Proactive approach to restraint of trade

 

Proactive approach to restraint of trade

As an Everton youngster, Wayne Rooney will have heard his fair share of Scouser chants from the Man U terraces.  “You’ll never get a job”? – hardly in his case.  Fast forward, and you have the third highest-paid footballer in the world, the face of Nike Laser boots and the FIFA 12 poster boy.

Not an immediately obvious candidate for a leading case on restraint of trade – the claim brought against Rooney by his former image-rights agent, Proactive Sports Management.[i]  For companies dealing with talent – whether sporting talent, actors, musicians or other entertainers – the decision serves as a cautionary tale of what not to do in the first place, and clarifies the legal risks that flow from getting it wrong.  Aptly enough, the case underlines the need for a proactive approach to restraint of trade.

Background

Wayne Rooney set up Stoneygate 48 Limited and assigned his image rights to the company. Stoneygate appointed Proactive as its image-rights agent under an Image Rights Representation Agreement dated 16 January 2003, when Rooney was a 17-year-old starting out in professional football.  Proactive was responsible, among other things, for negotiating third-party contracts, such as sportswear endorsement contracts and sponsorship deals.  The agreement was an exclusive, worldwide deal at a flat rate of commission of 20% for a term of eight years – i.e. far longer than the two-year limit under FIFA regulations for on-field representation (and going well beyond the market norm for image-right agency contracts).

In October 2008 the relationship broke down.  Stoneygate effectively withdrew from the agreement, appointing another agent instead, and refusing to pay any further commission to Proactive.  In December 2009 Stoneygate formally terminated the contract.  Proactive sued for repudiatory breach and unpaid commission at the contractual rate of 20%.  Stoneygate contended that the agreement was in unreasonable restraint of trade.

High Court decision

In a ruling handed down on 15 July 2010, His Honour Justice Hegarty QC held that the agreement was unenforceable due to restraint of trade.  Among several factors that influenced the decision:

·                     the agreement restricted Rooney’s freedom to exploit his earning capacity over a very long period (without any right of early termination), and the eight-year term was likely to be half of Rooney’s professional career;

·                     Rooney was only 17 years of age on entering into the agreement;

·                     Rooney and his parents were wholly unsophisticated in legal, commercial, financial and contractual matters;

·                     despite various warnings given to Proactive that a lack of legal advice might render the agreement unenforceable, Rooney and his parents did not take any independent legal advice, nor were they advised that they should (and so the contractual assertion to the contrary effect was not binding); 

·                     the agreement was not a standard industry agreement, nor was it the outcome of a process of meaningful negotiation between equals (there being no serious competition to Proactive at the time of contracting); and

·                     even if 20% was a fairly standard rate of commission for a young player, it would not be reasonable to expect that rate to apply without some form of reduction throughout such a long-term arrangement (illustrated by the fact that, if Rooney had been free to negotiate in 2008, he could clearly have negotiated a lower rate of commission with a new agent).

Since the agreement was unenforceable, Proactive could not recover any contractual commission that would otherwise have fallen due under the agreement (including future commission), nor could it pursue a claim for damages for breach of contract.  Proactive was, however, entitled to restitutionary compensation for its unpaid services, to be assessed at a later hearing on a quantum meruit basis – so measured by reference to the reasonable value of the services (to the extent not already fairly remunerated), not the 20% contractual rate of commission.  Proactive appealed.

Court of Appeal decision

In a judgment published on 1 December 2011, the Court of Appeal upheld the trial judge’s ruling on almost all points.

The doctrine of restraint of trade

In considering the doctrine, the Court affirmed that “there is no single, exhaustive or precise test”.[ii]  Parties cannot contract out of the doctrine: whether a contract is in restraint of trade is a matter of substance rather than form.  This must be assessed objectively at the time of conclusion of the contract.[iii]  The burden of proof is on the party seeking to enforce the contract.

