Few agreements in the world are as personality-driven as endorsement agreements, making them perhaps some of the most interesting yet gruelling agreements to negotiate. And these agreements are increasingly likely to involve very high stakes. This becomes evident in a recent Kroll report estimating the overall brand value of just the top 25 Indian celebrities in 2022 to be USD 1.6 billion, signifying an increase of about 29.1% from 2021. The study computes the brand value of celebrities based on their earnings potential from brand endorsements.
Who is a celebrity?
While there is no standard legal definition of “celebrities”, the Advertising Standards Council of India (“ASCI”) which is a voluntary advertising monitoring organisation, explains this term in its Code for Self-Regulation of Advertising Content in India (“Code”). According to ASCI, celebrities refer to “famous and well-known people” who are drawn from the fields of entertainment, sports, medicine, literature, activism, education etc. and are “compensated for appearing in advertising”.[i] The Endorsements Know-Hows, published by the Department of Consumer Affairs on January 20, 2023, define celebrities as “famous personalities” who have the “power to affect the decisions or opinions of their audience.”
What is a Celebrity Endorsement Agreement (“CEA”)?
Typically, a CEA refers to an agreement in which a celebrity consents to promote a company’s products or services in consideration of specified payments.[ii] Parties negotiating CEAs have to ensure that they do not fall afoul of the various advertising, media, entertainment, intellectual property and consumer protection laws governing such agreements.
What are the safeguards that companies must have in place when negotiating CEAs?
No two CEAs are identical and an infinite variety of issues can crop up in hammering out such agreements. We have spotlighted 10 essential safeguards here that companies must adopt while negotiating CEAs with celebrities:[iii]
- Define the scope of the endorsement intricately:
It is imperative for parties to spell out the brand for which the endorsement is contemplated, the territory in which the endorsement will operate and the period for which the endorsement will last in the CEA. Even more crucially, the list of endorsed products has to be fleshed out carefully and it is quite common for parties to wrangle on this point. This is because a CEA usually contains “exclusivity” clauses which prohibit the celebrity from advertising products belonging to the company’s competitors or products which are similar to the endorsed products, during the term of the CEA. Expectedly, celebrities benefit from narrowing down the scope of the endorsed products in the CEA, so that they are free to take on a higher number of endorsements from other companies. By contrast, it works to the company’s advantage to define the endorsed products list as widely as possible, in order to cover new categories of products that the company may introduce during the term of the CEA.
Caution must be exercised by the company, however, in ensuring that the message underlying the endorsed product does not stand at odds with the public persona of the celebrity. A recent fast-food chain’s advertisement is a case in point. The advertisement featured an Indian actress relishing a non-vegetarian burger and faced tremendous backlash for being hypocritical, after social media users pointed out her past claims of being vegetarian. It is thus critical for companies to avoid such misalignments, by vetting celebrity profiles thoroughly before engaging them as brand ambassadors.
- Vet the celebrity’s exclusions to the scope of endorsement thoroughly:
It is commonplace for celebrities to carve out some exclusions from the scope of the endorsement in CEAs. These exclusions enable a celebrity to carry out certain activities during the course of the CEA, without breaching the agreement. For instance, when a CEA prohibits an actress from advertising the products of the company’s competitors, she may request exclusions in the form of promoting certain charitable activities of the competitors. Such exclusions could also extend to attending shows or performing in movies in which a competitor’s products are featured in the background.
Companies must examine such exclusions thoroughly and ensure that they do not defeat the whole purpose of bringing the endorser onboard. In order to protect their interests, companies typically embed certain conditions in these exclusions to permit passive engagement, while disallowing active engagement, with the competitor’s products. For instance, the company may allow the celebrity to participate in a charitable show in which certain competing products feature in the background, provided the celebrity does not hold or promote the competitor’s products.
- Craft the work schedule of the celebrity in detail:
A CEA generally incorporates a work/services schedule setting out the days, locations and timings at which the celebrity will make herself available for performing the endorsement services. While this may seem like a relatively straightforward exercise, parties tend to argue over the manner of computation of service hours and days. For instance, an actress is required to make herself available for an 8-hours shift per day for 5 days under the CEA, for shooting a brand commercial. Would the 8 hours be inclusive of the time taken for her make-up, hair dressing and travel to the location of the shoot? While the company may prefer to answer such a question in the negative, in order to maximise the time available with the celebrity to conduct the actual shoot, parties often have to reach a middle ground. For example, the company may allow for the inclusion of time spent by the actress in traveling to an international shoot location in the calculation of the service hours under the CEA, while excluding the time spent by the actress for travel to a shoot located in her city of residence.
