Nike made headlines this week with its announcement that it revoked Manny Paquiao’s contract after he claimed gay couples were “worse than animals.” The world champion boxer, who landed the number two spot on Forbes’ highest paid athletes in the world list last year, initially signed an endorsement deal with Nike in 2006 (Note: per Forbes, endorsements represent less than 10% of his $485 million career earnings). Such endorsement contracts come with explicit morals clauses, the violation of which caused Nike to terminate its longstanding deal with Paquiao.

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. The athletes’ counsel will undeniably push for more lenient terms, and the parties may negotiate a bit before they ultimately decide on what the terms of the moral clause will entail.

A particularly strict clause 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 Paquiao (more about that in a minute), it will be interesting to see what action Nike takes in terms of seeking recourse for Paquiao’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).

This is not the first time Pacquiao has had a fall out with Nike. According to Forbes, “Nike did not renew their partnership after it expired at the end of 2012. There were calls for Nike to drop Pacquiao in the first half of that year when he made similar comments about same-sex marriages, but Nike waited to see Pacquiao’s performance in the ring. It wasn’t good. He lost both his fights, including a devastating knockout at the hands of Juan Manuel Marquez in December 2012. Almost all of Pacquiao’s endorsement partners walked away at that point with Pacquiao looking like a shot fighter. Nike walked away too, according to Pacquiao’s camp.”

Speaking out this week about the status of its relationship with Pacquiao, Nike issued a statement: “We find Manny Pacquiao’s comments abhorrent. Nike strongly opposes discrimination of any kind and has a long history of supporting and standing up for the rights of the LGBT community. We no longer have a relationship with Manny Pacquiao.”