The Athlete As A Business Entity

ENSURING LONGEVITY IN THE FIELD OF PROFESSIONAL SPORTS

ELIJAH ADEFOPESmall Business seminar

12/5/2015

I. INTRODUCTION

James Brown once said, “show business has two parts; there’s the show and then

there’s the business”. Those words have never been as relevant as they are today. The

only difference between the show business world of the 1960’s and 70’s, of James

Brown’s prime, and today is the increase of its’ scope and monetization. Today’s

world of show business, or entertainment, now includes digital music and visual

media which is able to be distributed onto all manner of mobile devices and into

international homes in an instant. The entertainment business of the 21st century also

includes professional sports which have seen explosive growth, participation, and

viewership in the last few decades and have the billion dollar multimedia rights

agreements to prove it. The entertainment business is just that, a business. As the

facts, figures, and following analysis will show, any athlete seeking to create and

sustain long term success in the fields of sports and entertainment must see

themselves as a business person and then avail themselves of the appropriate

corporate and legal strategies to success.

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II. A LOOK AT THE NUMBERS

A. THE GROWTH OF PROFESSIONAL SPORTS IN AMERICA

In his book Show Me the Money, which details the business machinations behind

international soccer, Senior Advisor to Manchester City FC, Esteve Calzada said,

“Sport is too much of a game to be a business and too much of a business to be a

game”. This insightful quote captures the unique position of professional sports in

our world today. Despite its’ inability to tangibly affect the realities of our everyday

lives, professional sports has the power to move not only the hearts, but the

pocketbooks of millions around the world. An analysis into the professional sports

leagues of our day will show just how big of an economic machine professional

sports has become.

i. Major League Soccer

Our brief inquiry into the finances of American professional sports

begins with the top tier professional soccer league – Major League

Soccer (MLS) While, on the surface, the MLS league may appear to be

the red-headed step child of the American professional sports leagues,

its’ games are actually the third most attended. The MLS’ 19,151

average attendees are behind only the National Football League’s

(68,331) and Major League Baseball’s (30,477) average fan

attendance1. The National Hockey League follows with 17,502 and the

1 Statista, Average attendance pro sports leagues in the US 2014-2015 | Statistic (2015), http://www.statista.com/statistics/207458/per-game-attendance-of-major-us-sports-leagues/ (last visited Sep 11, 2015).

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National Basketball League rounds out the top five with 17,809

average attendees2.

The reason for the MLS’ lack of self-evident popularity can be

attributed to several reasons, but I believe that one of the most

significant reasons is the lack of media coverage. Media coverage and

the broadcasting of league games are vital to the financial success of

any sports league because a large portion of league revenues come

from multimedia/broadcast deals with television stations and networks.

The lack of media coverage, however, is really a symptom of what

may be a lack of interest by the general population. While MLS games

are more attended than NBA games, they are watched less on

television than NBA games. This may be because of cultural reasons

or because soccer is not perceived, in America, to be as exciting as the

NBA or other professional sports. One reason for this, which also

leads us to another reason for the MLS’ lack of self-evident popularity,

is that the best soccer players usually seek to play overseas for higher

pay and then come back to play for MLS in the sunset of their careers.

For these reasons, MLS salaries are significantly less than other

professional leagues. The median MLS salary is approximately

$91,827.00 compared with the NFL (approx. $770,000), MLB

(approx. $987,500.00), the NHL (approx. $2,000,000.00), and the

2 Id.

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NBA (approx. $2,245,886.00)3. I used the median salary because it is a

more accurate reflection of the typical salary; whereas the average

salary is often skewed based on the higher player salaries that are out

of the norm.

In spite of Major League Soccer’s position, in comparison with the

other professional sports leagues, it appears to be positioned for a take-

off. In 2014, MLS entered into an eight-year television broadcast deal

with ESPN and Fox for an annual average pay-out for MLS of $75

million4. The MLS also signed a similar eight-year deal, in the same

year, with Univision which will pay MLS an average of $15 million

per year5. When calculated in its’ entirety, this deal will net MLS an

overall amount of $720 million, an average $90 million per year,

which is a sharp increase from the $18 million per year average the

league previously received from its’ partner networks6. The effect of

these new deals on MLS popularity and growth remains to be seen, but

the sheer size of the numbers seem to bode well for the league

3 Statista, Average attendance pro sports leagues in the US 2014-2015 | Statistic (2015), http://www.statista.com/statistics/207458/per-game-attendance-of-major-us-sports-leagues/ (last visited Sep 11, 2015).4 Sportsbusinessdaily.com, MLSbigplay (2015), http://www.sportsbusinessdaily.com/Journal/Issues/2014/05/12/Media/MLS-TV.aspx (last visited Nov 16, 2015).5 Id.6 Id.

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ii. National Basketball Association

The National Basketball Association is one of the most popular

and financially successful sports leagues in the world. Since the days

of the 1992 U.S. Men’s Olympic Basketball “Dream Team”, the NBA

has been on an international platform, setting it apart from other

American leagues. The 2013 NBA Finals between the Miami Heat and

San Antonio Spurs was “seen in 215 countries and broadcast in 47

different languages”7. Also, in 2013, NBA teams played ten games in

six countries including England, Spain, and Brazil. Further evidence of

the NBA’s international influence is its’ unique popularity in Asia

which sets it apart from other American professional sports leagues. In

2002, the NBA created an “NBA China” division, and saw it bring in

$150 million in revenue in 2012. It also has a combined 70 million

followers on Sina Weibo and Tencent (Asian micro-blogging

platforms), compared with fewer than 400,000 followers for the

National Football League8.

