company from cutting ties with these entrepreneurs completely because their losses have been remedied under this clause. However, attorneys should assess an entrepreneur’s reputation and history before suggesting the inclusion of this clause. If the celebrity is a highly controversial figure and has been caught in numerous scandals, then the termination of endorsement deals might be more beneficial to them than paying a massive sum of damages. Generally, an indemnification clause that is too broad and does not clearly state what type of misconduct will be covered is unenforceable.
Celebrity entrepreneurs can also trigger the “liquidated damages” clause when a retail company or brand terminates their contract. Attorneys should pay attention to such clauses because most courts have ruled that liquidated damages clauses intended to serve as a penalty clause or deter individuals from breaching contracts are unenforceable. Courts often do not favor liquidated damages clauses that are arbitrary in terms of damage amount. To ensure the enforceability of such a clause, an attorney must ensure that the clause is intended to remedy the amount of damages that is reasonably expected and calculated if the company terminates its contract with entrepreneurs. To seek legal remedy, celebrity entrepreneurs must show that they have fulfilled their duty to mitigate damages, such as whether they have attempted to find other endorsement deals or contracts with other companies to mitigate their loss. However, once their reputation is negatively impacted, it is less likely that another company would want to work with them. Regardless, celebrity entrepreneurs must fulfill their duty to mitigate in order to recover damages from a breach of contract.
Celebrity entrepreneurs should spend substantial effort in protecting their reputations, and attorneys who represent them should explain the legal consequences of losing their images. One way to minimize loss incurred from a damaged reputation is to include them as many legal protections, such as carefully-drafted moral clause and liquidated damages provision, in the contract during the negotiation phase. Once a celebrity’s reputation is negatively impacted and their career is overshadowed by scandal, their businesses will likely to incur a loss in revenue, and the termination of a retail contract or brand sponsorship will only exacerbate the economic loss. Thus, attorneys can protect clients’ economic and legal interests with creative contract provisions and offering them solutions in terms of damage control.
This post has been reproduced and updated with the author’s permission. It was originally authored on January 26, 2024 and can be found here.
Sources:
In re WorldCom, Inc., 361 B.R. 675
Space Master Int’l, Inc. v. Worcester, 940 F.2d 16
https://plus.lexis.com/api/permalink/f18da27c-840d-4828-8efc-ba5707731b75/?context=1530671
https://plus.lexis.com/api/permalink/da87f2a5-8556-4729-82d4-7f6b69f200ca/?context=1530671
https://time.com/collection/time100-impact-awards/6160129/huda-kattan-time100-impact-awards/
https://www.change.org/p/urge-sephora-to-remove-huda-beauty-products-from-us-stores
Image link: https://www.harpersbazaar.com/beauty/makeup/a38746663/huda-beauty-liquid-lipstick-relaunch/
