Contracts Corner: Sponsorship Agreements

By on January 10, 2024

Sponsorships continue to be one of the alcohol beverage industry’s primary methods of promoting brands to drinkers. In professional sports alone, alcohol beverage brands contributed $480 million in sponsorship revenue across the four major professional sports leagues during the 2022–2023 season, according to a SponsorUnited study. As suppliers look to better target audiences via sponsorships, it’s important for industry members looking to enter into a sponsorship relationship, as well as those hoping to engage an alcohol beverage brand as a sponsor, to understand how the regulation of the alcohol industry impacts these relationships and the contracts that solidify them.

The Federal Alcohol Administration (FAA) Act prohibits an industry member (a supplier or wholesaler of alcohol beverages) from inducing a retailer to purchase a particular product to the exclusion of competitive products. See 27 U.S.C. § 205. An “inducement” may include a partial ownership stake in a retailer, money, free goods or other “things of value” provided to a retailer. The “exclusion” element requires the Alcohol and Tobacco Tax and Trade Bureau to show a potential real-world impact (i.e., the inducement results in a retailer purchasing less of a competing product than it otherwise would have, and the inducement places or threatens to place a retailer’s independence at risk) before a violation is found.

Sponsorships in other industries often involve a commitment that the brand paying sponsorship dollars will be the exclusive offering of a team, venue or event, or at a minimum, require that a particular brand be offered or available to consumers as part of the sponsor benefits. In the alcohol space, an industry member paying a retailer in exchange for the retailer’s commitment to serve the supplier’s brand(s) of alcohol beverages, often called “pouring rights,” typically satisfies both elements necessary to find a violation of the FAA Act: that the sponsorship fee is a thing of value, and it leads to the exclusion of competitive products.

Sponsor benefits should not include a commitment that a retailer purchase or not purchase a particular brand or brands of alcoholic beverages. Because of restrictions on the flow of money from suppliers to retailers, most sponsorship agreements involving an alcohol brand are between an industry member and a third-party unlicensed entity, not the entity holding the license to sell or serve alcohol at an event or within a venue. However, conduct that is prohibited for an industry member to engage in directly is also prohibited if undertaken indirectly using a third party as a pass-through entity. Accordingly, the entity selling sponsorship rights should represent and warrant the following:

  • It does not hold a license to sell alcohol at retail.
  • The funds paid under the terms of the agreement will not be passed on to a retailer.
  • Nothing contained in the agreement is intended to require or prohibit any retailer or concessionaire from purchasing or not purchasing a particular brand or brands of alcoholic beverages.

As we support clients in negotiating sponsorship agreements and understanding the scope of sponsor benefits available to industry members, we’ve noted key regulatory and contractual considerations that brands should take into consideration:

  • A few states have created exceptions or carveouts to general trade practice rules that allow alcohol beverage suppliers to pay a retailer for certain sponsorship rights where the retailer is affiliated with a professional sports organization or situated in a government-owned or public entertainment venue. Understanding whether those exceptions apply will impact the terms of a sponsorship agreement. For example, your standard template may require the party on the other side of the sponsorship agreement to make a host of commitments about their relationship with licensed retailers (e.g., that they are “unaffiliated” with a retailer or that they won’t pass money to a retailer) that may need to be reworked.
  • As industry members well know, although a sponsorship cannot include a commitment from an event to only serve or sell a certain alcoholic beverage, brands may purchase exclusivity for marketing or advertising purposes. Typically, the purchase of marketing or advertising exclusivity gives a brand the right to use a certain sponsorship designation (e.g., the “Official Beer Sponsor”). While the sponsorship designation itself must be carefully crafted to ensure trade practice compliance, from a contractual perspective, you should ensure that the entity with whom you are contracting can represent and warrant that the designation and associated sponsorship rights can freely be granted without violating the contractual rights of another. As alcohol brand sponsorships become more common and the categories of alcoholic beverages continue to expand, explicitly specifying in the contract what rights you are (or are not) purchasing is critical. For example, if you contract to be the “Official Vodka Sponsor” of an event, does that mean the official full-proof vodka sponsor? Does it include vodka-based ready-to-drink cocktails? Has the event already sold sponsorship exclusivity to a vodka-based ready-to-drink brand such that your purchase of the right to use the “Official Vodka Sponsor” could give rise to a dispute with that preexisting sponsor? The representation and warranty that each party can enter into a contract without violating the rights of another party or breaching another agreement is a standard but often overlooked term in a template contract, and it can be incredibly important in a sponsorship agreement.
  • Alcohol suppliers continue to innovate not only within the alcohol category, but in the non-alcohol space as well. Should a supplier wish to have its non-alcoholic brand sponsor an event, a team or a venue, both parties should understand and agree contractually about what rules and restrictions may govern the sponsor benefits and any activations that the parties wish to hold as part of the sponsorship. For example, if a non-alcoholic brand in your portfolio is sponsoring an event that is held in multiple states, the parties should align on whether it is worthwhile to take advantage of relaxed trade practice rules in one state (i.e., a state where conduct requires a nexus to the sale of alcohol in order for it to be prohibited). Alternatively, the parties may agree on a uniform nationwide policy to better mitigate regulatory risk, accommodating the laws of states where the usual alcohol beverage trade practice rules apply regardless of the alcohol content of the brand being sold or promoted (i.e., the states that prohibit an entity from engaging in certain conduct solely because it holds an alcohol license, regardless of whether the entity’s conduct touches or involves alcoholic beverages).

Sponsorships continue to be a valuable tool for alcohol beverage marketers. Ensuring that the contracts solidifying a sponsorship relationship are carefully crafted in light of our heavily regulated industry is critical to both mitigate risk to industry members and see the greatest return on a sponsorship investment.

For questions about sponsorship agreements in the alcohol industry, please contact Isabelle Cunningham or McDermott’s alcohol team.

Isabelle Cunningham
Isabelle R. Cunningham focuses her practice on regulatory matters, particularly in the area of alcohol and distribution. Isabelle concentrates her work on franchise law related to new product launches, transfers of brand rights, supplier rights in a distributor transaction and has experience drafting, reviewing and negotiating contracts. Read Isabelle Cunningham's full bio.

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