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Tuesday, August 14, 2007
11th Circuit Overturns Injunction Against NASCAR on Standing Question
The 11th Circuit handed NASCAR won a big victory in a high-stakes case involving the exclusivity of its sponsorship agreement with Nextel/Sprint over a claim by a race car driver that the use of the logo of AT&T Mobility (formally known as a Cingular Wireless) pursuant to an 2007 agreement and addendum.
The facts of the case demonstrate the difficulty when an umbrella organization like NASCAR consummates inclusive sponsorship agreements that may conflict with the terms of agreements signed by its participants, the racing teams. In 2001, AT&T became the primary sponsor of one of the racing teams, RCR, (known as the # 31 Car, driven by Jeff Burton). That agreement originally ran from 2001-2004, and the parties renewed this agreement to run from 2005-2007, and includes an exclusive right to negotiate a renewal beyond 2007. At the time of the agreement, the #31 Car featured the Cingular brand and logo as part of its paint scheme.
After many years, NASCAR and Winston (which was the primary sponsor for the NASCAR "Cup Series" parted ways. On June 17, 2003, NASCAR and Nextel Communications entered into the "Nextel Sponsorship Agreement," which provided that beginning with the 2004 Season, Nextel Communications would become the Official Series Sponsor of the NASCAR NEXTEL Cup Series. More recently, Nextel merged with Sprint Corporation and has changed its name to Sprint Nextel Corporation ("Sprint Nextel"). The Nextel Sponsorship Agreement granted exclusivity to Sprint Nextel as the "sole telecommunications company" sponsoring Cup Series races, and the firm paid dearly for this designation: about $ 700 million over a 10-year period.
There lies a problem. RCR had a pre-existing sponsorship agreement with a direct competitor of Sprint Nextel and has the Cingular image pasted on its car. Aware of this, NASCAR suggested, and the parties incorporated into the Nextel Sponsorship Agreement, narrow exceptions to Sprint Nextel's exclusivity, which included race teams that had pre-existing sponsorship agreements with Sprint Nextel's Competitors and which could be permitted to continue with those sponsorships according to certain terms and conditions. Cingular's deal with RCR was part of this exception.
In late 2006, AT&T merged with BellSouth. Cingular, which was a joint venture between the two before the merger, would be called "AT&T Mobility LLC." The Cingular name and logo would fade, replaced by the AT&T name and logo in its worldwide wireless activities. [Note: for a detailed history of the dispute, check out "Understanding the AT&T - NASCAR mess" by Chuck Wallace in Nascarinsider.com.
In preparation for the 2007 Cup season, Cingular (now AT&T Mobility) exercised its right in the sponsorship agreement with RCR to determine the name and logo on the 31 car, and submitted a new paint scheme featuring the AT&T name and logo. RCR submitted the new scheme to NASCAR, which rejected it. NASCAR claimed that it (and not RCR nor AT&T) held the right under the rules to make paint scheme decisions and that it was precluded by the exclusivity agreement with Nextel from allowing the AT&T name and logo. NASCAR told RCR and AT&T Mobility that the grandfather agreement did not allow a company name change. AT&T Mobility sued, seeking a preliminary injunction.
The trial court, in an opinion by federal judge Marvin Shoob, granted the injunction, concluding that there was a likelihood of success on the merits. The decision centered around the grandfather clause -- whether the rebranding into AT&T is within the rights conferred to the race car team under that agreement. AT&T argued that grandfather clause was not limited to the Cingular name and logo, since it referred to “the sponsor.” Since just the name, not the sponsoring company changed, the court agreed. By not permitting the change, AT&T would lose brand value and would confuse the fans it wished to sell to. The court rejected NASCAR's argument that the clause gave it more discretion.
Like Judge Schoob, I did not read the grandfather clauses as preventing a renaming and rebranding. I felt that NASCAR and should have negotiated a more limited agreement with greater specifics. The fact that it only referred to a "sponsor" and not a particular company was a major factor. In his opinion, Judge Schoob noted that AT&T was not a party to the agreements, but rather an intended third party beneficiary. Honestly, I did not pay that much heed, thinking that there was little dispute that the classic intended third party beneficiary rule gave AT&T Mobility standing.
The 11th Circuit did not see it this way. The panel, in a unanimous opinion by Judge Fay, disagreed with the district court's conclusion , noting that under Georgia state law, a third party beneficiary need not be specifically named in the contract, but the parties' intention to benefit the third party must be evident from the face of the contract. Using a narrow intepretation, the court stated: "The RCR Agreement clearly did not require RCR to renew its sponsorship with Cingular. In fact, under the RCR Agreement, RCR was free to seek the sponsorship of any company not included within the narrow universe of Sprint Nextel Competitors. . . The Addendum to the RCR Agreement was intended to protect RCR from the potential harm caused by a sudden loss of sponsorship due to Sprint Nextel's exclusivity. Any benefit to Cingular (now AT&T Mobility) resulting from NASCAR's commitment to grant RCR the option to continue and renew its sponsorship agreement was merely incidental to NASCAR's intended purpose of preserving RCR's choice of sponsorship."
The court added, "we are unable to see how the parties could have intended these sponsorship guidelines to produce anything more than an incidental benefit to Cingular (now AT&T Mobility). Further, we are unable to conclude that in executing the RCR Agreement NASCAR promised to render any performance to Cingular. Georgia law is clear that there must be "a promise by the promisor to the promisee to render some performance to [the] third person, and it must appear that both the promisor and the promisee intended that the third person should be the beneficiary." It added: "The mere fact that RCR has opted to exercise its right to retain Cingular as its sponsor does not convert that option into a "legally protected right" for Cingular or AT&T Mobility under NASCAR's agreement with RCR."
But this is circular. The grandfather clause was made to protect the existing deal that RCR had with Cingular. It was clear that Cingular knew about the grandfather agreement. Cingular and then AT&T Mobility relied on it in their rebranding. To make an "option" in the way court does, it to trivialize a sponsorship agreement between a top-level company and a well-known racing team.
To my mind, Georgia's law on third party beneficiaries does not vary much with other states, but even if it is a bit more limited, I cannot see how AT&T Mobility could not be considered "intended."
RCR must take off the AT&T logo on its Car #31 as soon as possible. But the case is not over. A $100 million counterclaim by NASCAR against AT&T Mobility, still is scheduled to go to trial.
One last point: it is interesting that RCR was not a party to the case. Could it be that they were afraid to incur the wrath of NASCAR?