Moreover, the form of media in which the endorser will appear must also be clarified in the CEA. Beyond traditional television commercials and press conference appearances, companies have lately started insisting on adding social media engagement clauses in CEAs. In such situations, companies should specify the minimum number of posts/content pieces that celebrities are expected to publish on their social media handles during the term of the CEAs.
- Structure the payment terms carefully:
Payments under CEAs can take various forms. A fixed-fee structure is the most common one, where a certain sum is agreed to be paid to the celebrity on the execution of the CEA and the remainder is payable in instalments during the term of the CEA. In such cases, companies must avoid agreeing to any interest provisions that celebrities may impose for delayed payments. Companies could also consider linking the instalment payments to the completion of certain work or performance milestones by the celebrities. Other payment forms gaining traction are providing celebrities luxury goods/merchandise for their personal use or granting them equity ownership in the companies. Given the increased scrutiny by taxation authorities on endorsement payments received by celebrities in recent times, it is critical that tax-related obligations are also spelt out clearly in the CEA.
Apart from the endorsement fees, parties often haggle over the company’s reimbursement obligations for travel, accommodation and other expenses incurred by the celebrity. It is very important for the company to lay down the specifics of such reimbursements in the CEA (for instance, the air travel class, hotel category etc. that the celebrity and her entourage are entitled to), in order to avoid last minute surprises.
- Clarify due diligence duties of the celebrity:
According to a May 2023 ASCI report, “in 97% of cases processed by ASCI featuring celebrities, they failed to provide any evidence of due-diligence”. This observation stems from the Guidelines for Prevention of Misleading Advertisements and Endorsements for Misleading Advertisements, 2022 (“Guidelines”) which require celebrities to exercise “due diligence” before making endorsements in advertisements.[iv] It is crucial for companies to highlight this due diligence obligation in CEAs and to require celebrities to execute the necessary undertakings to that effect. Any contravention of the Guidelines could attract drastic penal consequences for both the company and the celebrity under the Consumer Protection Act, 2019.[v]
- Lay down certain legal and behavioural obligations on the celebrity:
The Guidelines mandate the disclosure of “material connection” between the celebrity and the company (for instance, monetary compensation, free products, trips, awards etc. provided by the company to the celebrity) in the endorsement.[vi] The Endorsements Know-Hows lay down the manner and format of making such disclosures by celebrities on social media platforms. In the event that a celebrity is required to make social media endorsements, the company must bring such disclosures to the celebrity’s attention in the CEA and mandate their compliance, to avoid liabilities for violation of the Guidelines.
It is also customary for companies to fix certain legal, moral and behavioural obligations on celebrities during the term of CEAs, to secure their interests. Such obligations include compliance with the Code and applicable laws, maintaining confidentiality of the terms of the CEA and adhering to specific exclusivity conditions. Besides these obligations, a CEA generally restricts a celebrity from endorsing third-party products which are prohibited by the law (for instance, tobacco), making defamatory statements affecting the company and participating in any activities that are incompatible with the endorsed brand’s image.
- Evaluate the cool-off mechanism mindfully:
The cool-off period ordinarily refers to a time frame, post the termination or expiry of the CEA, within which the company must remove all the advertising materials featuring the celebrity. CEAs generally stipulate that if any advertising material is found in the public domain post the cool-off period, the company will become liable for a breach of the CEA. Given the fast-paced and ubiquitous dissemination of advertisements, particularly in digital media, companies must attempt to keep the cool-off period as long as possible, to ensure that they have enough time to fulfil their advertisement removal obligations.
- Ensure that the company’s intellectual property and creative rights are secured:
The effective securing of intellectual property rights under the CEA is foundational to the company’s right to use the advertising material featuring the celebrity effectively. The CEA must clarify that all the intellectual property rights (including copyright) in the advertising material (including photographs, scripts etc.), in all forms of media, will vest with the company. Likewise, the company should be explicitly authorised in the CEA to use the celebrity’s image (including her name, voice etc.) for the purpose of the endorsement. Express rights to translate, dub, adapt and edit the advertising material should also be vested in the company.
