The Athlete As A Business Entity
ENSURING LONGEVITY IN THE FIELD OF PROFESSIONAL SPORTS
ELIJAH ADEFOPESmall Business seminar
12/5/2015
I. INTRODUCTION
James Brown once said, “show business has two parts; there’s the show and then
there’s the business”. Those words have never been as relevant as they are today. The
only difference between the show business world of the 1960’s and 70’s, of James
Brown’s prime, and today is the increase of its’ scope and monetization. Today’s
world of show business, or entertainment, now includes digital music and visual
media which is able to be distributed onto all manner of mobile devices and into
international homes in an instant. The entertainment business of the 21st century also
includes professional sports which have seen explosive growth, participation, and
viewership in the last few decades and have the billion dollar multimedia rights
agreements to prove it. The entertainment business is just that, a business. As the
facts, figures, and following analysis will show, any athlete seeking to create and
sustain long term success in the fields of sports and entertainment must see
themselves as a business person and then avail themselves of the appropriate
corporate and legal strategies to success.
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II. A LOOK AT THE NUMBERS
A. THE GROWTH OF PROFESSIONAL SPORTS IN AMERICA
In his book Show Me the Money, which details the business machinations behind
international soccer, Senior Advisor to Manchester City FC, Esteve Calzada said,
“Sport is too much of a game to be a business and too much of a business to be a
game”. This insightful quote captures the unique position of professional sports in
our world today. Despite its’ inability to tangibly affect the realities of our everyday
lives, professional sports has the power to move not only the hearts, but the
pocketbooks of millions around the world. An analysis into the professional sports
leagues of our day will show just how big of an economic machine professional
sports has become.
i. Major League Soccer
Our brief inquiry into the finances of American professional sports
begins with the top tier professional soccer league – Major League
Soccer (MLS) While, on the surface, the MLS league may appear to be
the red-headed step child of the American professional sports leagues,
its’ games are actually the third most attended. The MLS’ 19,151
average attendees are behind only the National Football League’s
(68,331) and Major League Baseball’s (30,477) average fan
attendance1. The National Hockey League follows with 17,502 and the
1 Statista, Average attendance pro sports leagues in the US 2014-2015 | Statistic (2015), http://www.statista.com/statistics/207458/per-game-attendance-of-major-us-sports-leagues/ (last visited Sep 11, 2015).
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National Basketball League rounds out the top five with 17,809
average attendees2.
The reason for the MLS’ lack of self-evident popularity can be
attributed to several reasons, but I believe that one of the most
significant reasons is the lack of media coverage. Media coverage and
the broadcasting of league games are vital to the financial success of
any sports league because a large portion of league revenues come
from multimedia/broadcast deals with television stations and networks.
The lack of media coverage, however, is really a symptom of what
may be a lack of interest by the general population. While MLS games
are more attended than NBA games, they are watched less on
television than NBA games. This may be because of cultural reasons
or because soccer is not perceived, in America, to be as exciting as the
NBA or other professional sports. One reason for this, which also
leads us to another reason for the MLS’ lack of self-evident popularity,
is that the best soccer players usually seek to play overseas for higher
pay and then come back to play for MLS in the sunset of their careers.
For these reasons, MLS salaries are significantly less than other
professional leagues. The median MLS salary is approximately
$91,827.00 compared with the NFL (approx. $770,000), MLB
(approx. $987,500.00), the NHL (approx. $2,000,000.00), and the
2 Id.
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NBA (approx. $2,245,886.00)3. I used the median salary because it is a
more accurate reflection of the typical salary; whereas the average
salary is often skewed based on the higher player salaries that are out
of the norm.
In spite of Major League Soccer’s position, in comparison with the
other professional sports leagues, it appears to be positioned for a take-
off. In 2014, MLS entered into an eight-year television broadcast deal
with ESPN and Fox for an annual average pay-out for MLS of $75
million4. The MLS also signed a similar eight-year deal, in the same
year, with Univision which will pay MLS an average of $15 million
per year5. When calculated in its’ entirety, this deal will net MLS an
overall amount of $720 million, an average $90 million per year,
which is a sharp increase from the $18 million per year average the
league previously received from its’ partner networks6. The effect of
these new deals on MLS popularity and growth remains to be seen, but
the sheer size of the numbers seem to bode well for the league
3 Statista, Average attendance pro sports leagues in the US 2014-2015 | Statistic (2015), http://www.statista.com/statistics/207458/per-game-attendance-of-major-us-sports-leagues/ (last visited Sep 11, 2015).4 Sportsbusinessdaily.com, MLSbigplay (2015), http://www.sportsbusinessdaily.com/Journal/Issues/2014/05/12/Media/MLS-TV.aspx (last visited Nov 16, 2015).5 Id.6 Id.
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ii. National Basketball Association
The National Basketball Association is one of the most popular
and financially successful sports leagues in the world. Since the days
of the 1992 U.S. Men’s Olympic Basketball “Dream Team”, the NBA
has been on an international platform, setting it apart from other
American leagues. The 2013 NBA Finals between the Miami Heat and
San Antonio Spurs was “seen in 215 countries and broadcast in 47
different languages”7. Also, in 2013, NBA teams played ten games in
six countries including England, Spain, and Brazil. Further evidence of
the NBA’s international influence is its’ unique popularity in Asia
which sets it apart from other American professional sports leagues. In
2002, the NBA created an “NBA China” division, and saw it bring in
$150 million in revenue in 2012. It also has a combined 70 million
followers on Sina Weibo and Tencent (Asian micro-blogging
platforms), compared with fewer than 400,000 followers for the
National Football League8.