The NBA has also deployed expansion efforts in India where, in

2011, it opened its first Indian office in Mumbai9. In 2012, “it signed a

7 Christopher Dragicevich, NBA to Become More Popular Internationally Than Domestically Guardian Liberty Voice (2014), http://guardianlv.com/2014/03/nba-to-become-more-popular-internationally-than-domestically/ (last visited Nov 16, 2015).8 Ben Sin, N.B.A. Looks to Asia for Next Growth Spurt Nytimes.com (2014), http://www.nytimes.com/2014/03/15/business/international/nba-looks-to-asia-for-next-growth-spurt.html?_r=0 (last visited Oct 16, 2015).9 Sam Riches, Basketball and Globalization - The New Yorker The New Yorker (2013), http://www.newyorker.com/business/currency/basketball-and-globalization (last visited Oct 19, 2015).

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broadcast deal with Sony Six, a sports channel owned by India’s Multi

Screen Media, to become the exclusive broadcaster of the N.B.A. in

the country and to host basketball events across India”10. The NBA can

arguably be considered the most international of all the American

leagues and its’ finances are not too shabby either.

In 2014, the NBA’s annual league revenue was $4.8 billion, an

increase of 5% from the previous year11. Sure to boost this revenue

even higher is the new nine-year, $24 billion television and media

rights deal that the NBA signed with The Walt Disney Company and

Turner Broadcasting in 201412. This deal is worth nearly three times as

much as the NBA’s previous television deal and moves the NBA’s

annual television and media rights revenue figure from approximately

$966 million to over $2.6 billion13.

Increased annual revenue and the new money coming in from this

deal has increased the worth of NBA franchises. According to Forbes

Magazine, as of 2015, the average NBA team is worth $1.1 billion14.

On its surface, this seems to be a rational calculation as the last three

10 Id.11 Forbes.com, Forbes Welcome (2015), http://www.forbes.com/sites/kurtbadenhausen/2015/01/21/average-nba-team-worth-record-1-1-billion-2/ (last visited Sep 10, 2015).12 "NBA Announces 9-year TV Deal with ESPN, Turner Sports." SI.com. Time, Inc., 6 Oct. 2014. Web. 13 Nov. 2015.13 Forbes.com, Forbes Welcome (2015), http://www.forbes.com/sites/kurtbadenhausen/2015/01/21/average-nba-team-worth-record-1-1-billion-2/ (last visited Sep 10, 2015).14 Id.

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NBA teams have sold for $2 billion (Clippers), $850 million (Hawks),

and $550 million (Bucks). Whether or not those franchise valuations

are supremely accurate, the international posturing and financial

growth of the National Basketball League ensures that it will be a

juggernaut in the professional sports field and a treasure chest of

opportunity for those athletes who are fortunate enough to join.

iii. National Football League

Although the National Football League does not have the same

international reach as the NBA, its’ domestic stronghold more than

makes up for it. In 2014, the NFL accrued a record-setting $7.3 billion

in league revenue15. Contributing heavily to this revenue is the NFL’s

nine-year, approximately $27 billion television rights deal with Fox,

NBC and CBS16. The NFL further capitalized on the demand for its

content by entering an eight-year, $12 billion deal with DirecTV

which granted DirecTV the rights to NFL games (NFL Sunday Ticket)

not broadcasted by local affiliates17.

Adding to the NFL’s broadcast revenue is its’ sponsorship revenue.

According to the International Evaluation Group, the NFL “and its 32

teams raked in a record-setting $1.07 billion in sponsorship revenue

15 Matthew Rocco, TV Deals Boost NFL Revenue to New Record Fox Business (2015), http://www.foxbusiness.com/industries/2015/07/21/tv-deals-boost-nfl-revenue-to-new-record/ (last visited Oct 24, 2015).16 Flint, Joe. "NFL Signs TV Rights Deals with Fox, NBC and CBS." Articles.latimes.com. Los Angeles Times, 15 Dec. 2011. Web. 13 Nov. 2015.17 Forbes.com, Forbes Welcome (2015), http://www.forbes.com/sites/greatspeculations/2014/10/08/directv-extends-its-deal-with-nfl-for-12-billion/ (last visited Nov 1, 2015).

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for the 2013 season, an increase of 5.7 percent over the 2012 season”18.

Credit for a significant share of the revenue increase can be claimed by

a new partnership between Microsoft and the NFL; showing the power

of professional sports, and the NFL in this case, as not just a game but

actual entertainment and a platform for commercial brands to gain

exposure19. The NFL/Microsoft deal will net the NFL approximately

$400 million and provides, among other things, that the Microsoft

Surface Tablets and other Microsoft technologies will be exclusively

used on the NFL sidelines and by all thirty-two teams20. As the

numbers have shown, the NFL is right up there with the best of them

and projects to continue its’ campaign for commercial dominance.

iv. Major League Baseball

Major League Baseball, “America’s Pastime”, ended 2014 with a

reported record $9 billion in total industry revenue21. Again, and on-

trend, this record-setting revenue is largely due to huge television

deals. In 2012, MLB signed an eight-year, $5.6 billion television rights

deal with ESPN22. The league also signed an eight-year deal with Fox 18 Ike Ejioche, How the NFL makes the most money of any pro sport CNBC (2014), http://www.cnbc.com/2014/09/04/how-the-nfl-makes-the-most-money-of-any-pro-sport.html (last visited Oct 18, 2015).19 Id.20 Id.21 Eric Fisher, MLBsettingabiggoalof15billioninrevenue Sportsbusinessdaily.com (2015), http://www.sportsbusinessdaily.com/Journal/Issues/2015/01/19/Leagues-and-Governing-Bodies/MLB-owners.aspx (last visited Nov 1, 2015).22 Mark Newman, MLB, ESPN agree on record eight-year deal Major League Baseball (2015), http://m.mlb.com/news/article/37476712/ (last visited Oct 12, 2015).

