Nike to stop making golf equipment: some thoughts from a contract law perspective

Nike to stop making golf equipment: some thoughts from a contract law perspective

Nike to stop making golf equipment: some thoughts from a contract law perspective

Nike’s recent announcement that it will transition out of making golf clubs, balls and bags was one of the bigger announcements this summer from a sporting goods and general retail perspective. As the subsequent surge in Callaway stock price suggests, this is good news for Nike’s competitors in the golf equipment market, particularly at a time when participation (and sales) levels in the game of golf continue to be hard to predict. From a sports marketing perspective, the announcement raises some different considerations, and as the second half of the golf season continues, the question over which clubs the likes of McIlroy, Woods and Koepka will have in their bag for next season and beyond continues to intensify.

These players have options open to them, that much is clear. The challenge for Nike is more clear-cut – retain talent to wear its footwear and apparel lines, whilst ensuring that the equipment used by the same talent is complimentary to, or at least does not dilute the Nike brand. Nike golfers will no longer be one-brand players, and there is now the potential at least for a Nike athlete to do the unthinkable and sign with the TaylorMade-Adidas Group (TMaG) for some or all of their clubs. TMaG’s looming presence encapsulates the issue – it currently produces some of the most popular clubs on the PGA and European Tours and may naturally attract certain Nike players, however absent a sale of TaylorMade (there’s a theme here!), a player using TMaG clubs and Nike clothing is the sort of clash of brands that both companies are likely to want to avoid (the same could also be said of Cobra, a subsidiary of Puma).

The contractual picture is likely to complicate this further. Deals between players and club manufacturers include an obligation on the relevant player to play certain clubs for an agreed period of time or number of events. This may be for a whole bag of equipment (e.g. Nike players), or for certain clubs only, and usually comes with an obligation to play the equipment that has been most recently released into the market by the manufacturer (with some notable exceptions). In Nike’s situation, much therefore depends on the wording of the latter obligation – if a player is contracted to play the clubs that have most recently been brought to market, then technically a decision to no longer manufacture clubs will not place the manufacturer in breach of the contract as the last-used clubs will continue to be the most recently released. In such instances, the relevant player may be bound to continue to use the same equipment until the end of their endorsement deal. A recipe for an unhappy golfer perhaps (assuming a lengthy deal), but possibly not a breach of contract from the manufacturer. The manufacturer’s position is less clear cut in those contracts which are more generally drafted, or which contain an obligation to play clubs that are currently manufactured and/or sold in the market – in these situations, a decision to withdraw from the relevant market will make it impossible for the manufacturer to provide the contracted kit.

Let’s be clear here – this is not a question of a frustrated contract (from which the parties could be released without liability). English law, at least, is clear that the doctrine of frustration is not available where the relevant event is brought about through the conduct of one of the parties. So, in a situation where a manufacturer finds itself unable to perform its contractual obligations due to its own business decisions, it feels more akin to a repudiatory breach scenario than anything else more forgiving. This is not enormously helpful from a leverage perspective if the same manufacturer is then looking to retain the relevant talent to endorse footwear and apparel.

This may all be a moot point if the opportunity is taken to refresh key endorsement deals to align with the new brand strategy. In doing so, the reality is likely to be that money talks – existing arrangements will certainly need to be amended or terminated to remove the equipment-related obligations, with new documentation drawn up to reflect any new deal, and sufficient financial incentives may mean that any issue of breach of contract is simply ignored. This also ignores the desirability of the new deal to the players, and in Nike’s situation, the reputation of its footwear and apparel is sufficiently high to bring with it a leverage of its own. However, in the absence of useful bespoke drafting, it seems difficult to imagine though how an amendment/termination/restatement situation might involve any repayment by the relevant athlete of base compensation sums already paid under the original contract or indeed a waiver of future sums due under the old deal. The same would also apply to those athletes with who do not enter into a new deal (for whatever reason).

It also stands to reason that a restriction on the use of the equipment of certain other manufacturers may also have its own price in contract negotiations in the same way any other measure of exclusivity might have in business more generally. It is also possible that any narrow restrictions may raise competition law concerns. A similar measure of control over which manufacturer an athlete signs with may be achieved through other contractual mechanisms rather than the restrictive covenant route. Either way, for Nike, it may take some time to work out a way of effectively co-existing with other brands, which is a challenge when one considers its entire golf strategy to date has been built around exclusive deals with its athletes.

The issue does seem primed to be resolved through a deal with each athlete though, and it will be interesting to watch how this plays out legally and commercially. Perhaps too, the word ‘transition’ is the most important one in the Nike announcement – it is perfectly possible for professional players to continue to use Nike clubs in the short to medium term, and for players like McIlroy who use older blade-style iron designs, this may make little practical difference for certain elements of their equipment (assuming Nike retains some level of club-making support for its players). Over time, however, the lack of investment in R&D will likely force the transition, and there are plenty of club manufacturers waiting with open arms for the cream of the Nike crop.

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