The NBA has also deployed expansion efforts in India where, in
2011, it opened its first Indian office in Mumbai9. In 2012, “it signed a
7 Christopher Dragicevich, NBA to Become More Popular Internationally Than Domestically Guardian Liberty Voice (2014), http://guardianlv.com/2014/03/nba-to-become-more-popular-internationally-than-domestically/ (last visited Nov 16, 2015).8 Ben Sin, N.B.A. Looks to Asia for Next Growth Spurt Nytimes.com (2014), http://www.nytimes.com/2014/03/15/business/international/nba-looks-to-asia-for-next-growth-spurt.html?_r=0 (last visited Oct 16, 2015).9 Sam Riches, Basketball and Globalization - The New Yorker The New Yorker (2013), http://www.newyorker.com/business/currency/basketball-and-globalization (last visited Oct 19, 2015).
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broadcast deal with Sony Six, a sports channel owned by India’s Multi
Screen Media, to become the exclusive broadcaster of the N.B.A. in
the country and to host basketball events across India”10. The NBA can
arguably be considered the most international of all the American
leagues and its’ finances are not too shabby either.
In 2014, the NBA’s annual league revenue was $4.8 billion, an
increase of 5% from the previous year11. Sure to boost this revenue
even higher is the new nine-year, $24 billion television and media
rights deal that the NBA signed with The Walt Disney Company and
Turner Broadcasting in 201412. This deal is worth nearly three times as
much as the NBA’s previous television deal and moves the NBA’s
annual television and media rights revenue figure from approximately
$966 million to over $2.6 billion13.
Increased annual revenue and the new money coming in from this
deal has increased the worth of NBA franchises. According to Forbes
Magazine, as of 2015, the average NBA team is worth $1.1 billion14.
On its surface, this seems to be a rational calculation as the last three
10 Id.11 Forbes.com, Forbes Welcome (2015), http://www.forbes.com/sites/kurtbadenhausen/2015/01/21/average-nba-team-worth-record-1-1-billion-2/ (last visited Sep 10, 2015).12 "NBA Announces 9-year TV Deal with ESPN, Turner Sports." SI.com. Time, Inc., 6 Oct. 2014. Web. 13 Nov. 2015.13 Forbes.com, Forbes Welcome (2015), http://www.forbes.com/sites/kurtbadenhausen/2015/01/21/average-nba-team-worth-record-1-1-billion-2/ (last visited Sep 10, 2015).14 Id.
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NBA teams have sold for $2 billion (Clippers), $850 million (Hawks),
and $550 million (Bucks). Whether or not those franchise valuations
are supremely accurate, the international posturing and financial
growth of the National Basketball League ensures that it will be a
juggernaut in the professional sports field and a treasure chest of
opportunity for those athletes who are fortunate enough to join.
iii. National Football League
Although the National Football League does not have the same
international reach as the NBA, its’ domestic stronghold more than
makes up for it. In 2014, the NFL accrued a record-setting $7.3 billion
in league revenue15. Contributing heavily to this revenue is the NFL’s
nine-year, approximately $27 billion television rights deal with Fox,
NBC and CBS16. The NFL further capitalized on the demand for its
content by entering an eight-year, $12 billion deal with DirecTV
which granted DirecTV the rights to NFL games (NFL Sunday Ticket)
not broadcasted by local affiliates17.
Adding to the NFL’s broadcast revenue is its’ sponsorship revenue.
According to the International Evaluation Group, the NFL “and its 32
teams raked in a record-setting $1.07 billion in sponsorship revenue
15 Matthew Rocco, TV Deals Boost NFL Revenue to New Record Fox Business (2015), http://www.foxbusiness.com/industries/2015/07/21/tv-deals-boost-nfl-revenue-to-new-record/ (last visited Oct 24, 2015).16 Flint, Joe. "NFL Signs TV Rights Deals with Fox, NBC and CBS." Articles.latimes.com. Los Angeles Times, 15 Dec. 2011. Web. 13 Nov. 2015.17 Forbes.com, Forbes Welcome (2015), http://www.forbes.com/sites/greatspeculations/2014/10/08/directv-extends-its-deal-with-nfl-for-12-billion/ (last visited Nov 1, 2015).
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for the 2013 season, an increase of 5.7 percent over the 2012 season”18.
Credit for a significant share of the revenue increase can be claimed by
a new partnership between Microsoft and the NFL; showing the power
of professional sports, and the NFL in this case, as not just a game but
actual entertainment and a platform for commercial brands to gain
exposure19. The NFL/Microsoft deal will net the NFL approximately
$400 million and provides, among other things, that the Microsoft
Surface Tablets and other Microsoft technologies will be exclusively
used on the NFL sidelines and by all thirty-two teams20. As the
numbers have shown, the NFL is right up there with the best of them
and projects to continue its’ campaign for commercial dominance.
iv. Major League Baseball
Major League Baseball, “America’s Pastime”, ended 2014 with a
reported record $9 billion in total industry revenue21. Again, and on-
trend, this record-setting revenue is largely due to huge television
deals. In 2012, MLB signed an eight-year, $5.6 billion television rights
deal with ESPN22. The league also signed an eight-year deal with Fox 18 Ike Ejioche, How the NFL makes the most money of any pro sport CNBC (2014), http://www.cnbc.com/2014/09/04/how-the-nfl-makes-the-most-money-of-any-pro-sport.html (last visited Oct 18, 2015).19 Id.20 Id.21 Eric Fisher, MLBsettingabiggoalof15billioninrevenue Sportsbusinessdaily.com (2015), http://www.sportsbusinessdaily.com/Journal/Issues/2015/01/19/Leagues-and-Governing-Bodies/MLB-owners.aspx (last visited Nov 1, 2015).22 Mark Newman, MLB, ESPN agree on record eight-year deal Major League Baseball (2015), http://m.mlb.com/news/article/37476712/ (last visited Oct 12, 2015).
