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Business & Corporate Law Contracts

The Importance of Morality Clauses in Contracts with Public Figures

The Importance of Morality Clauses in Contracts with Public Figures

Madison Shaner

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In the age of social media and the 24-hour news cycle, opportunities for public figures to be called to the mat and canceled over their statements and behavior are plentiful. Whether looking at Kanye West, aka Ye, with his antisemitic statements on Twitter, “White Lives Matter” t-shirt at Paris Fashion Week, and a myriad of other public offenses, T.J. Holmes and Amy Robach’s affair, or Try Guys’ Ned Fulmer’s affair with an employee, when the transgressions become public, so do the calls from the public for the brands and companies they work with to cut them loose.

The question then becomes how, and how quickly, can those contracts be terminated and what the consequences for termination are. A company’s failure to act swiftly when a public figure it works with can result in calls for boycott and damage both to the brand and its image. For instance, the calls to boycott Adidas in the weeks following Ye’s antisemitic comments on Twitter in October 2022 were rampant, with many wondering what was taking the brand so long to denounce the tweets and distance itself from Ye, and Adidas spending weeks with the relationship “under review.” The terms of the contract between the parties would have been a critical portion of that review, as was the potential economic consequence of the reported $246 million profit loss to Adidas per year in discontinuing the Yeezy line, which was contracted to last through 2026.  

As we’ve previously discussed in this Blog,  having a well-thought-out contract between a brand and the social media content creators is paramount to the success of that relationship – and whether your company is engaging with a content creator who has gained renown on social media, or a much more prominent partner, it is important to consider whether a morality clause is worth including in that contract. Ideally, a company would partner with a celebrity or creator whose conduct and values align with the brand, and where there is little concern about skeletons in the closet because the partner has been appropriately vetted, including a review of old tweets and other social media posts. It goes without saying that all parties to these contracts hope that a morality clause never comes into play, and that the end to any business relationship can be drama-free. The protection afforded by a carefully drafted morality clause can be useful in the worst-case scenario.

So, what is a morality clause? A morality clause, or a morals clause, is a provision in the contract that gives a company a unilateral right to terminate a contract or take other, defined, remedial action, if the other party to the contract causes a breach by engaging in conduct that is considered to be immoral, scandalous, or might otherwise injure or tarnish the reputation of the company. Essentially, it is a special provision that allows for swift action to terminate a contract to help the company avoid scandal and damage to a company’s public image. When a morality clause is triggered, it is typically considered a material and uncurable breach of the contract, which comes with a significantly reduced timeline on which the company can operate to quickly terminate the contract, to the company’s benefit.

How the parties define the actions that fall under the terms of a morality clause depends on the parties, how heavily negotiated the provision is, and what the parties believe the possible realm of actions might be. Historically, morality clauses were intended to address potential criminal conduct of employees and other contracting parties, but the scope of what is covered by these clauses has significantly broadened over the years, particularly following cultural phenomena like the #MeToo movement. A creator or public figure who is subject to a morality clause ideally prefers a more specific, narrowly defined universe of actions—with limited discretion from the partnering company—that would allow the company they’re under contract with to terminate the relationship. Companies, on the other hand, often prefer language that is broader and more ambiguous, with sole and unqualified discretion of what constitutes a violation by their counterparty. A creator or public figure may also seek to include intentional action on their part, rather than merely recklessness, while companies are often disinclined to consider the intentions in favor of focusing on the outcome. The question of provable offenses and allegations is another critical point of negotiation between the parties – is an allegation of misconduct enough to terminate the contract or is it required that the misconduct be proved? If so, who determines whether it has been sufficiently proved?

Ultimately, a well-drafted and carefully considered and negotiated morality clause is important to protect both parties in a contract between a company and any public figure it associates with. The corporate and business team at Milgrom & Daskam has significant experience drafting and negotiating these clauses and would be happy to discuss your options as you move forward in your contracts.

ABOUT THE AUTHOR

SENIOR ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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Readers of my last, irresistibly juicy blog post, “First-Ever Court Ruling Means Your Utility Token May Be an Unregistered Security,” know that the Securities and Exchange Commission (“SEC”) recently landed a blow against blockchain-based media company LBRY when a district court in New Hampshire held that LBRY’s native “utility token,” LBC, was an unregistered security.

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U.S. Supreme Court Hears Oral Arguments on Colorado Business’s First Amendment Speech Rights

U.S. Supreme Court Hears Oral Arguments on Colorado Business’s First Amendment Speech Rights

Jason Fisher

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The U.S. Supreme Court heard oral arguments last month in a case challenging the Colorado Anti-Discrimination Act (CADA) in a scenario similar to the Masterpiece Cakeshop decision of 2018. 303 Creative LLC, a Colorado based graphic design service is seeking to provide wedding website design services but only for opposite-sex weddings due to the owner’s religious beliefs that preclude her from providing the same services for same-sex couples.

303 Creative LLC is classified as a “public accommodation” under CADA and therefore subject to its prohibition on refusing service to an individual or group on the basis of sexual orientation. CADA further prohibits businesses from announcing an intent to discriminate in this manner. A public accommodation is defined under CADA as “any place of business engaged in any sales to the public and any place offering services, facilities, privileges, advantages, or accommodations to the public.”