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and Turner Broadcasting, granting the networks MLB weekend and

playoff rights for a cumulative sum of $6.8 billion23. With no signs of

slowing down and, at the risk of sounding repetitive, the MLB’s

financial ecosystem provides another environment in which capable

athletes can thrive.

v. National Hockey League

Last, but not least, is the National Hockey League. According to

reports, in what seems like a recurring headline for professional sports

leagues, the NHL witnessed record revenues of $3.7 billion in 201424.

Following in the steps of its’ rival leagues, the NHL signed a ten-year

American television rights deal with NBC Sports Group25. The NHL

also followed up this deal, in 2013, by signing a Canadian media rights

agreement with Rogers Communications for 12 years and $5.2 billion;

establishing itself as a major player in the professional sports sphere.26

III. MANAGING THE ENTITY

Because of the large financial opportunity available to athletes through their

collectively bargained salaries, endorsements, and other opportunities that become

available via a professional athletic career, it is vital for professional athletes to

23 Joe Lucia, Turner and Fox to retain MLB rights Awful Announcing (2012), http://awfulannouncing.com/2012-articles/turner-and-fox-to-retain-mlb-rights.html (last visited Oct 18, 2015).24 James Mirtle, Report: NHL revenues to hit record $3.7-billion The Globe and Mail (2014), http://www.theglobeandmail.com/sports/hockey/globe-on-hockey/report-nhl-revenues-to-hit-record-37-billion/article19080171/ (last visited Sep 6, 2015).25 Travis Hughes, Why the NHL's new TV deal with NBC, not ESPN, is great for hockey and the Flyers Broad Street Hockey (2011), http://www.broadstreethockey.com/2011/4/20/2122187/nhl-tv-contract-nbc-comcast-espn-philadelphia-flyers (last visited Nov 10, 2015).26 Sportsbusinessdaily.com, RogersNHLReach12-YearMediaRightsDealWorth5.2BHasNoNationalGames (2015), http://www.sportsbusinessdaily.com/Daily/Issues/2013/11/26/Media/NHL-Rights.aspx (last visited Nov 2, 2015).

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cultivate a business mindset. This means that they must actually put in the work to

become capable of operating themselves and their career as a business entity. One

step towards achieving this goal is by securing and assembling a business team.

Before an athlete assembles their team, however, they must understand that they are

ultimately responsible for their affairs. Too often, athletes get into financial trouble

because of a lack of due diligence and monitoring of those monitoring their money

and business affairs.

One such example of this is the case of Williams v. CWI, Inc. In this case,

professional basketball player Reginald Williams and his wife brought a claim against

a financial advisor and his associated companies to recover $50,000 that the Williams

had entrusted to the defendant, Waymon Hunt, through one of his affiliated

companies27. Looking to do the right thing with his money, Mr. Williams was referred

to Mr. Hunt. The two entered an agreement whereby Mr. Hunt would provide tax

preparation and financial advisory services to Mr. Williams; and in the course of this

agreement, Mr. Hunt brought to the Williams' attention an opportunity for investment

involving the purchase of a product; atmospheric reverse refrigeration heating units28.

The Williams agreed to buy $1 million worth of these units through a Hunt affiliated

company, Success Through Association (“STA”)29. The Williams were unaware that

STA was a Hunt operated and controlled company and only had $301.50 in its bank

account; nonetheless, the Williams agreed to purchase the reverse refrigeration

units30. Mr. Hunt, however, never held up his end of the bargain; misappropriating the

27 Williams v. CWI, Inc., 777 F. Supp. 1006, 1006-07 (D.D.C. 1991)28 Id. at 100729 Id. 1006-0730 Id.

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Williams’ $50,000 deposit; as well as failing to perform according to the various

terms of their agreement31.

In its’ ruling, the court found that the Williams were entitled to a judgment

against Mr. Hunt on both contract and fraud theories32. Critical in this case, for the

purpose of this paper is not necessarily the holding; but rather the insight that with

greater due diligence into the parties and terms of the deal, Reginald Williams could

have averted the fraud entirely.

Another example of what can happen when athletes aren’t diligent about their

business affairs is the famous case of sports agent, Harry Stern. In 1986 his company,

Technical Equities Corporation, declared bankruptcy taking down with it, 70

professional athletes and nearly 700 others33. Mr. Sterns’ company “allowed

individuals to invest in high-tech, manufacturing, and real estate deals”34. Many of

Mr. Sterns’ athletic clients invested their life’s earnings into his company. Mr. Stern

eventually plead guilty to criminal fraud charges and was sentenced to a five-year

prison term35. More examples36 include: Linda Frykholm, who defrauded several

investors, including Brian Simmons of the Cincinnati Bengals, of a total of $15

million; Richard Sorkin who, while performing duties as a sports agent, gambled and

lost more than $1 million in earnings of over fifty hockey and basketball players; and

financial advisor, Robert Lum, who was ordered to pay former NBA player, Scottie 31 Id.32 Id. at 100833 Shropshire, Kenneth, and Timothy Davis. "Unscrupulous and Criminal." The Business of Sports Agent. 2nd ed. Philadelphia: U of Pennsylvania, 2008. Print34 Id.35 Id.36 Id.

