Morals Clause in Endorsement Contracts

Date: 06 Apr 2016

1. What is a Morals Clause?

A morals clause is a provision in a contract which prohibits and/or restrains certain illegal and/or immoral and/or unethical behaviour of the party(s) to a contract, often used to protect the image and reputation of the company. Most importantly; it enables one party to unilaterally terminate the contract (or some other form of intermediate redress) if the other party engages in conduct that could have some sort of negative impact on the particular company or organisation.

2. The need for a morals clause

A morals clause is of crucial importance to an endorsee, who is very often investing large sums of money to engage an endorser to endorse the company's products and/or services. In many cases, the company builds its advertising and marketing campaign around the endorser, in order to associate the endorser's talents and achievements with the company’s products and/or services. It should be of major concern to the endorsee that its reputation and interests could be adversely affected by the acts (whether good or bad) of its endorser.

An effective morals clause can be viewed as a shield to protect a company’s interests and reputation when an endorser has behaved immorally or improperly.

3. Morals Clause – Asia Perspective 

What constitutes an immoral or improper behaviour cannot be judged by simply looking at the wording of a morals clause in isolation. Immoral or improper behaviour, however, must always be considered in the context of the beliefs, culture, social norms, and customs of a society at a particular period of time.

Although a morals clause is commonly found in various endorsement contracts, the scope of the clause has to be judged in the context of a society or societies covered by the brand endorsement. Asian societies, in particular, tend to uphold a more conservative attitude towards the behaviour of a public figure; for example, an artist caught smoking on the street can be on the headline of the entertainment page of a newspaper.

4. How can a company's position be better protected?

(a) The morals clause should be specifically drafted. A company signs a particular endorser to endorse particular brands because the endorser represents a specific concept or image that the company wishes to be associated with the product, service or brand. Companies should think carefully as to what that concept or image is and draft a morals clause that addresses the particular behaviour or conduct that could tarnish such concept or image.

(b) The contract should provide for a mechanism to determine when a breach occurs. In the case of conduct resulting from a criminal investigation; the determination could be a criminal conviction or a custodial sentence. However, there are often cases where inappropriate behaviour falls short of criminal conduct, e.g. leaking of nude photos or scandalous videos online. In such situations, the company may set the determining trigger to be the disclosure of the particular photos by the news media.

(c) The contract should provide for actions that the company can take if an endorser breaches the morals clause. Termination could be one of the remedies. Some morals clauses allow companies to levy a penalty and/ or deduct payment rather than terminate a contract. For endorsement contracts with multi-year initial terms, considering the risks associated with the endorser's behaviour, the company may consider an “early exit fee" to terminate the contract.

5. Latest trend - A reverse morals clause?

A relatively new twist is a so-called “reverse morals clause”; the purpose of which is to allow an endorser to receive compensation and/or terminate a contract if the company and/or its executives behave badly.

6. Social media and endorsement contract

A further consideration is the popular use of social media. For example, Facebook, Twitter, Weibo and Instagram have become a very common means for celebrity endorsers to instantly share their lives, opinions and whereabouts. Social media’s power to influence customers and brands is, to a certain extent, measurable, and can be calculated by the “likes” and “followers” that can be seen on any social media platform. World-over, celebrity endorsers often use Twitter (or equivalents) to promote brands openly.

Celebrities in Asia, like their counterparts in the West, have started incorporating social media in their brand endorsement contracts or are getting paid separately for tweeting about brands. In an endorsement contract, one particular point to note is that an endorser should seek the company’s prior approval before posting any comments/pictures online. In reality, this may be difficult to implement, especially for multi-brands endorsers.

Hong Kong Copyright Law: Key Changes Proposed In Copyright (Amendment) Bill 2014

With the rapid developments in information technology, new modes of electronic transmissions have emerged. In order to protect copyright owners in the digital environment and to keep pace with international copyright protection, key changes have been proposed to update Hong Kong’s copyright laws through the Copyright (Amendment) Bill 2014 (the “2014 Bill”).