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and Turner Broadcasting, granting the networks MLB weekend and
playoff rights for a cumulative sum of $6.8 billion23. With no signs of
slowing down and, at the risk of sounding repetitive, the MLB’s
financial ecosystem provides another environment in which capable
athletes can thrive.
v. National Hockey League
Last, but not least, is the National Hockey League. According to
reports, in what seems like a recurring headline for professional sports
leagues, the NHL witnessed record revenues of $3.7 billion in 201424.
Following in the steps of its’ rival leagues, the NHL signed a ten-year
American television rights deal with NBC Sports Group25. The NHL
also followed up this deal, in 2013, by signing a Canadian media rights
agreement with Rogers Communications for 12 years and $5.2 billion;
establishing itself as a major player in the professional sports sphere.26
III. MANAGING THE ENTITY
Because of the large financial opportunity available to athletes through their
collectively bargained salaries, endorsements, and other opportunities that become
available via a professional athletic career, it is vital for professional athletes to
23 Joe Lucia, Turner and Fox to retain MLB rights Awful Announcing (2012), http://awfulannouncing.com/2012-articles/turner-and-fox-to-retain-mlb-rights.html (last visited Oct 18, 2015).24 James Mirtle, Report: NHL revenues to hit record $3.7-billion The Globe and Mail (2014), http://www.theglobeandmail.com/sports/hockey/globe-on-hockey/report-nhl-revenues-to-hit-record-37-billion/article19080171/ (last visited Sep 6, 2015).25 Travis Hughes, Why the NHL's new TV deal with NBC, not ESPN, is great for hockey and the Flyers Broad Street Hockey (2011), http://www.broadstreethockey.com/2011/4/20/2122187/nhl-tv-contract-nbc-comcast-espn-philadelphia-flyers (last visited Nov 10, 2015).26 Sportsbusinessdaily.com, RogersNHLReach12-YearMediaRightsDealWorth5.2BHasNoNationalGames (2015), http://www.sportsbusinessdaily.com/Daily/Issues/2013/11/26/Media/NHL-Rights.aspx (last visited Nov 2, 2015).
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cultivate a business mindset. This means that they must actually put in the work to
become capable of operating themselves and their career as a business entity. One
step towards achieving this goal is by securing and assembling a business team.
Before an athlete assembles their team, however, they must understand that they are
ultimately responsible for their affairs. Too often, athletes get into financial trouble
because of a lack of due diligence and monitoring of those monitoring their money
and business affairs.
One such example of this is the case of Williams v. CWI, Inc. In this case,
professional basketball player Reginald Williams and his wife brought a claim against
a financial advisor and his associated companies to recover $50,000 that the Williams
had entrusted to the defendant, Waymon Hunt, through one of his affiliated
companies27. Looking to do the right thing with his money, Mr. Williams was referred
to Mr. Hunt. The two entered an agreement whereby Mr. Hunt would provide tax
preparation and financial advisory services to Mr. Williams; and in the course of this
agreement, Mr. Hunt brought to the Williams' attention an opportunity for investment
involving the purchase of a product; atmospheric reverse refrigeration heating units28.
The Williams agreed to buy $1 million worth of these units through a Hunt affiliated
company, Success Through Association (“STA”)29. The Williams were unaware that
STA was a Hunt operated and controlled company and only had $301.50 in its bank
account; nonetheless, the Williams agreed to purchase the reverse refrigeration
units30. Mr. Hunt, however, never held up his end of the bargain; misappropriating the
27 Williams v. CWI, Inc., 777 F. Supp. 1006, 1006-07 (D.D.C. 1991)28 Id. at 100729 Id. 1006-0730 Id.
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Williams’ $50,000 deposit; as well as failing to perform according to the various
terms of their agreement31.
In its’ ruling, the court found that the Williams were entitled to a judgment
against Mr. Hunt on both contract and fraud theories32. Critical in this case, for the
purpose of this paper is not necessarily the holding; but rather the insight that with
greater due diligence into the parties and terms of the deal, Reginald Williams could
have averted the fraud entirely.
Another example of what can happen when athletes aren’t diligent about their
business affairs is the famous case of sports agent, Harry Stern. In 1986 his company,
Technical Equities Corporation, declared bankruptcy taking down with it, 70
professional athletes and nearly 700 others33. Mr. Sterns’ company “allowed
individuals to invest in high-tech, manufacturing, and real estate deals”34. Many of
Mr. Sterns’ athletic clients invested their life’s earnings into his company. Mr. Stern
eventually plead guilty to criminal fraud charges and was sentenced to a five-year
prison term35. More examples36 include: Linda Frykholm, who defrauded several
investors, including Brian Simmons of the Cincinnati Bengals, of a total of $15
million; Richard Sorkin who, while performing duties as a sports agent, gambled and
lost more than $1 million in earnings of over fifty hockey and basketball players; and
financial advisor, Robert Lum, who was ordered to pay former NBA player, Scottie 31 Id.32 Id. at 100833 Shropshire, Kenneth, and Timothy Davis. "Unscrupulous and Criminal." The Business of Sports Agent. 2nd ed. Philadelphia: U of Pennsylvania, 2008. Print34 Id.35 Id.36 Id.