Giving the leading judgment, Lady Justice Arden followed the two-stage approach set out in the Panayiotou case,[iv] under which a court can set aside a contract for services if:

(a)           the doctrine is engaged (i.e. the contract prima facie restricts the contractor from trading as the contractor sees fit); and

(b)           the restraint of trade is unreasonable (i.e. both as between the parties and so far as the public interest is concerned).[v]

She also cited Lord Justice Pearce’s characterisation[vi] of the essence of this test as whether, in substance, the contract “sterilises” a person’s capacity to trade.[vii]  Accordingly, there is no clear-cut line between the two stages, and matters raised under the first stage are potentially relevant to the second stage.[viii]  Determining whether the contract is oppressive is a question of evaluating all the factors (assessed cumulatively),[ix] and an appellate court will not interfere with a trial judge’s determination unless it is clearly wrong.[x]

Application by the Court of Appeal

In applying the test, the Court found the agreement to be in unreasonable restraint of trade.

(a)           The doctrine was engaged, as it involved significant, exclusive restrictions (in the context of a substantial imbalance of bargaining power at the time of signature of the agreement).  In addition, it did not matter that exploitation of image rights was an ancillary trade to Rooney’s primary trade as a footballer,[xi] nor that the agreement could help Rooney to realise his earning potential (if there was insufficient scope to ensure that his talent was promoted).[xii]

(b)           The restrictions were unreasonable on the facts, given the various oppressive characteristics noted by the High Court.  The judges’ round rejection of the defences submitted by Proactive is also instructive.  For Lady Justice Arden, it was no defence to say that that there had been substantial financial rewards for all involved: this was a case where one party used its superior bargaining power to force another into making unfairly onerous promises at the time of contracting.[xiii]  The trial judge also rejected a number of justifications suggested by Proactive (which might have been more persuasive in other contexts, and were largely dropped on appeal), including that:

(i)             the restrictions were required to recoup substantial financial investment (of which there was a low risk on the facts);

(ii)            the restrictions were necessary to compensate for wide-ranging representation obligations (there actually being a low level of obligation if Rooney were not successful, and a high reward if he were); and

(iii)           the lengthy term was beneficial as encouraging a strategic approach (which might justify up to four to five years in the circumstances, but not eight).

Financial implications

As the agreement was not enforceable, Proactive could not claim unpaid commission on income received by Stoneygate under third-party contracts, either before or after Stoneygate’s withdrawal from the agreement.  Whether commission might have “accrued” (as contended by Proactive) was irrelevant: having chosen not to abide by an unenforceable contract, Stoneygate could not now be forced to perform its obligation to pay commission, even for agency services performed and freely accepted before Stoneygate’s withdrawal from the contract.[xiv]

Proactive was, however, entitled to restitution on a quantum meruit basis.[xv]  The Court of Appeal agreed with the High Court that further submissions of evidence were required to establish quantum, and that those should be deferred to a further hearing.[xvi]  While the Court of Appeal made essentially procedural comments on quantum, it is worth noting that, for the High Court: (a) the quantum would be less than the contractual claim (or else it would be tantamount to enforcing the agreement); and (b) relevant factors might include savings that Proactive would have made if it had not provided the services.[xvii]

The Court of Appeal allowed the appeal on one technical point: on true construction of the specific wording of the commission clause, commission would (absent restraint of trade) be payable on sums arising from the relevant exploitation of the image rights, whether received before or after termination of the agreement (not merely those received before termination, as the High Court had ruled).  This point was academic, however, as Stoneygate was only entitled to restitution.[xviii]

Side-issue

The Court of Appeal also allowed the appeal on a related side-issue: whether, in the absence of a signed contract, there was an implied contract with Speed 9849 Limited (the image rights company for Rooney’s wife, Coleen Rooney) on a basis of commission equivalent to that contained in the Stoneygate agreement.  The Court overruled the trial judge, finding that commission was owed to Proactive for work carried out by Proactive for Coleen Rooney before termination of the implied contract (which was enforceable on the facts, unlike Wayne Rooney’s agreement).

Practical effect for talent contracts

The decision does not provide definitive guidance on the enforceability of talent contracts.  Nor could it: the application of the doctrine of restraint of trade is a question of fact in each case, so it is not a precise science. 