While it is fair for the celebrity to be granted some degree of oversight over the advertising material, the CEA should specify that the final creative control over such material will lie with the company. Moreover, where the celebrity is granted approval rights over the advertisement material, it is imperative to stipulate a time period within which such approval should be given by her, in order to prevent unwarranted delays in releasing the advertising material.
- Account for unforeseen circumstances which could affect the endorsement:
A CEA generally, and justifiably, contains a clause excusing a celebrity from performing her obligations during the period of any illness or physical incapacity that she may suffer. It is typical for companies to stipulate in the CEA that upon the cessation of such illness or incapacity, the celebrity shall accord priority to the company’s work. If the illness or incapacity lasts for more than a specified period in the CEA, the company is usually accorded the right to terminate or extend the term of the CEA.
Similarly, it is crucial to incorporate a clause to account for force majeure events i.e. events beyond the control of parties, such as natural disasters. In such cases, parties are typically excused from the performance of their obligations under the agreement for the duration of the force majeure event. A right to terminate the CEA is generally conferred on the parties, in case the force majeure event continues beyond the period mentioned in the CEA.
- Incorporate mechanisms to protect the company’s interests for celebrity breaches:
Companies should ensure that they have adequate exit options under CEAs, by way of incorporating robust termination clauses. Such termination could be invoked by the company upon a breach of certain obligations by the celebrity under the CEA or where the celebrity becomes subject to any criminal investigation. Post-termination rights and obligations (including the company’s obligation to make only pro-rata payments to the celebrity) should be spelt out clearly in the CEA.
Moreover, a well-drafted indemnity clause, requiring the celebrity to indemnify the company for any claims arising out of the breach of the celebrity’s obligations, representations and warranties under the CEA, could also go a long way in securing the company’s interests. Generally, celebrities insist on extracting indemnities from companies for any manufacturing or advertising claims in relation to the endorsed products. In such situations, companies must ensure that their indemnities are limited and capped to a suitable monetary ceiling. Finally, while negotiating dispute resolution clauses, companies must choose forums that are geographically convenient and cost-effective.
Over the years, celebrity endorsements have become invaluable to the brand equity of numerous companies. A well-structured and implemented CEA could cause a company’s brand value to soar and catapult its products into the top-selling league. By contrast, a CEA which is drafted and executed rashly could cause irreparable harm to a company’s reputation, plunging sales of its products and substantial losses. Moreover, it could leave the company remediless in the face of a breach by the celebrity of its obligations under the CEA. With increased scrutiny over advertisements by regulators and consumers in recent times, it has become essential, now more than ever, that companies review CEAs with a fine-tooth comb.
[i] Additionally, ASCI prescribes certain monetary and ranking criteria in order to qualify as a celebrity, for the purpose of the Code.
[ii] In recent times, it has become increasingly common for the celebrity’s agent to become a party to the CEA, in addition to the celebrity and the company.
[iii] For the purpose of our analysis, we have considered a product endorsement negotiation between two parties: an actress and a company. However, these 10 points can, with appropriate modifications, be utilized for other forms of CEAs as well. These points are merely illustrative and do not constitute an exhaustive list.
[iv] According to guideline 13, “Any endorsement in an advertisement must reflect the genuine, reasonably current opinion of the individual, group or organisation making such representation and must be based on adequate information about, or experience with, the identified goods, product or service and must not otherwise be deceptive.”
[v] Such consequences include penalties ranging from a maximum of INR 10 lakhs for the first offence to a maximum of INR 50 lakhs for subsequent offences. Other repercussions could entail discontinuation or modification of the advertisement and a prohibition on the endorser from making any endorsement for a specified period of time.
[vi] Guideline 14 stipulates that “Where there exists a connection between the endorser and the trader, manufacturer or advertiser of the endorsed product that might materially affect the value or credibility of the endorsement and the connection is not reasonably expected by the audience, such connection shall be fully disclosed in making the endorsement.”
Disclaimer: This article is intended to provide general information and should not be substituted for context-specific professional legal advice. Neither the author nor Anoma Legal shall be responsible for any loss whatsoever sustained by any person relying on this article.