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Pippen, $11.8 million due to fraudulent representation. The examples go on and on.
Unfortunately, there are no shortages of instances where professional athletes have
been taken advantage of by those closest to them. These stories are reminders to
professional athletes and would-be professional athletes everywhere to pay close
attention to everything that concerns them.
A. BUILDING A SOLID TEAM
Undoubtedly, understanding that one is ultimately responsible for his affairs is
vital for professional athletes. Once this principle is understood, understanding the
roles of the various business team members can follow.
i. Lawyer
An athlete or entertainer needs good legal counsel to advise them
concerning their careers, contracts, business ventures, and any other legal
matters that may arise. The professional may hire a general attorney who will
attempt to handle the myriad of issues that face the professional, or an
attorney who specializes in a specific area and will assist the professional in
hiring other attorneys who will specialize in specific areas. The latter is the
most advisable course of action as the law is becoming increasingly complex
as business spheres and technology evolves. Such specialized areas may
include entertainment, sports, corporate, intellectual property, bankruptcy, tax;
etc. While many lawyers may combine several areas, it is best to hire an
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attorney who is strong in the areas in which they profess to practice. Lastly, a
skilled attorney is a valuable resource to analyze and oversee the other
members of the professional’s team, making sure that they all are conducting
their affairs and stewarding the professional’s business interests prudently.
ii. CPA
A CPA is a Certified Public Accountant. This individual is responsible for
bookkeeping and accounting, risk management, tax preparation, investment
planning, and estate planning. The professional will work closely with their CPA
to make sure that they secure their financial future, meet financial goals, and
make wise and profitable investments. Some financial advisors may also have
access to high profile and high-net worth individuals and networks that can be of
value to the professional, often able to connect the professional with advantageous
investment opportunities.
iii. Sports Agent
A sports agent (or athlete manager), is an individual tasked with helping a
professional athlete manage, direct, and grow their career. A sports agents role is
generally to negotiate professional contracts for the athlete as well as
endorsements (although most professional athletes don’t get the big endorsements
promised; and few get state or local endorsements). In recent times, many sports
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agents and agencies have evolved in regard to the kind of services that they
provide to athletes. Some agencies offer traditional team and endorsement
negotiations plus CPA/Accountant services, and also legal services.
Other agencies offer additional “perks” to their clients by paying for certain
expenses before the professional draft like renting an apartment, transportation,
food, clothes, and training. It’s important for professional athletes to know that
anything paid for by the sports agent can and usually is required to be paid back
(especially when the athlete decides to break ties with the agent).
IV. PROTECTING THE ENTITY
A. THE BENEFITS OF INCORPORATING
For high net-worth individuals such as professional athletes and entertainers, an
area of significant concern is (or should be) retaining the money they will earn during
the course of their careers. This concern is especially significant for professional
athletes who only have a few years, on average, of professional playing time. A good
business team will assist the individual in accomplishing this goal, often using the
vehicle of an incorporated entity. The benefits of creating and incorporating such an
entity for an athletes’ business endeavors are largely tax and liability based in nature.
Depending on the type of entity incorporated, an entity can shield the individual from
most personal liability claims. An incorporated entity, when used strategically, can
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also significantly minimize the amount of taxes that the individual is responsible for
paying. Incorporated business entities can be used for a variety of purposes including,
but not limited to, an intellectual property management and licensing company, a real
estate investment company; and any other business that the individual can fathom.
Often, however, professional athletes choose to incorporate an entity for specific use
as a loan-out company or charitable foundation.
i. Loan-Out Companies
“A loan-out company is a legal business entity established for the purpose
of providing the personal services of its owner/employee to third parties”37. It
is referred to as a “loan-out company because it “lends” its’ employee’s
services by making contracts with the end users of those services38. In other
words, the only difference between a loan-out company and any other
incorporated entity is its’ purpose. Accordingly, a loan-out company may take
on any legal structure (LLC, S-Corp, or C-Corporation) that the owner
desires39. A loan-out company is advantageous because instead of an
individual signing a contract with another company, such as an athletic shoe
company, the individual’s loan-out company would sign the contract on
behalf of the individual, “loaning-out” their services. This kind of agreement
between an individual’s loan-out company and another company is known as
a loan-out agreement.
37 Gordon Firemark, Should you have a loan-out company for your work in entertainment? - Entertainment Law Offices of Gordon P. Firemark Entertainment Law Offices of Gordon P. Firemark (2015), http://firemark.com/2015/01/12/should-you-have-a-loan-out-company-for-your-work-in-entertainment/ (last visited Oct 1, 2015).38 Id.39 Id.
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Often times, the other company that is wanting to do a deal with the
individual (and his loan-out company) will additionally request what is known
as an inducement agreement. An inducement agreement is a binding
agreement between the other company and the individual guaranteeing that
the individual will abide by the terms of the loan-out agreement40.
This inducement agreement is needed to ensure that the loan-out
agreement is not used as a shield to a breach of contract claim, to the
detriment of the other party. One last point of importance when creating and
executing loan-out companies and loan-out agreements is that the individual
will want to ensure that they have entered into a legally sufficient employment
agreement with their loan-out company. Without such an agreement, the
individual is not a legal employee of the loan-out company and the loan-out
agreement will most likely be construed as a sham by any involved tax or
legal entities in the case of complications.