Although Rooney won hands down, the case is not a new shield for talent.  If Rooney is the lovable Shrek, an agent (or an engager of talent) need not fear being type-cast as a scheming Lord Farquaad.  Restraint of trade is only the villain of the piece where it is over-reaching.

Nonetheless, for agents and engagers of talent, the case illustrates the need to anticipate issues of restraint of trade from the outset of a talent relationship, and to make the contract reflect the company’s legitimate interests and commensurate benefits for the talent.  In this context, a checklist of do’s and don’ts can be drawn from the case for companies dealing with talent.

(a)           Avoid a stance that the contract is non-negotiable, especially where the talent is young, inexperienced and/or in a weak bargaining position.  An even-handed deal stands a much better chance of surviving the talent’s later success – and all the more so for talent with “just enough education to perform”, as Rooney’s own tattoo proudly declares.

(b)           Ensure that the talent takes expert professional advice from an independent lawyer with experience in the industry concerned.  This can be counter-intuitive – especially where the company is called on to pay for a lawyer to negotiate a better deal for the talent – but it pays dividends in the long run, through supporting the enforceability of the contract.

(c)           Exercise particular caution when the talent is a minor.  The talent’s parents or guardians should also receive the professional advice, and should sign an appropriately worded approval of the contract.

(d)           Take on reasonable obligations to exploit the talent’s services.  Agents and engagers of talent prefer to be as risk-averse as possible, shying away from exploitation commitments and guarantees of success.  That is sensible, but talent must at least be free to terminate the contract and/or to claim rights back if the talent’s career is not being sufficiently advanced.  Those termination rights will ultimately secure the continuation of the contract where the company is doing a good job.

(e)           Be careful what you wish for in terms of duration of the contract.  A long term can be counter-productive, especially if it would amount to a significant proportion of the talent’s professional career.  Break points will not be given much weight where extension of an initial term is at the company’s option.  While a high level of investment and obligation could potentially justify a relatively lengthy term, the “upside” can only go so far.  Certainly, anything beyond an industry norm risks being set aside by the courts – and even the norm might be called into question on the specific facts of the case (such as where there is an unusually low level of investment and/or obligation).

(f)            Consider the scope of the engagement – particularly in the context of music contracts, where it is becoming increasingly common for record labels to enter into so-called “360° deals” or “multiple-rights deals”.  The enforceability of such deals has yet to be tested before the courts, but there is a clear engagement of the doctrine of restraint of trade, so every restriction needs to be justified – especially in terms of investment and expertise across any so-called “ancillary rights”, such as merchandising, sponsorship and endorsement, and live performance rights.  Those rights (and especially extensive passive participations in non-core income streams) could be vulnerable to challenge if not commercially justified, particularly if other grounds of challenge can be raised, such as: (i) conflict of interest and abuse of confidence (both of which are of clear relevance to management and agency components of multiple-rights deals); (ii) unreasonableness of standard terms under the Unfair Contract Terms Act 1977; and/or (iii) issues raised by a minor’s capacity to contract (which may, in part, turn on the ultimate contractual benefit to the minor).

(g)           Last and not least, negotiate remuneration that is fair to both parties.  Depending on the level of the initial contractual rates, it may be appropriate to anticipate changes over time, such as (in a commission context) tapering provisions and/or post-term “sunset” clauses or (in a royalty context) escalations in the talent’s favour.  At the very least, the industry norm should inform what is appropriate in this context.  With new types of deal, it would be advisable to base commercial rates and (where suitable) sliding scales on a sensible analogy with deals for which there is an established industry pattern.  In essence, a balance should be struck to avoid an unconscionable bargain.

Not that any of this will cause too much concern to Wayne Rooney at this stage.  He belies that jibe: “What do you say to a Scouser with a job? – Big Mac, please.”  But his case is a big deal for talent that really are flipping burgers.

Ed Baden-Powell and Jessie Woodhead

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Article written for Entertainment Law Review.

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Article written for Entertainment Law Review. [i] Proactive Sports Management Limited v Wayne Rooney [2011] EWCA Civ 1444.  Paragraph references below are to this judgment, unless otherwise stated.

 

 

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