(1) Expanding Exclusive Rights

Copyright owners have certain exclusive rights in dealing with their copyright works, including a communication right that is specific to cable programme services (i.e. to broadcast the work or include it in a cable programme service” under section 22(l)(f) of the Copyright Ordinance). In view of the new modes of electronic transmissions; a new right is proposed that allows copyright owners to communicate their copyright works on any electronic platforms. The 2014 Bill proposes to replace the communication right under section 22(1)(f) of the Copyright Ordinance with a general communication right that is defined broadly, in order to cover any existing or future modes of electronic transmissions.

(2) Additional Fair Dealing Exceptions

Under Hong Kong’s Copyright laws, certain acts are permitted in relation to the copyright works, for example, fair dealings of copyright works are allowed for the purposes of (a) research and private studies; (b) criticism, review and news reporting; (c) education; and (d) public administration.

Three additional fair dealing exceptions are being proposed by the 2014 Bill:

•    For the purposes of parody, satire, caricature and pastiche, although the terms “parody, satire, caricature and pastiche” are not defined in the 2014 Bill;

•    Use for the purposes of commenting on current events. This would seem to expand on the current section 39 of the Copyright Ordinance which provides for fair dealings for the purposes of news reporting, affording protection to Internet users who have been using copyright works when commenting on current political or social events (in addition to reporting current events); and

•    Use of a quotation to the extent which is no more than necessary for the specific intended purpose. This is aimed at allowing the Internet users to quote copyright works (including academic or scholarly texts, literary or artistic works, films and sound recordings) for the purposes of facilitating discussions, providing information or expressing opinions as used on blogs and social media websites.

While the fair dealing exceptions in the 2014 Bill is intended to afford better protection to the Internet users than the current regime, some have argued that the scope is not wide enough to cover all common derivative works. For example cover songs, self-publish comic remixes, live-stream games, lyrics rewriting that are not created for the stipulated purposes are unlikely to be covered under the new scheme.

(3) Safe Harbour Provisions for OPS

Given the growing importance of Online Service Providers (“OSPs”), safe harbour provisions were introduced to limit the liability of OSPs in relation to the copyright infringements conducted by their users, provided that certain conditions are met.

Under the proposal, OSPs must, after receiving notices of infringements, notify their users that they have posted infringing content on their platforms and must remove the same from their platforms. Civil liability and criminal liability will be imposed on persons making false statements in the notices. The users may file counter notices to dispute the infringements and request for the content to be reinstated. In such cases, OSPs must reinstate the content unless the OSPs are informed by the complainants in writing that they have commenced court proceedings in Hong Kong. OSPs are advised to follow the voluntary Code of Practice that is to be issued.

(4) Civil Liability - Feature for Assessing Damages

In many instances, copyright owners may not bring civil claims in cases of infringements due to the difficulties of proving actual loss and enormous costs and time involved especially in online piracy cases. In light of this, in addition to existing provisions under the Ordinance pertaining to awarding of damages by the Court, the 2014 Bill proposes to introduce two additional factors in the assessment of damages: (a) any unreasonable conduct by the defendant after having been informed of the infringement; and (b) the likelihood of widespread circulation of infringing copies as a result of the infringement.

(5) Criminal Liability

Under section 118(l)(g) of the current Copyright Ordinance, a person commits an offence if he distributes an infringing copy of the copyrighted work without the licence of the copyright owner to such an extent as to affect prejudicially the copyright owner. What the phrase of “such an extent as to affect prejudicially the copyright owners” means is not clear from the current Copyright Ordinance. The 2014 Bill attempts to clarify this by providing that the court will examine all the circumstances of a case and, in particular, the economic prejudicial effect on the copyright owner, having regard to whether the infringing copy amounts to a substitution for the work.

Status of the 2014 BillThe second reading of the 2014 Bill was completed on 21 January 2016 and the 2014 Bill was passed that day. However, the 2014 Bill has to go through the procedural stages of “three readings” before it can be published in the Gazette and come into operation.

The passing of the 2014 Bill has been controversial. Mr. Gregory So, the Secretary for Hong Kong Government’s Commerce and Economic Development Bureau, announced on 25 February 2016 that if the 2014 Bill cannot be passed on 4 March 2016,it will be shelved. It remains to be seen whether the 2014 Bill will come into operation.

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