There are several benefits of loan-out companies such as: asset protection,
fiscal year tax planning, lower corporate tax rates, qualified pension and
profits sharing plans, and medical reimbursements and other employee benefit
plans41. The negatives of loan-out companies are minor in comparison and
include annual operating expenses such annual filings, and state tax payments,
double taxation requirements if the company owner(s) elect for the company
40 Litwak, Mark. "Artist Employment." Contracts for the Film & Television Industry. Third ed. Beverly Hills: Silman-James, 2012. 70. Print.
41 Gordon Firemark, Should you have a loan-out company for your work in entertainment? - Entertainment Law Offices of Gordon P. Firemark Entertainment Law Offices of Gordon P. Firemark (2015) http://firemark.com/2015/01/12/should-you-have-a-loan-out-company-for-your-work-in-entertainment/ (last visited Oct 1, 2015).
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to be taxed as a C-Corporation, and the IRS may choose to disregard the entity
and reallocate income if the company is not properly established and
documented42. Attorney Gordon Firemark, in his article on loan-out
companies, states that the IRS will choose to reallocate the companies income
and cause the individual to pay a higher personal tax rate when “the company
is formed after the signing of the contracts for the individuals services”43. If
formed and operated properly, however, a loan-out company is a strategic
corporate vehicle that an athlete can use to his economic advantage.
An example of a professional athlete who has used the loan-out
corporation strategy to his advantage is Lebron James. While Lebron could
have just done what so many athletes do and taken every endorsement dollar
that was thrown at him, he decided to be proactive and take control of his
brand and career. He incorporated a company, named it ‘LRMR’, and hired
his friend Maverick Carter as a partner and made him CEO of LRMR. While I
don’t know the inner workings of this company, it is clear that they use the
revenue they get from marketing Lebron to fund the company, pay staff, and
plan for future growth and investment. This wisdom and strategy led to a
ground breaking partnership between LRMR and Fenway Sports Management
(FSM)44.
FSM is a subsidiary of Fenway Sports Group. Fenway Sports Group owns
entities like the Boston Red Sox, Liverpool F.C., Fenway Park, Anfield, 42 Id.43 Id.44 Silva, Steve. "LeBron James Joins Forces with Fenway Sports Group, Gets Stake in Liverpool." Boston.com. Boston Globe Media Partners, LLC, 6 Apr. 2011. Web. 17 Nov. 2015.
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Roush Fenway Racing, and NESN45. FSM provides marketing and
representation services for all of those companies that I just mentioned and
LRMR which, currently, has Lebron James and Johnny Manziel as clients.
Reports46 state that this deal makes LRMR and FSM the exclusive marketing
representatives of Lebron James and as part of the deal, grants Lebron a piece
of Liverpool F.C., a premier league football club owned by Fenway Sports
Group.
ii. Charitable Foundations
Charitable organizations are not-for-profit organizations which can be
set up by professional athletes. These organizations are generally set up
with a stated charitable mission. These organizations can be attractive for
the tax protection they provide professional athletes. Setting up a
charitable organization also provides the opportunity for an athlete to
employ relatives and friends. Because of these incentives, charitable
foundations are also opportunities for professional athletes to run afoul of
the law. “An ‘Outside the Lines’ investigation of 115 charities
founded by high-profile, top-earning male and female athletes
has found that most of their charities don't measure up to what
charity experts would say is an efficient, effective use of
money”47. “Using guidelines set by nonprofit watchdogs Charity
Navigator, the Better Business Bureau and the National
Committee for Responsive Philanthropy, ‘Outside the Lines"’
45 Id.46 Id.47 Lavigne, Paula. "Athlete Charities Often Lack Standards." Espn.go.com. ESPN, 3 Mar. 2013. Web. 5 Dec. 2015.
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found that 74 percent of the nonprofits fell short of one or more
acceptable nonprofit operating standards”48. For this reason,
professional athletes who are unprepared to run, or have
someone, run their charitable foundations according to IRS
guidelines, should think about simply incorporating a for-profit
company, such as a loan-out company, and hire family or
friends to manage their charitable giving; as well as their other
business endeavors.
V. METHODS OF EXPLOITING THE ENTITY
The economic environment of the field of professional sports has been discussed
up to this point. Also discussed has been the necessity and means of preparing a firm
foundation for one’s career as a professional athlete. It is not enough, however, to
simply know how much money is being generated in one’s field, nor is it enough to
simply incorporate an entity and assemble a team. As a professional athlete, one must
have a strategy for exploiting his value.
A. RIGHT OF PUBLICITY
The right of publicity gives professional athletes the right to protect the
commercial use of their name, image, and likeness. Four elements are needed in order
to bring a right of publicity infringement claim: the plaintiff must show that (1) the
defendant used the plaintiff’s identity, (2) the use was for the purpose of commercial
gain, (3) it was without consent, and (4) the plaintiff suffered monetary harm as a
48 Id.
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result49. The right of publicity is a major right for athletes and entertainers and can
prove highly valuable when enforced correctly.
In the longstanding case of Michael Jordan vs. supermarket chain, Dominick’s,
the jury recently held that the current owner of the chain was on the hook for $8.9
million for using Jordan’s name and promoting a product in an ad without his
permission. This massive monetary judgment was reached with the help of “sports
economist Andrew Zimbalist, who testified that Jordan's fair market value for the ad
was $10 million”50. Jordan’s advisors also pointed to his “brand strategy” in which
Jordan purposely limits the number and type of companies he endorses, so as to drive
up his value51. The jury evidently sided with Jordan and awarded him a dollar figure
not too far off from what he was arguing.
