What do comedian Kevin Hart, model Kendall Jenner, rapper Snoop Dogg, actor Dwayne “The Rock”, Johnson and CNBC’s “Mad Money” host Jim Cramer have in common? They all have inked deals recently to promote alcohol beverage products. More celebrity collaborations with wine, beer, and spirits makers are being announced seemingly every week. Celebrity partnerships have unique marketing and advertising opportunities for well-known and niche alcohol beverage brands, and can be lucrative for everyone involved. But these collaborations also raise legal issues requiring careful consideration for both the brand and the celebrity.
Here are six key considerations:
- What’s the Deal?
Celebrity collaborations can take a number of different forms. Some typical structures include:
a. Endorsement Deals. In this structure, an established alcohol beverage company partners with a high-profile spokesperson to promote a brand or product. In endorsement-style collaborations, a celebrity enters into a sponsorship agreement with an alcohol beverage company that allows the company to use the celebrity’s name, image, and likeness to promote an existing brand. In exchange, the celebrity receives cash compensation that may be tied to the brand’s performance and sometimes an equity interest in the brand.
b. Development Deals. Celebrities also can partner with existing distillers, vintners, or brewers to develop new brands. Kendall Jenner, for example, partners with a “private label” Mexican distillery to produce her tequila brand, 818. This arrangement gives celebrities more control over the final product – letting them develop a proprietary flavor profile and unique branding – without the complications of owning their own manufacturing facility.
c. Full Ownership. Some celebrities own both the brand (the trademark and other intellectual property) and the means of production. One example is musician Dave Matthews, who owns a vineyard outside of Charlottesville, Virginia, where he produces Blenheim brand wines. This gives the celebrity full control over production; but also requires a lot of time and energy managing operations and sales functions.
Each structure has its merits and drawbacks for both the company and the celebrity, and should be considered carefully, based at least partly on how much control both parties want to have over brand development and operations, as well as ownership interest.
- Tied-House Issues
In the United States, federal and state laws generally divide the production, marketing, and sale of alcohol beverages into three tiers: producers/importers, distributors/wholesalers, and retailers. Federal and state laws generally prohibit individuals and entities involved in one tier of the alcohol beverage industry from having an interest in another tier. Accordingly, an individual who owns a bar or restaurant where alcohol beverages are sold is generally prohibited from having an “interest” in a brewery, distillery, or vineyard. What constitutes an “interest” varies from jurisdiction to jurisdiction, making compliance challenging for even experienced participants. So having an interest in a brewery, while also having an interest in a restaurant selling alcohol, could run afoul of state and federal regulations.
These rules create a minefield for celebrities (and for brands collaborating with celebrities). Celebrities often own a wide variety of investments, some of which could be in a business that sells alcohol beverages at retail, such as a restaurant or hotel. And sometimes, the problem is not so obvious. For example, a baseball star might own a building that leases space to a restaurant. If the restaurant pays a portion of its revenue or profits as rent, this could create an “interest” in the restaurant for the baseball star in some jurisdictions, thereby precluding the star from having an interest in a distillery.
Experienced counsel can help navigate these rules and develop strategies to mitigate tied-house risks. Celebrities eyeing entry into the alcohol beverage industry, and the brands that they collaborate with, should diligence potential tied-house conflicts early in their discussions so that they can properly address any issues.
- Target Audience
Regulations surrounding alcohol beverage advertisements are nuanced and fragmented, and should be considered before the launch of any marketing campaign. Of particular importance when inking a deal with a high-profile figure: whether that person’s primary fan base is too young to imbibe alcohol. Brands should exercise caution when working with celebrities who appeal primarily to individuals below the legal drinking age, and when working with celebrities who have fans of all ages, brands should ensure that their alcohol marketing is focused on media targeted to fans who are old enough to drink.
- Endorsement Disclosures
Whenever working with celebrity endorsers – including social-media influencers – it’s important to take note of the Federal Trade Commission’s disclosure rules, which require brands to clearly and conspicuously disclose whether a particular spokesperson has been compensated for their endorsement. Of course, if the financial relationship between a celebrity and alcohol beverage brand is obvious, an express disclosure may not be required, but this needs to be carefully assessed based on the unique aspects of each endorsement arrangement.
- Morals Clauses
Increasingly, brands are including morals clauses in their celebrity collaboration contracts to allow for the termination of the relationship if the celebrity engages in conduct that poses a threat to the brand’s reputation or goodwill. Not all clauses will look the same; brands should be attentive to each celebrity’s unique public appeal. But these clauses raise a number of thorny issues for brands and celebrities. For example, what actions will trigger the clause? Is a credible accusation of prohibited conduct enough to terminate the contract? Or should there be some burden on the brand to establish that the prohibited conduct occurred? These issues are compounded if the celebrity has equity interest in the brand, which would typically need to be unwound if the relationship is being terminated due to conduct.
- Background Checks
Many jurisdictions require officers, directors, and/or major stockholders of alcohol beverage licensees to submit to fingerprinting and criminal background checks. Before celebrity negotiations get too far, brands and celebrities alike should ensure they have a clear understanding of any red flags in a celebrity’s background (e.g., criminal convictions) that may complicate the ability to obtain necessary alcohol beverage licenses. The sooner issues are identified, the sooner the transaction structure can be modified to address the issue.
While celebrity collaborations with alcohol beverage brands are exciting ways to make a brand stand out in an increasingly crowded alcohol beverage market, special care should be taken to ensure brands and celebrities navigate their partnership with commercial best practices and an understanding of the many legal considerations.
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