Contractual Issues Endorsement Deals

ZICO Beverages is Suing Chad Johnson for Breach of Contract

The following article was written by Benjamin Haynes, Esq.

Wide receiver Chad Johnson is being sued over a breach of an endorsement agreement.
Wide receiver Chad Johnson is being sued over a breach of an endorsement agreement.

On February 1, 2013, ZICO Beverages LLC (ZICO) filed a Complaint against Chad Johnson, aka Chad Ochocinco, in the state of California. Back in June of 2012, ZICO entered into an endorsement agreement with Johnson. Pursuant to the terms of this agreement, Johnson was to “refrain from engaging in any conduct that disparages or reflects unfavorably upon ZICO.” This is essentially a very broad morality clause. Just 47 days after entering into this agreement, Johnson was arrested on charges of domestic violence. Johnson eventually plead no-contest and is now serving a 12-month probation while being required to spend 26 weeks in a battery intervention program. Four days after the initial incident, ZICO terminated their agreement with Johnson for breaching his obligations under this morality clause.

On September 5, 2012, ZICO demanded that Johnson pay all of ZICO’s losses as a result of this breach. ZICO alleges that they have paid Johnson for services that he did not render, spent a large portion of their marketing budget in reliance of Johnson’s endorsement, and also declined other sponsorship opportunities in reliance upon the agreement with Johnson. Chad has allegedly declined to pay for ZICO’s damages based on the breach of contract.

This Complaint specifically brings two causes of action under both a breach of contract, and a breach of implied covenant of good faith and fair dealing claim. With regards to the breach of contract claim, ZICO states that Johnson breached by: 1) failing to fulfill his obligations under the agreement; 2) disparaging ZICO by words and conduct; 3) being involved in a public scandal that significantly impaired the use of his image; and 4) causing injury to ZICO’s reputation. With regards to the good faith and fair dealing claim, ZICO stated that Johnson breached this duty when he was arrested. Thus, ZICO claims that Johnson breached his obligation to be a positive spokesperson for ZICO.

As a result of Johnson’s alleged breach, ZICO is seeking no less than $40,886.76 in damages.

In the recent settlement between Rashard Mendenhall v. Hanesbrands, Rashard had brought a lawsuit against Hanesbrands for terminating his endorsement deal because of some morally questionable tweets Mendendall had published. In that case, the Judge stated, “Hanesbrands has an implied covenant of good faith and fair dealing not to act arbitrarily, irrationally or unreasonably in exercising discretion to execute its termination rights under the morals clause of the contract with Mendenhall.” This is a common expectation when companies impose morality clauses. In fact, most judges will not tolerate an unreasonable exercise of discretion when companies enforce morality clauses.

In the instant case, ZICO’s termination of this endorsement contract will most likely be found as a reasonable exercise of discretion on behalf of the company. Domestic violence, by actors and athletes, has been found to shed bad light on companies who use such people to endorse their product or service. While ZICO seemingly will be victorious in their breach of contract claim, the amount of damages awarded will be a key issue that remains. Look for this case to settle before attorney’s fees become astronomical.