Nike made headlines again this past week for an athlete gone bad. In the news this time: Nike’s ousting of Maria Sharapova from its celeb athlete roster after discovering that the Russian tennis star tested positive for a banned performance-enhancing substance. This comes just weeks after the Oregon-based sportswear giant revoked the contract of champion boxer, Manny Paquiao, after he made disparaging comments about gay couples.

As we told you in connection with Paquiao, Nike can very easily up and fire any of its star endorsers in light of negative press. This is because such endorsement contracts come with explicit morals clauses, the violation of which allows Nike to give the celeb the boot, as Sharapova, who tested positive for meldonium at the Australian Open, learned this past week.

Companies take on quite a significant amount of risk when contracting with professional athletes and/or celebrities to endorse their products, as the famous individuals and their behavior – whether in terms of sporting or in their often paparazzi-plagued personal lives – serves as a reflection of the brand. In order to protect themselves and their carefully crafted identities, brands include explicit morals clauses in their spokespersons’ contracts.                                                                       

Morals clauses are typically worded in such a way as to allow a brand (read: Nike) to immediately terminate an endorsement contract, without any penalty, should the athlete endorser act in a certain manner that would tarnish the reputation of the brand.

A particularly strict clause (which is likely what Nike likely bargained very hard for) may read as follows: “If at any time, in the opinion of Sponsor, Athlete becomes the subject of public disrepute, contempt, or scandal that affects Athlete’s image or goodwill, then Company may, upon written notice to Athlete, immediately suspend or terminate this Endorsement Agreement and Athlete’s services hereunder, in addition to any other rights and remedies that Sponsor may have hereunder or at law or in equity.”

But regardless of what behavior triggers the clause, the remedy for such a violation may ultimately be more significant. The endorser/brand (Nike, for instance) will likely seek any number of potential remedies for such a violation, including but not limited to: the termination of the agreement; suspension the agreement for a period of time; imposition of a financial penalty for the behavior at issue without terminating the endorsement contract; or the payment of damages by the athlete for breaching the agreement.

As Christopher Chase of Frankfurt Kurnit Klein & Selz, PC accurately states: “Termination and suspension raise another issue – the payment of compensation. If either option is exercised, the advertiser may want to: hold back compensation owed to the athlete; pay the athlete on a pro-rata basis either for the services performed to date or based on the term of the agreement (and pay nothing else going forward); or seek a refund of any compensation paid to the athlete (however, a refund clause is often a difficult provision to insert).”

So, while it is certainly news in itself that Nike has terminated its relationship with Sharapova (more about that in a minute), it will be interesting to see what action Nike takes in terms of seeking recourse for Sharapova’s actions. Chances are, we will not be privy to what likely amounts to confidential information, unfortunately.

Interesting also is the fact that Nike has begun distancing itself from athletes it deems to be liabilities to its brand, almost certainly stemming from Nike’s choice to uphold said morals clauses, something the sportswear giant only relatively recently begun doing. Over the past several years, the sportswear giant has severed deals with a number of athletes, including cyclist Lance Armstrong, running backs Ray Rice and Adrian Peterson, and sprinter Oscar Pistorius. One of the earliest contract disputes came in 2007 when quarterback Michael Vick entered into a plea agreement on dogfighting charges. (Nike re-signed him in 2011).  

However, the company has an extensive history of standing behind its endorsed athletes even when they have faced significant legal trouble and/or public fallout. In 2003, for instance, Nike upheld its endorsement relationship with Kobe Bryant when rape charges were brought – and eventually dropped – against the Los Angeles Lakers superstar. Additionally, the company stood behind Ben Roethlisberger, even when multiple sexual assault charges were filed against the Pittsburgh Steelers quarterback. Most notably, the athletic apparel company chose not to disassociate itself from Tiger Woods when he found himself at the center of an extremely public cheating scandal in 2009. (It is worth noting that Nike reportedly cut Tiger Woods’ deal from $20 million to $10 million following the negative press surrounding his extra-marital affairs).

Interestingly, though, sources suggest that Nike’s focus is not on morals at all, but its bottom line … and sports, of course. Writing for InvestorPlace, Louis Navellier noted, in connection with the sportswear giant’s latest controversy: “The Nike litmus is more about sports than morals. It will not stand for unsportsmanlike behavior, but it doesn’t expect athletes to be society’s moral guardians. What people do in their private lives has little to do with the Nike brand on the field of play.” As for how that explains the company’s decision to let Paquiao go, that is not entirely clear.