From Perkins Law, by Eric C. Perkins, Esq.:
Today’s competitive marketplace requires businesses to build and maintain a positive reputation and image. But, with the advent of social media, companies are forced under a magnifying glass of worldwide proportions. A company’s brand and reputation can suffer significant and immediate damage when a scandal erupts involving a high-level executive, a franchisee, or a professional athlete or entertainer who endorses the company’s products or services. In the eyes of the public, a company representative’s misdeeds are often attributed back to the company. And, unfortunately, these examples of embarrassing and offensive misconduct are commonplace and found in every industry. One way that companies attempt to mitigate this risk and protect their brand is by including what are referred to as “morals clauses” in their employment agreements with key executives, franchise agreements, and endorsement agreements, among others.
What is a morals clause and what purpose does it serve?
A morals clause is a contractual provision that gives a company the unilateral right to terminate a contract or take other remedial action if the breaching party engages in misconduct that might negatively impact the company’s reputation. It allows the company to quickly sever its relationship with the offending individual; thereby distancing the company from whatever the person did (or is alleged to have done).
What are common problems to watch out for when reviewing or negotiating a morals clause provision?
While a morals clause can be helpful in protecting a company and encouraging good behavior on the part of the individual in question, these clauses present some drafting challenges and are often the subject of extensive negotiation. For the executive, franchisee, or pro-athlete being asked to agree to a morals clause in what might be a multi-million dollar contract, the key concern to watch out for when reviewing or negotiating a morals clause is overly broad or ambiguous language.
- Broad language. A morals clause that is too broad creates unnecessary risk to the individual that he or she could be penalized for things that could not reasonably be expected to hurt the company and, instead, could be used as a pretext to allow a company to back out of a deal for unrelated reasons. For example, some contracts include morals clauses that are triggered upon mere accusations being made or charges being filed, as opposed to an actual conviction or admission of guilt. From the company’s perspective, once a negative story garners media attention, the damage to the company’s reputation is arguably done—regardless of the ultimate legal outcome of the situation. From the individual’s perspective, due process and the presumption of innocence are important rights worth fighting for. Is it reasonable for an individual to bear the risk of losing a million-dollar endorsement deal because a disgruntled friend with a grudge falsely accuses the person of assault, triggering a feeding frenzy of media coverage and a criminal investigation which months later is closed without formal action being taken due to a lack of evidence?
A broadly worded morals clause allowed Nike to end its endorsement deal with Lance Armstrong in 2012 after multiple allegations surfaced that he used performance enhancing drugs over the course of his career. Nike’s morals clause was worded in such a way that Nike was allowed to immediately terminate its endorsement contract with Armstrong, without any penalty, should Armstrong act in a manner that would tarnish the reputation of the brand.
Generally speaking, if an individual has sufficient bargaining leverage, she should aim to negotiate for a specific, narrowly defined set of triggering events in a morals clause. For example, limiting the morals clause to convictions of specific crimes (e.g., felonies involving physical violence or fraud) will better protect the individual by reducing the universe of events that might triggers the clause.
- Ambiguous language. Confusing and ambiguous language in a morals clause adds an unnecessary element of unpredictability to its interpretation and enforcement. For example, a term commonly found in morals clauses is “moral turpitude,” a term not clearly defined by any statute or regulation. Instead, one must look case law to find judicial interpretations of the term. In general, moral turpitude is thought to be a term describing wicked, deviant behavior constituting an immoral, unethical, or unjust departure from ordinary social standards that would shock a community. Well, what in the world does that mean in 2020? Due to its malleable nature, inclusion of the term moral turpitude in a morals clause makes it difficult to predict what kind of conduct would trigger the clause and result in termination.
Accordingly, contracting parties would be wise to negotiate a provision that is written in plain English with reasonable specificity as to the prohibited conduct that would constitute a violation. Perhaps instead of a “moral turpitude,” a better drafted morals clause would consist of an itemized list of types of misconduct that would constitute a breach of contract.
What are common examples of “moral turpitude” that would trigger a morals clause?
While it may be advisable to avoid using the term “moral turpitude” in a morals clause, it remains a commonly used term in this context. Therefore, when determining if an individual’s conduct involves moral turpitude, courts typically depend on the person’s intentions (i.e., did the person intend to act in a reprehensible manner? Was the person being reckless when the act was committed?). Moral turpitude often also depends on the nature of the conduct. If the conduct is considered to be bad only because the law says so, then courts will generally not find an act of moral turpitude. However, if the crime is inherently bad and is not compatible with commonly accepted rules of morality, then the court will be more likely to find an act of moral turpitude.
In its Foreign Affairs Manual, the U.S. Department of State considers the most common acts involving moral turpitude to include: (i) fraud, (ii) larceny, and (iii) intent to harm a person or property. Further, crimes involving moral turpitude have further been grouped into three general categories: (i) crimes against property; (ii) crimes against governmental authority; and (iii) crimes against persons.
Note, however, this is only a brief overview of the various types of crimes that courts and government authorities have characterized as acts of moral turpitude; thus, it is important to recognize that there is no clear, comprehensive legal definition of moral turpitude.
What ultimately drives the outcome of morals clause negotiations?
One the one hand, concerns about broad and ambiguous language can be negotiated to tailor the language to more precisely address each party’s concerns and efficiently allocate risk. However, as noted above, it is the relative bargaining leverage between the negotiating parties (along with the particular needs and objectives of each contracting party) that ultimately drives the outcome of any negotiation concerning a morals clause.
In conclusion, a well-drafted morals clause can provide a clear message from a company to an employee, franchisee, or celebrity endorser as to what is expected of them while simultaneously providing a contractual mechanism to protect the company’s image in the event of a scandal or other unfortunate event involving one of its representatives.
If you have questions about morals clauses or business contracts in general, please e-mail or call Eric Perkins at email@example.com or (804) 205-5162.