In another right of publicity case, Ali v. Playgirl, Inc., Muhammad Ali brought a
claim against Playgirl, Inc. for their unauthorized printing, publication and
distribution of an objectionable portrait of Ali in the February, 1978 issue of Playgirl
Magazine (“Playgirl”), a monthly magazine published by Playgirl, Inc.52 The Court
held that the portrait, which included the phrase “The Greatest”, was sufficient to
violate Muhammad Ali’s right of publicity53. In their ruling, the Court heavily relied
on New York’s right of publicity law, Section 51 of the New York’s Civil Right Law
which states in part that, “any person whose name, portrait or picture is used within
49 Hilton v. Hallmark Cards, 499 F.3d 894, 909 (2010)50 Darren Rovell, Supermarket chain must pay Jordan $8.9M ESPN.com (2015), http://espn.go.com/nba/story/_/id/13486052/supermarket-chain-pay-michael-jordan-89-million-use-name (last visited Nov 1, 2015).51 Jansen Kim, Corilyn Shropshire & Wendy Donahue, What Michael Jordan's Dominick's lawsuit teaches us about business chicagotribune.com (2015), http://www.chicagotribune.com/business/ct-michael-jordan-dominicks-case-lessons-0823-biz-20150821-story.html (last visited Nov 3, 2015).52 Ali v. Playgirl, Inc., 447 F. Supp. 723, 725 (S.D.N.Y. 1978)53 Id.
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this state for . . . the purposes of trade without the written consent (of that person)
may maintain an equitable action . . . against the person, firm or corporation so using
his name, portrait or picture, to prevent and restrain the use thereof; and may also sue
and recover damages for any injury sustained by reason of such use . .54”
Ali’s estate showed further shrewdness and understanding of the value of
publicity rights when it licensed 80% of Ali’s name and likeness to entertainment and
licensing firm CKX for a reported $50 million in cash55. Regardless of whether the
athlete or entertainer is legendary like Muhammad Ali or just starting out in their
career, the right of publicity provides that no one may capitalize on their name and
likeness without permission. The right of publicity also prepares the pathway for
deals such as endorsements to be made, often beginning with the licensing of
intellectual property.
B. INTELLECTUAL PROPERTY
i. Trademarks
In today’s world where a person’s, especially, a celebrity’s “brand” are hot
button issues, securing the trademarks associated with one’s business is
essential. In my opinion, the word “brand” simply refers to one’s reputation as
a provider of goods or services. Historically, the word referred to the mark
that a seller used to distinguish his products from the products of another.
These definitions of a brand are not necessarily adverse and can be used
54 Id.55 Money.cnn.com, Muhammad Ali sells rights to name, image for $50M - Apr. 11, 2006 (2015), http://money.cnn.com/2006/04/11/news/newsmakers/muhammad_ali/?cnn=yes (last visited Sep 7, 2015).
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synergistically. For professional athletes, this synergy can be found in high
performance, a good publicist, and by securing trademarks.
“Trademark law comes from many sources: federal and state trademark
statues, federal and state statutes defining and prohibiting ‘unfair competition’
between businesses, and federal and state cases interpreting these laws”56.
“The federal law that governs trademark rights and registration is known as
the Lanham Act”57
Trademarks generally fall into two categories: marks that identify goods or
products and marks that identify services58. The latter category is often
referred to as a “service mark”; although the term trademark can be used
interchangeably for both. “A trademark is any word, design, slogan, sound, or
symbol that serves to identify a specific product brand”59. Examples of
trademarks include Nike’s “Just Do It”, Burger King’s “Have It Your Way”,
and Apples’ “Think Different”. “A service mark is any word, phrase, design,
or symbol that operates to identify a specific brand of service”60. Examples of
service marks include Apples’ apple logo, the word Adidas in reference to the
athletic goods company, and the MTV logo. The moment that any business or
56 Elias, Stephen, and Richard Stim. "A Trademark Primer." Trademark: Legal Care for Your Business & Product Name. Ninth ed. Berkeley: NOLO, 2010. 22. Print.
57 Id.58 Id. at 1859 Id.60 Id.
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product name or any other identifying mark or sound is used in commerce or
advertising; it is eligible for recognition as a trademark (or service mark).
Trademark protection is based on a “strength” classification system where
distinctive trademarks are considered strong and protectable61. There are
generally five categories of trademarks that govern the distinctiveness of a
prospective mark and its’ ability to be registered as a trademark. The five
categories are fanciful, arbitrary, suggestive, descriptive, and generic. Marks
that are fanciful, arbitrary, or suggestive are considered distinctive enough to
function as trademarks62. However, a descriptive mark can only be registered
as a trademark if it obtains secondary meaning; while generic marks can never
be trademarked63.
Fanciful marks are considered the strongest or most distinctive type of
marks. Fanciful marks are those marks that have been created for the singular
purposes of operating as a trademark and have no secondary meanings64. An
example of a fanciful mark is google. An arbitrary mark is one that has a
common meaning, but not a meaning associated with the product or service
(Apple Computers)65.Suggestive marks are marks that suggest a quality or
characteristic of the goods and services66. Suggestive marks are often difficult
to distinguish from descriptive marks, since both are intended to refer to the
61 Id. at 2562 Bitlaw.com, Strength of Trademarks (BitLaw) (2015), http://www.bitlaw.com/trademark/degrees.html (last visited Oct 11, 2015).63 Id.64 Id.65 Id.66 Id.