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Pippen, $11.8 million due to fraudulent representation. The examples go on and on.

Unfortunately, there are no shortages of instances where professional athletes have

been taken advantage of by those closest to them. These stories are reminders to

professional athletes and would-be professional athletes everywhere to pay close

attention to everything that concerns them.

A. BUILDING A SOLID TEAM

Undoubtedly, understanding that one is ultimately responsible for his affairs is

vital for professional athletes. Once this principle is understood, understanding the

roles of the various business team members can follow.

i. Lawyer

An athlete or entertainer needs good legal counsel to advise them

concerning their careers, contracts, business ventures, and any other legal

matters that may arise. The professional may hire a general attorney who will

attempt to handle the myriad of issues that face the professional, or an

attorney who specializes in a specific area and will assist the professional in

hiring other attorneys who will specialize in specific areas. The latter is the

most advisable course of action as the law is becoming increasingly complex

as business spheres and technology evolves. Such specialized areas may

include entertainment, sports, corporate, intellectual property, bankruptcy, tax;

etc. While many lawyers may combine several areas, it is best to hire an

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attorney who is strong in the areas in which they profess to practice. Lastly, a

skilled attorney is a valuable resource to analyze and oversee the other

members of the professional’s team, making sure that they all are conducting

their affairs and stewarding the professional’s business interests prudently.

ii. CPA

A CPA is a Certified Public Accountant. This individual is responsible for

bookkeeping and accounting, risk management, tax preparation, investment

planning, and estate planning. The professional will work closely with their CPA

to make sure that they secure their financial future, meet financial goals, and

make wise and profitable investments. Some financial advisors may also have

access to high profile and high-net worth individuals and networks that can be of

value to the professional, often able to connect the professional with advantageous

investment opportunities.

iii. Sports Agent

A sports agent (or athlete manager), is an individual tasked with helping a

professional athlete manage, direct, and grow their career. A sports agents role is

generally to negotiate professional contracts for the athlete as well as

endorsements (although most professional athletes don’t get the big endorsements

promised; and few get state or local endorsements). In recent times, many sports

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agents and agencies have evolved in regard to the kind of services that they

provide to athletes. Some agencies offer traditional team and endorsement

negotiations plus CPA/Accountant services, and also legal services.

Other agencies offer additional “perks” to their clients by paying for certain

expenses before the professional draft like renting an apartment, transportation,

food, clothes, and training. It’s important for professional athletes to know that

anything paid for by the sports agent can and usually is required to be paid back

(especially when the athlete decides to break ties with the agent).

IV. PROTECTING THE ENTITY

A. THE BENEFITS OF INCORPORATING

For high net-worth individuals such as professional athletes and entertainers, an

area of significant concern is (or should be) retaining the money they will earn during

the course of their careers. This concern is especially significant for professional

athletes who only have a few years, on average, of professional playing time. A good

business team will assist the individual in accomplishing this goal, often using the

vehicle of an incorporated entity. The benefits of creating and incorporating such an

entity for an athletes’ business endeavors are largely tax and liability based in nature.

Depending on the type of entity incorporated, an entity can shield the individual from

most personal liability claims. An incorporated entity, when used strategically, can

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also significantly minimize the amount of taxes that the individual is responsible for

paying. Incorporated business entities can be used for a variety of purposes including,

but not limited to, an intellectual property management and licensing company, a real

estate investment company; and any other business that the individual can fathom.

Often, however, professional athletes choose to incorporate an entity for specific use

as a loan-out company or charitable foundation.

i. Loan-Out Companies

“A loan-out company is a legal business entity established for the purpose

of providing the personal services of its owner/employee to third parties”37. It

is referred to as a “loan-out company because it “lends” its’ employee’s

services by making contracts with the end users of those services38. In other

words, the only difference between a loan-out company and any other

incorporated entity is its’ purpose. Accordingly, a loan-out company may take

on any legal structure (LLC, S-Corp, or C-Corporation) that the owner

desires39. A loan-out company is advantageous because instead of an

individual signing a contract with another company, such as an athletic shoe

company, the individual’s loan-out company would sign the contract on

behalf of the individual, “loaning-out” their services. This kind of agreement

between an individual’s loan-out company and another company is known as

a loan-out agreement.

37 Gordon Firemark, Should you have a loan-out company for your work in entertainment? - Entertainment Law Offices of Gordon P. Firemark Entertainment Law Offices of Gordon P. Firemark (2015), http://firemark.com/2015/01/12/should-you-have-a-loan-out-company-for-your-work-in-entertainment/ (last visited Oct 1, 2015).38 Id.39 Id.

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Often times, the other company that is wanting to do a deal with the

individual (and his loan-out company) will additionally request what is known

as an inducement agreement. An inducement agreement is a binding

agreement between the other company and the individual guaranteeing that

the individual will abide by the terms of the loan-out agreement40.

This inducement agreement is needed to ensure that the loan-out

agreement is not used as a shield to a breach of contract claim, to the

detriment of the other party. One last point of importance when creating and

executing loan-out companies and loan-out agreements is that the individual

will want to ensure that they have entered into a legally sufficient employment

agreement with their loan-out company. Without such an agreement, the

individual is not a legal employee of the loan-out company and the loan-out

agreement will most likely be construed as a sham by any involved tax or

legal entities in the case of complications.

