Thursday, September 24, 2020
In yet another pandemic-induced contract dispute, UCLA is suing Under Armour to enforce a sponsorship agreement. Pursuant to their contract, Under Armour was supposed to provide at least $280 million in monetary payments and products over a fifteen-year term. In return, UCLA promised to have its student-athletes and personnel wear exclusively Under Armour’s products. Now Under Armour wants out and UCLA is calling foul. And here we are – another pandemic-related lawsuit to discuss on this blog.
Under the sponsorship agreement, Under Armour could terminate if UCLA breached any material term of the Agreement, failed to participate in a complete regular season, or a head coach or senior administrator pleaded guilty or no contest to a “severe felony” and UCLA failed to take “reasonably appropriate actions.” There was a force majeure clause that required the party seeking excuse to promptly notify and take “all reasonable steps” to mitigate the effects of the force majeure. It further stated that delays from force majeure would not change Under Armour’s obligation to supply the delayed items. Force majeure was defined as an event that was (1) “beyond the commercially reasonable control” of the parties and (2) “render the performance…impossible or impracticable.” Examples included “acts of any regulatory, governmental body and/or agency.”
(IMO I think at this point, we should all agree that this pandemic was an unforeseen circumstance and qualifies as a force majeure event, unless it was expressly excluded. Everyone refers to it as “unprecedented” and whether it’s the governmental order that prevented the performance or the pandemic itself, i.e. someone fell ill from COVID-19, it qualifies. Of course, if the contract was entered into after say December that would be a different story since by that time, the pandemic was arguably foreseeable).
Under Armour gave several grounds for its termination but I want to focus on its force majeure argument. Under Armour claimed the pause of athletic events was force majeure, excusing its performance. UCLA disputed this, claiming that the clause applies only when an event “renders the performance….by the affected Party either impossible or impracticable.” UCLA argued that “(n)othing about COVID-19 made it ‘impossible or impracticable’ for Under Armour to meet its obligations…Nor did COVID-19 make it impossible or impracticable for UCLA to meet its material obligations under the Agreement.”
I think UCLA is right to a certain extent – the pandemic related fallout didn’t make it impossible or impracticable for Under Armour to perform. (Although I find it hard to believe that UCLA performed as expected given the circumstances). Rather, Under Armour’s purpose in entering into the contract was frustrated. This brings me to the all-too-common confusion between impracticability/impossibility and frustration of purpose. Under Armour’s purpose in entering into the contract with UCLA was to have its brand associated with UCLA’s athletes and to generate publicity for its brand by having its products viewed by the huge crowds that gather to watch UCLA games. And while UCLA claims that it met its obligations, I think an argument could be made that it did not and that its performance was made impracticable/impossible by the pandemic and related government ordered shut-down. In other words, it seems that Under Armour could claim UCLA's performance was a constructive condition to its performance but that UCLA breached - which then excuses Under Armour's performance.
Although I do think Under Armour has a frustration of purpose defense to UCLA's complaint, I don’t think that will work to excuse it from performance entirely. If the performance of the parties can be deferred or delayed, rather than entirely excused, that seems to be the right approach to minimize damage for both parties. My guess is that courts will be doing a lot of allocating risks/fairness assessment with an eye to how it will affect third parties and future transactions.
UCLA claims that the real reason Under Armour wants out of the contract is because it is struggling financially and has been for some time even pre-pandemic. This seems to me all the more reason that it's reasonable for Under Armour to want to escape its obligations under this contract given that it's not really getting what it bargained for given the cancellation of UCLA athletic events.