303 Creative LLC is bringing a pre-enforcement challenge against CADA meaning Colorado authorities have not alleged any wrongdoing, rather 303 Creative LLC is bringing the case to permit an exception to CADA for a planned announcement that it will not provide services for same-sex marriages to be posted on its website. 303 Creative LLC’s argument is rooted in the First Amendment’s protection of free speech whereas Colorado has asserted that CADA regulates conduct, not speech, by requiring only that the business provide services to anyone who wants to pay for them.

It will likely be several more months before a decision is issued in this case, but groups protected by CADA and business owners should follow along closely. A decision in 303 Creative LLC’s favor may permit businesses to deny service to certain individuals and groups currently protected by CADA’s public accommodation laws. If this comes to pass business owners should consider the reputational harm that will result from adopting a policy of refusing service and must avoid fostering a hostile work environment in which harassment or discrimination may occur which would still result in legal ramifications.

If you are a business owner it is ever more important to adopt strong policies addressing workplace accommodation, anti-harassment, and discrimination to promote a healthy work environment and head off potential legal claims.

ABOUT THE AUTHOR

ASSOCIATE

Jason focuses his practice on corporate governance, commercial finance, commercial contracts, and employment law. He advises clients on all aspects of general corporate matters and strategic business decisions including organization structure, operating/shareholder agreements, and private debt and equity offerings.

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Business & Corporate Law

The Importance of Morality Clauses in Contracts with Public Figures

In the age of social media and the 24-hour news cycle, opportunities for public figures to be called to the mat and canceled over their statements and behavior are plentiful. Whether looking at Kanye West, aka Ye, with his antisemitic statements on Twitter, “White Lives Matter” t-shirt at Paris Fashion Week, and a myriad of other public offenses, T.J. Holmes and Amy Robach’s affair, or Try Guys’ Ned Fulmer’s affair with an employee, when the transgressions become public, so do the calls from the public for the brands and companies they work with to cut them loose.

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U.S. Supreme Court Hears Oral Arguments on Colorado Business’s First Amendment Speech Rights

The U.S. Supreme Court heard oral arguments last month in a case challenging the Colorado Anti-Discrimination Act (CADA) in a scenario similar to the Masterpiece Cakeshop decision of 2018. 303 Creative LLC, a Colorado based graphic design service is seeking to provide wedding website design services but only for opposite-sex weddings due to the owner’s religious beliefs that preclude her from providing the same services for same-sex couples.

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Business & Corporate Law

First-Ever Court Ruling Means Your Utility Token May Be an Unregistered Security

First-Ever Court Ruling Means Your Utility Token May Be an Unregistered Security

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The First-Ever Court Ruling Means Your Utility Token May Be an Unregistered Security 

Which could be bad news for you. Here’s what happened and why you should care. 

What Happened

Last month a federal judge in New Hampshire ruled that LBRY’s utility token was an unregistered security.[1]

LBRY is a decentralized file-sharing platform designed to be “YouTube on blockchain.” LBRY created a native digital token called LBRY Credits, known as “LBC,” which users can buy with U.S. dollars. To view any content on LBRY other than free content, users must pay with LBC. Users can also use LBC to publish content, create channels, and tip other content creators, among other things.

The problem for LBRY came when the Securities and Exchange Commission (“SEC”) sued it for selling unregistered securities. The SEC argued that while users could use the LBC within the LBRY ecosystem, in reality the token was acting more like a security, a financial asset which comes with regulatory requirements LBRY didn’t comply with when it sold LBC to purchasers.

In agreeing with the SEC, the court relied on the three-part Howey test, which originated from a famous case the Supreme Court decided in 1946. Under Howey, to prove something is a security, there must be 1) an investment of money, 2) in a common enterprise, 3) with an expectation of profits to be derived solely from the efforts of the promoter or a third party. The only element in doubt in this case was the last one: “whether the economic realities surrounding LBRY’s offerings of LBC led investors to have ‘a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.’”

In holding that LBC satisfied the third element of the Howey test, the court relied on statements LBRY representatives made to potential LBC purchasers that essentially touted LBC as a good investment and the fact that LBRY’s business model depended on LBC increasing in value, meaning purchasers would expect LBC to increase in value based on the efforts of LBRY employees.

LBRY has appealed, but as things stand today, the utility token LBC is a security.

Why Should I Care

What you may have thought was a currency or a commodity may actually be a highly regulated financial product. This is going to be a paradigm shift for anyone who wasn’t previously aware that utility tokens could be considered securities.

  • If You Issued Tokens: You may have sold an investment product subject to federal and state securities laws. If you did not comply with those laws when you advertised or sold the tokens, you could be liable to the SEC or to your state securities regulator for statutory violations, and you could also be liable if a purchaser sues you.
  • If You Purchased Tokens: You have rights as an investor if the company that sold the tokens to you did not comply with the law. There are federal and state laws specific to financial wrongdoing that you may be able to use to recover money you lost in connection with purchasing a token.

Bottom Line

Don’t ever let anyone tell you that “there are no crypto laws.” There are many laws that apply to digital assets, even if they do not specifically say “crypto” or “token” or use other blockchain-specific terminology.

If you have questions as a token issuer or as a purchaser, feel free to contact us. Technology changes, but the law still applies. We’re here to help.


[1] The case is Sec. & Exch. Comm’n v. LBRY, Inc., No. 21-CV-260-PB, 2022 WL 16744741 (D.N.H. Nov. 7, 2022).

ABOUT THE AUTHOR

PARTNER

Rachel is an experienced trial lawyer, having litigated jury trials and bench trials, and represented clients in private arbitrations. She has worked with U.S. and international clients and with businesses of all sizes, from early-stage ventures to publicly traded companies.

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