There are several benefits of loan-out companies such as: asset protection,

fiscal year tax planning, lower corporate tax rates, qualified pension and

profits sharing plans, and medical reimbursements and other employee benefit

plans41. The negatives of loan-out companies are minor in comparison and

include annual operating expenses such annual filings, and state tax payments,

double taxation requirements if the company owner(s) elect for the company

40 Litwak, Mark. "Artist Employment." Contracts for the Film & Television Industry. Third ed. Beverly Hills: Silman-James, 2012. 70. Print.

41 Gordon Firemark, Should you have a loan-out company for your work in entertainment? - Entertainment Law Offices of Gordon P. Firemark Entertainment Law Offices of Gordon P. Firemark (2015) http://firemark.com/2015/01/12/should-you-have-a-loan-out-company-for-your-work-in-entertainment/ (last visited Oct 1, 2015).

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to be taxed as a C-Corporation, and the IRS may choose to disregard the entity

and reallocate income if the company is not properly established and

documented42. Attorney Gordon Firemark, in his article on loan-out

companies, states that the IRS will choose to reallocate the companies income

and cause the individual to pay a higher personal tax rate when “the company

is formed after the signing of the contracts for the individuals services”43. If

formed and operated properly, however, a loan-out company is a strategic

corporate vehicle that an athlete can use to his economic advantage.

An example of a professional athlete who has used the loan-out

corporation strategy to his advantage is Lebron James. While Lebron could

have just done what so many athletes do and taken every endorsement dollar

that was thrown at him, he decided to be proactive and take control of his

brand and career. He incorporated a company, named it ‘LRMR’, and hired

his friend Maverick Carter as a partner and made him CEO of LRMR. While I

don’t know the inner workings of this company, it is clear that they use the

revenue they get from marketing Lebron to fund the company, pay staff, and

plan for future growth and investment. This wisdom and strategy led to a

ground breaking partnership between LRMR and Fenway Sports Management

(FSM)44.

FSM is a subsidiary of Fenway Sports Group. Fenway Sports Group owns

entities like the Boston Red Sox, Liverpool F.C., Fenway Park, Anfield, 42 Id.43 Id.44 Silva, Steve. "LeBron James Joins Forces with Fenway Sports Group, Gets Stake in Liverpool." Boston.com. Boston Globe Media Partners, LLC, 6 Apr. 2011. Web. 17 Nov. 2015.

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Roush Fenway Racing, and NESN45. FSM provides marketing and

representation services for all of those companies that I just mentioned and

LRMR which, currently, has Lebron James and Johnny Manziel as clients.

Reports46 state that this deal makes LRMR and FSM the exclusive marketing

representatives of Lebron James and as part of the deal, grants Lebron a piece

of Liverpool F.C., a premier league football club owned by Fenway Sports

Group.

ii. Charitable Foundations

Charitable organizations are not-for-profit organizations which can be

set up by professional athletes. These organizations are generally set up

with a stated charitable mission. These organizations can be attractive for

the tax protection they provide professional athletes. Setting up a

charitable organization also provides the opportunity for an athlete to

employ relatives and friends. Because of these incentives, charitable

foundations are also opportunities for professional athletes to run afoul of

the law. “An ‘Outside the Lines’ investigation of 115 charities

founded by high-profile, top-earning male and female athletes

has found that most of their charities don't measure up to what

charity experts would say is an efficient, effective use of

money”47. “Using guidelines set by nonprofit watchdogs Charity

Navigator, the Better Business Bureau and the National

Committee for Responsive Philanthropy, ‘Outside the Lines"’

45 Id.46 Id.47 Lavigne, Paula. "Athlete Charities Often Lack Standards." Espn.go.com. ESPN, 3 Mar. 2013. Web. 5 Dec. 2015.

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found that 74 percent of the nonprofits fell short of one or more

acceptable nonprofit operating standards”48. For this reason,

professional athletes who are unprepared to run, or have

someone, run their charitable foundations according to IRS

guidelines, should think about simply incorporating a for-profit

company, such as a loan-out company, and hire family or

friends to manage their charitable giving; as well as their other

business endeavors.

V. METHODS OF EXPLOITING THE ENTITY

The economic environment of the field of professional sports has been discussed

up to this point. Also discussed has been the necessity and means of preparing a firm

foundation for one’s career as a professional athlete. It is not enough, however, to

simply know how much money is being generated in one’s field, nor is it enough to

simply incorporate an entity and assemble a team. As a professional athlete, one must

have a strategy for exploiting his value.

A. RIGHT OF PUBLICITY

The right of publicity gives professional athletes the right to protect the

commercial use of their name, image, and likeness. Four elements are needed in order

to bring a right of publicity infringement claim: the plaintiff must show that (1) the

defendant used the plaintiff’s identity, (2) the use was for the purpose of commercial

gain, (3) it was without consent, and (4) the plaintiff suffered monetary harm as a

48 Id.

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result49. The right of publicity is a major right for athletes and entertainers and can

prove highly valuable when enforced correctly.

In the longstanding case of Michael Jordan vs. supermarket chain, Dominick’s,

the jury recently held that the current owner of the chain was on the hook for $8.9

million for using Jordan’s name and promoting a product in an ad without his

permission. This massive monetary judgment was reached with the help of “sports

economist Andrew Zimbalist, who testified that Jordan's fair market value for the ad

was $10 million”50. Jordan’s advisors also pointed to his “brand strategy” in which

Jordan purposely limits the number and type of companies he endorses, so as to drive

up his value51. The jury evidently sided with Jordan and awarded him a dollar figure

not too far off from what he was arguing.