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goods and services in question67. Suggestive marks require some imagination,
thought, or perception to reach a conclusion as to the nature of the goods
(Microsoft – suggestive of software for microcomputers)68.
The next category of distinctiveness are descriptive marks. Descriptive
marks are marks that simply describe the product or service (Hot Pancakes,
Fast Shipping, Strong Movers). A descriptive mark can, however, become
distinctive when it achieves secondary meaning. This occurs when consumers
recognize the mark as originating from a single source (the objective of
registering trademarks). “Secondary meaning can be achieved through long
term use, or large amounts of advertising and publicity”69. “The acquisition of
secondary meaning is often proven through the use of consumer surveys that
show that consumers recognize the mark as a brand, such as ‘FORD’, as
opposed to a descriptive term, such as ‘reliable’”70.
Regarding the ability of the mark “Ford Motors to be registered, typically
last names are not able to be registered unless they achieve secondary
meaning. Generic marks are those that identify an actual product or service
(Basketball, Apple, or Delivery). This category of mark is prohibited from
registration to prevent from blocking the public from using every-day, generic
terminology. “A valid trademark can become generic if the consuming public
misuses the mark sufficiently for the mark to become the generic name for the
67 Id.68 Id.69 Id.70 Id.
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product”71. “The prime examples of former trademarks that became the
generic name for a product are Aspirin and Cellophane72.An example of a
trademark that was once considered to be possibly generic is Xerox.
Athletes have further ability to protect and exploit their intellectual
property through the Madrid Protocol. The Madrid Protocol, adopted by the
United States in 2003, simplified the process of extending domestic trademark
protection to its 78 member countries, including the European Community
which is designated as a whole73. The registration and maintenance of
trademarks is very important for athletes. Professional athletes are able to
trademark their names as service marks when used in association with
endorsements or as trademarks when used in association with products such as
shoes. Also, and because, they are in the medias’ spotlight, athletes often have
the opportunity to trademark phrases and logos they have made popular.
One example of an athlete who failed to take the appropriate steps to
protect his brand through trademark law is Michael Jordan, who recently had
his trademark case “against a company using a similar name and logo to his
Nike-produced brand” dismissed by a Chinese court74. The defendant in this
case, was a Chinese company called Qiaodan Sports. “Qiaodan” is a Chinese
word which can be translated as “Jordan”; among other things. “As well as the
name, Qiaodan's products carry a silhouette of a leaping basketball player 71 Id.72 Id.73 Chris Lonegro, For International Brand Protection Consider Madrid Ober.com (2009), http://www.ober.com/publications/642-for-international-brand-protection-consider-madrid (last visited Oct 7, 2015).74 "Michael Jordan Loses China Trademark Suit: Report." Businessinsider.com. Business Insider, Inc., 29 July 2015. Web. 5 Dec. 2015.
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resembling the "Jumpman" logo used by US sporting goods giant Nike to
promote its Air Jordan brand”75. In its’ decision, the Court referred to the fact
that “Jordan” is not the only possible translation of Qiaodan76. Also playing a
part in the Courts’ decision was the fact that Michael Jordan did not register
“Qiaodan”, in China, as a trademark associated with his goods and services.
Understandably, this would have taken great foresight; but, nonetheless,
someone with a great international reach (like Jordan) could have saved
millions if he would have taken advantage of the Madrid Protocol.
Another example of not taking advantage of trademark rights and
privileges are the players of the Seattle Seahawks secondary. The Seattle
Seahawks own several registered trademarks for the phrase “Legion of Boom”
which describes their defensive secondary. This term was actually coined by
the fans of the Seahawk team. To me, this fact shows a failed opportunity for
the players who make up the Seattle secondary to capitalize on their value.
While it is true that such a registration, and any attempted sale of products
associated with the phrase, would be difficult because the Seahawks own all
intellectual property associated with the name “Seattle Seahawks” as well as
jerseys and other team likenesses. The NFL also owns and polices, very
heavily, their own registered trademarks. However, I believe that some
creative maneuvering could have made this registration possible for Seattle
Seahawk players such as Richard Sherman and Kam Chancellor. A successful
registration would have allowed the players to license their trademark to the
75 Id.76 Id.
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Seattle Seahawks who, because of their own trademarks (team logo, team
name, NFL association; etc.), would undoubtedly be able to exploit the
trademark to a greater degree.
C. REAL ESTATE
Real estate investment is another option for professional athletes seeking to
preserve and multiply wealth. On a basic level, real estate investment can include one
of four avenues. The first is real estate flipping which occurs when individuals buy
old, and often run-down houses, fix them up, and immediately sell them for a profit.
Secondly, is the buy and hold method which includes buying real estate property
(houses, apartments, office buildings; etc.) and charging rent to tenants; often selling
the property years after the initial buy. Thirdly, is real estate development which is
essentially the construction of real estate properties whether it be a hotel, park, or
resort. Lastly, are Real Estate Investment Trusts (REITS); companies that own
income producing real estate. As an aside, the relationship between professional
sports and real estate is interesting because the way in which real estate property is
valued is pretty much the same way that professional athletes are valued by teams. In
fact, there are several principles of real estate economics that apply to professional
athlete valuations. Applied to their use in the field of professional sports, these
principles are:
1) Principle of Substitution - The maximum value of an athlete is determined by
the cost of acquiring another athlete with equal attributes and statistics, assuming no
costly delay is encountered. The best way to determine an athletes’ value, to the team,
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is to look at what other athletes with similar statistics and at similar positons have
gotten.