In another right of publicity case, Ali v. Playgirl, Inc., Muhammad Ali brought a

claim against Playgirl, Inc. for their unauthorized printing, publication and

distribution of an objectionable portrait of Ali in the February, 1978 issue of Playgirl

Magazine (“Playgirl”), a monthly magazine published by Playgirl, Inc.52 The Court

held that the portrait, which included the phrase “The Greatest”, was sufficient to

violate Muhammad Ali’s right of publicity53. In their ruling, the Court heavily relied

on New York’s right of publicity law, Section 51 of the New York’s Civil Right Law

which states in part that, “any person whose name, portrait or picture is used within

49 Hilton v. Hallmark Cards, 499 F.3d 894, 909 (2010)50 Darren Rovell, Supermarket chain must pay Jordan $8.9M ESPN.com (2015), http://espn.go.com/nba/story/_/id/13486052/supermarket-chain-pay-michael-jordan-89-million-use-name (last visited Nov 1, 2015).51 Jansen Kim, Corilyn Shropshire & Wendy Donahue, What Michael Jordan's Dominick's lawsuit teaches us about business chicagotribune.com (2015), http://www.chicagotribune.com/business/ct-michael-jordan-dominicks-case-lessons-0823-biz-20150821-story.html (last visited Nov 3, 2015).52 Ali v. Playgirl, Inc., 447 F. Supp. 723, 725 (S.D.N.Y. 1978)53 Id.

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this state for . . . the purposes of trade without the written consent (of that person)

may maintain an equitable action . . . against the person, firm or corporation so using

his name, portrait or picture, to prevent and restrain the use thereof; and may also sue

and recover damages for any injury sustained by reason of such use . .54”

Ali’s estate showed further shrewdness and understanding of the value of

publicity rights when it licensed 80% of Ali’s name and likeness to entertainment and

licensing firm CKX for a reported $50 million in cash55. Regardless of whether the

athlete or entertainer is legendary like Muhammad Ali or just starting out in their

career, the right of publicity provides that no one may capitalize on their name and

likeness without permission. The right of publicity also prepares the pathway for

deals such as endorsements to be made, often beginning with the licensing of

intellectual property.

B. INTELLECTUAL PROPERTY

i. Trademarks

In today’s world where a person’s, especially, a celebrity’s “brand” are hot

button issues, securing the trademarks associated with one’s business is

essential. In my opinion, the word “brand” simply refers to one’s reputation as

a provider of goods or services. Historically, the word referred to the mark

that a seller used to distinguish his products from the products of another.

These definitions of a brand are not necessarily adverse and can be used

54 Id.55 Money.cnn.com, Muhammad Ali sells rights to name, image for $50M - Apr. 11, 2006 (2015), http://money.cnn.com/2006/04/11/news/newsmakers/muhammad_ali/?cnn=yes (last visited Sep 7, 2015).

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synergistically. For professional athletes, this synergy can be found in high

performance, a good publicist, and by securing trademarks.

“Trademark law comes from many sources: federal and state trademark

statues, federal and state statutes defining and prohibiting ‘unfair competition’

between businesses, and federal and state cases interpreting these laws”56.

“The federal law that governs trademark rights and registration is known as

the Lanham Act”57

Trademarks generally fall into two categories: marks that identify goods or

products and marks that identify services58. The latter category is often

referred to as a “service mark”; although the term trademark can be used

interchangeably for both. “A trademark is any word, design, slogan, sound, or

symbol that serves to identify a specific product brand”59. Examples of

trademarks include Nike’s “Just Do It”, Burger King’s “Have It Your Way”,

and Apples’ “Think Different”. “A service mark is any word, phrase, design,

or symbol that operates to identify a specific brand of service”60. Examples of

service marks include Apples’ apple logo, the word Adidas in reference to the

athletic goods company, and the MTV logo. The moment that any business or

56 Elias, Stephen, and Richard Stim. "A Trademark Primer." Trademark: Legal Care for Your Business & Product Name. Ninth ed. Berkeley: NOLO, 2010. 22. Print.

57 Id.58 Id. at 1859 Id.60 Id.

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product name or any other identifying mark or sound is used in commerce or

advertising; it is eligible for recognition as a trademark (or service mark).

Trademark protection is based on a “strength” classification system where

distinctive trademarks are considered strong and protectable61. There are

generally five categories of trademarks that govern the distinctiveness of a

prospective mark and its’ ability to be registered as a trademark. The five

categories are fanciful, arbitrary, suggestive, descriptive, and generic. Marks

that are fanciful, arbitrary, or suggestive are considered distinctive enough to

function as trademarks62. However, a descriptive mark can only be registered

as a trademark if it obtains secondary meaning; while generic marks can never

be trademarked63.

Fanciful marks are considered the strongest or most distinctive type of

marks. Fanciful marks are those marks that have been created for the singular

purposes of operating as a trademark and have no secondary meanings64. An

example of a fanciful mark is google. An arbitrary mark is one that has a

common meaning, but not a meaning associated with the product or service

(Apple Computers)65.Suggestive marks are marks that suggest a quality or

characteristic of the goods and services66. Suggestive marks are often difficult

to distinguish from descriptive marks, since both are intended to refer to the

61 Id. at 2562 Bitlaw.com, Strength of Trademarks (BitLaw) (2015), http://www.bitlaw.com/trademark/degrees.html (last visited Oct 11, 2015).63 Id.64 Id.65 Id.66 Id.

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goods and services in question67. Suggestive marks require some imagination,

thought, or perception to reach a conclusion as to the nature of the goods

(Microsoft – suggestive of software for microcomputers)68.

The next category of distinctiveness are descriptive marks. Descriptive

marks are marks that simply describe the product or service (Hot Pancakes,

Fast Shipping, Strong Movers). A descriptive mark can, however, become

distinctive when it achieves secondary meaning. This occurs when consumers

recognize the mark as originating from a single source (the objective of

registering trademarks). “Secondary meaning can be achieved through long

term use, or large amounts of advertising and publicity”69. “The acquisition of

secondary meaning is often proven through the use of consumer surveys that

show that consumers recognize the mark as a brand, such as ‘FORD’, as

opposed to a descriptive term, such as ‘reliable’”70.

Regarding the ability of the mark “Ford Motors to be registered, typically

last names are not able to be registered unless they achieve secondary

meaning. Generic marks are those that identify an actual product or service

(Basketball, Apple, or Delivery). This category of mark is prohibited from

registration to prevent from blocking the public from using every-day, generic

terminology. “A valid trademark can become generic if the consuming public

misuses the mark sufficiently for the mark to become the generic name for the

67 Id.68 Id.69 Id.70 Id.

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product”71. “The prime examples of former trademarks that became the

generic name for a product are Aspirin and Cellophane72.An example of a

trademark that was once considered to be possibly generic is Xerox.

Athletes have further ability to protect and exploit their intellectual

property through the Madrid Protocol. The Madrid Protocol, adopted by the

United States in 2003, simplified the process of extending domestic trademark

protection to its 78 member countries, including the European Community

which is designated as a whole73. The registration and maintenance of

trademarks is very important for athletes. Professional athletes are able to

trademark their names as service marks when used in association with

endorsements or as trademarks when used in association with products such as

shoes. Also, and because, they are in the medias’ spotlight, athletes often have

the opportunity to trademark phrases and logos they have made popular.

One example of an athlete who failed to take the appropriate steps to

protect his brand through trademark law is Michael Jordan, who recently had

his trademark case “against a company using a similar name and logo to his

Nike-produced brand” dismissed by a Chinese court74. The defendant in this

case, was a Chinese company called Qiaodan Sports. “Qiaodan” is a Chinese

word which can be translated as “Jordan”; among other things. “As well as the

name, Qiaodan's products carry a silhouette of a leaping basketball player 71 Id.72 Id.73 Chris Lonegro, For International Brand Protection Consider Madrid Ober.com (2009), http://www.ober.com/publications/642-for-international-brand-protection-consider-madrid (last visited Oct 7, 2015).74 "Michael Jordan Loses China Trademark Suit: Report." Businessinsider.com. Business Insider, Inc., 29 July 2015. Web. 5 Dec. 2015.

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resembling the "Jumpman" logo used by US sporting goods giant Nike to

promote its Air Jordan brand”75. In its’ decision, the Court referred to the fact

that “Jordan” is not the only possible translation of Qiaodan76. Also playing a

part in the Courts’ decision was the fact that Michael Jordan did not register

“Qiaodan”, in China, as a trademark associated with his goods and services.

Understandably, this would have taken great foresight; but, nonetheless,

someone with a great international reach (like Jordan) could have saved

millions if he would have taken advantage of the Madrid Protocol.

Another example of not taking advantage of trademark rights and

privileges are the players of the Seattle Seahawks secondary. The Seattle

Seahawks own several registered trademarks for the phrase “Legion of Boom”

which describes their defensive secondary. This term was actually coined by

the fans of the Seahawk team. To me, this fact shows a failed opportunity for

the players who make up the Seattle secondary to capitalize on their value.

While it is true that such a registration, and any attempted sale of products

associated with the phrase, would be difficult because the Seahawks own all

intellectual property associated with the name “Seattle Seahawks” as well as

jerseys and other team likenesses. The NFL also owns and polices, very

heavily, their own registered trademarks. However, I believe that some

creative maneuvering could have made this registration possible for Seattle

Seahawk players such as Richard Sherman and Kam Chancellor. A successful

registration would have allowed the players to license their trademark to the

75 Id.76 Id.

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Seattle Seahawks who, because of their own trademarks (team logo, team

name, NFL association; etc.), would undoubtedly be able to exploit the

trademark to a greater degree.

C. REAL ESTATE

Real estate investment is another option for professional athletes seeking to

preserve and multiply wealth. On a basic level, real estate investment can include one

of four avenues. The first is real estate flipping which occurs when individuals buy

old, and often run-down houses, fix them up, and immediately sell them for a profit.

Secondly, is the buy and hold method which includes buying real estate property

(houses, apartments, office buildings; etc.) and charging rent to tenants; often selling

the property years after the initial buy. Thirdly, is real estate development which is

essentially the construction of real estate properties whether it be a hotel, park, or

resort. Lastly, are Real Estate Investment Trusts (REITS); companies that own

income producing real estate. As an aside, the relationship between professional

sports and real estate is interesting because the way in which real estate property is

valued is pretty much the same way that professional athletes are valued by teams. In

fact, there are several principles of real estate economics that apply to professional

athlete valuations. Applied to their use in the field of professional sports, these

principles are:

1) Principle of Substitution - The maximum value of an athlete is determined by

the cost of acquiring another athlete with equal attributes and statistics, assuming no

costly delay is encountered. The best way to determine an athletes’ value, to the team,

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is to look at what other athletes with similar statistics and at similar positons have

gotten.