2) Principle of Highest and Best Use – An athlete will yield the highest value when
he/she is being employed in his/her highest and best legal use. The position at which
an athlete excels to the highest degree is the position at which they will command the
highest dollar amount.
3) Principle of Competition – When the demand increases, a new supply of athletes
is brought into the marketplace. When demand falls, only those athletes with the best
service will remain. For example, when teams in a certain sports suddenly want a
specific skill-set or position, it opens the door for athletes with that skill set to be
acquired. When there are too many athletes with that skill set or at that position, only
the best will be acquired.
4) Principle of Supply and Demand - When the supply of athletes (especially at
certain positions or with certain skill sets) outweighs the demand (at those position or
for those skill sets), the price of the athlete will fall. When the demand of athletes
(especially at certain positions or with certain skill sets) outweighs the supply of
athletes (at those positions or with those skill sets), the price of those athletes will
increase. This can typically be seen in free agency. When there are a lack of free
agents at certain positions, free agent players will usually be able to create a bidding
war and receive a premium price. Alternatively, when there is an abundance of a
certain position, the best will get a premium price; while the others will have to take
what they can get.
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D. FRANCHISING
Franchising is the licensing, by a franchisor, of its’ trademarks, and operational
system and trade secrets, to a franchisee for a license fee. In practice, the way
franchising works is that a company (I will use McDonalds as an example) allows an
investor to capitalize off of its’ “brand awareness”, by opening another (or several)
McDonalds. The way this works is that if a professional athlete were the investor (or
the franchisee), he would pay McDonalds (the franchisor) an initial fee to open up a
new McDonalds store. This initial fee, depending on the value of the franchisor, can
be in the tens of thousands to low millions (what many athletes spend on jewelry, cars
and clothes that make them no money).
The initial fee would give the professional athlete the right to open up a new
McDonalds store in a certain location. Once the franchisee pays McDonald’s the
initial fee, McDonalds would use the money to build out the physical McDonalds
building in the chosen location, provide the necessary equipment, as well as any other
support outlined in the franchise disclosure document; the binding contract agreement
between the franchisor and franchisee which outlines the terms and conditions of the
business relationship.
The benefit of franchising is that it allows the investor to capitalize off of a
proven business model. Instead of starting a brand new company with the uncertainty
of whether or not it will succeed, franchising allows individuals to invest into a
company that is already successful and has already perfected their system. Another
benefit is that it can provide consistent income for athletes preparing to transition into
their post-career. A downside of franchising is that a franchisee does not “own” the
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company; they are an investor. Franchisees must pay royalties on all of the income
that they make from the franchise that they open. Another downside is that because
franchisees don’t own their franchises, they are restricted by the marketing,
employment, and organizational policies and regulations of the franchisor.
There are several former professional players that have been successful with
franchising. Former NBA player, Jamal Mashburn, invested in 37 Papa John’s, 34
Outback Steakhouses, three Dunkin’ Donuts stores, and currently has the largest
Toyota dealership in Kentucky77. Another professional athlete, Peyton Manning,
despite his numerous endorsements has invested in over 20 Papa John’s franchises78.
Another former NBA player, Magic Johnson, invested in 105 Starbucks, TGI
Friday’s, and Loew’s Movie Theaters79. Last, but definitely not least, is former
Milwaukee Buck – Junior Bridgeman. He is the second-largest Wendy’s franchisee
with 195 stores; he has also invested in 125 Chili’s restaurants, 45 Fannie May
Chocolate stores, and other retail franchises80. His employee roster numbers 9,000
people and estimates of his net worth range from $250 million to $400 million; which
did not come from playing basketball, but rather investing in franchises81.
B. CONCLUSION
77Bogar, Craig. "Former Professional Athletes and Successful Franchising." Sportsfitnessnetwork.com. Sports Fitness Network, 2 June 2014. Web. 17 Nov. 2015. 78 Bradford, Harry. "Peyton Manning Purchases 21 Colorado Papa John's Franchises Just 2 Weeks Before Weed Legalization." HuffingtonPost.com. HuffingtonPost.com, Inc., 8 Nov. 2012. Web. 18 Nov. 2015.79 Bogar, Craig. "Former Professional Athletes and Successful Franchising." Sportsfitnessnetwork.com. Sports Fitness Network, 2 June 2014. Web. 17 Nov. 2015.80 Lawrence, Andrew. "Junior Bridgeman: A Different Kind of Franchise Player." Fortune.com. Time Inc. Network, 7 July 2014. Web. 18 Nov. 2015.81 Id.
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The field of professional sports is a billion dollar-generating field that is run by
experts and business savvy individuals. I would guess that most professional athletes
are not adequately prepared to operate, at a high level, alongside those (team owners,
team executives, CEO’S; etc.) who have been operating in and alongside the field of
professional sports for a long time. For this reason, it is important for professional
athletes to invest in their own business knowledge and assemble credible, and
competent individuals to be a part of their business team. Above all, professional
athletes must reverse, what has often been, years of over-dependence on others, and a
lack of academic and intellectual accountability on their parts. While this has not been
an exhaustive treatise on every business and legal aspect of professional sports; this
paper has set out a basic blueprint for the professional athlete. In order to maximize
his business success, the professional athlete must first see himself as a business
person, his career as a business entity, and seek to manage, protect, and exploit the
entity.
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