2) Principle of Highest and Best Use – An athlete will yield the highest value when

he/she is being employed in his/her highest and best legal use. The position at which

an athlete excels to the highest degree is the position at which they will command the

highest dollar amount.

3) Principle of Competition – When the demand increases, a new supply of athletes

is brought into the marketplace. When demand falls, only those athletes with the best

service will remain. For example, when teams in a certain sports suddenly want a

specific skill-set or position, it opens the door for athletes with that skill set to be

acquired. When there are too many athletes with that skill set or at that position, only

the best will be acquired.

4) Principle of Supply and Demand - When the supply of athletes (especially at

certain positions or with certain skill sets) outweighs the demand (at those position or

for those skill sets), the price of the athlete will fall. When the demand of athletes

(especially at certain positions or with certain skill sets) outweighs the supply of

athletes (at those positions or with those skill sets), the price of those athletes will

increase. This can typically be seen in free agency. When there are a lack of free

agents at certain positions, free agent players will usually be able to create a bidding

war and receive a premium price. Alternatively, when there is an abundance of a

certain position, the best will get a premium price; while the others will have to take

what they can get.

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D. FRANCHISING

Franchising is the licensing, by a franchisor, of its’ trademarks, and operational

system and trade secrets, to a franchisee for a license fee. In practice, the way

franchising works is that a company (I will use McDonalds as an example) allows an

investor to capitalize off of its’ “brand awareness”, by opening another (or several)

McDonalds. The way this works is that if a professional athlete were the investor (or

the franchisee), he would pay McDonalds (the franchisor) an initial fee to open up a

new McDonalds store. This initial fee, depending on the value of the franchisor, can

be in the tens of thousands to low millions (what many athletes spend on jewelry, cars

and clothes that make them no money).

The initial fee would give the professional athlete the right to open up a new

McDonalds store in a certain location. Once the franchisee pays McDonald’s the

initial fee, McDonalds would use the money to build out the physical McDonalds

building in the chosen location, provide the necessary equipment, as well as any other

support outlined in the franchise disclosure document; the binding contract agreement

between the franchisor and franchisee which outlines the terms and conditions of the

business relationship.

The benefit of franchising is that it allows the investor to capitalize off of a

proven business model. Instead of starting a brand new company with the uncertainty

of whether or not it will succeed, franchising allows individuals to invest into a

company that is already successful and has already perfected their system. Another

benefit is that it can provide consistent income for athletes preparing to transition into

their post-career. A downside of franchising is that a franchisee does not “own” the

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company; they are an investor. Franchisees must pay royalties on all of the income

that they make from the franchise that they open. Another downside is that because

franchisees don’t own their franchises, they are restricted by the marketing,

employment, and organizational policies and regulations of the franchisor.

There are several former professional players that have been successful with

franchising. Former NBA player, Jamal Mashburn, invested in 37 Papa John’s, 34

Outback Steakhouses, three Dunkin’ Donuts stores, and currently has the largest

Toyota dealership in Kentucky77. Another professional athlete, Peyton Manning,

despite his numerous endorsements has invested in over 20 Papa John’s franchises78.

Another former NBA player, Magic Johnson, invested in 105 Starbucks, TGI

Friday’s, and Loew’s Movie Theaters79. Last, but definitely not least, is former

Milwaukee Buck – Junior Bridgeman. He is the second-largest Wendy’s franchisee

with 195 stores; he has also invested in 125 Chili’s restaurants, 45 Fannie May

Chocolate stores, and other retail franchises80. His employee roster numbers 9,000

people and estimates of his net worth range from $250 million to $400 million; which

did not come from playing basketball, but rather investing in franchises81.

B. CONCLUSION

77Bogar, Craig. "Former Professional Athletes and Successful Franchising." Sportsfitnessnetwork.com. Sports Fitness Network, 2 June 2014. Web. 17 Nov. 2015. 78 Bradford, Harry. "Peyton Manning Purchases 21 Colorado Papa John's Franchises Just 2 Weeks Before Weed Legalization." HuffingtonPost.com. HuffingtonPost.com, Inc., 8 Nov. 2012. Web. 18 Nov. 2015.79 Bogar, Craig. "Former Professional Athletes and Successful Franchising." Sportsfitnessnetwork.com. Sports Fitness Network, 2 June 2014. Web. 17 Nov. 2015.80 Lawrence, Andrew. "Junior Bridgeman: A Different Kind of Franchise Player." Fortune.com. Time Inc. Network, 7 July 2014. Web. 18 Nov. 2015.81 Id.

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The field of professional sports is a billion dollar-generating field that is run by

experts and business savvy individuals. I would guess that most professional athletes

are not adequately prepared to operate, at a high level, alongside those (team owners,

team executives, CEO’S; etc.) who have been operating in and alongside the field of

professional sports for a long time. For this reason, it is important for professional

athletes to invest in their own business knowledge and assemble credible, and

competent individuals to be a part of their business team. Above all, professional

athletes must reverse, what has often been, years of over-dependence on others, and a

lack of academic and intellectual accountability on their parts. While this has not been

an exhaustive treatise on every business and legal aspect of professional sports; this

paper has set out a basic blueprint for the professional athlete. In order to maximize

his business success, the professional athlete must first see himself as a business

person, his career as a business entity, and seek to manage, protect, and exploit the

entity.

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