Key points in due diligence on sporting event IP in China

By Zhang Qinghua and Shi Xiaonan, East & Concord Partners
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Since the issuance by the State Council of the Several Opinions of the State Council on Accelerating the Development of the Sports Industry and Promoting Sports Consumption on 2 October 2014, the Chinese sports industry has become a new growth driver in the market, with relevant M&A cases and purchases of sports assets greatly increasing.

张青华 ZHANG QINGHUA 天达共和律师事务所合伙人 Partner East & Concord Partners
张青华
ZHANG QINGHUA
天达共和律师事务所合伙人
Partner
East & Concord Partners

However, due to such reasons as the lack of clarity of the relevant legal nature of intellectual property in the sports industry, obstacles have arisen when investors wished to acquire sports companies or purchase sports industry related assets. This column highlights key points in due diligence for the acquisition of sports industry related companies and the purchase of sports industry related intellectual property in the light of practical experience.

Sporting event intellectual property. From the perspective of a sporting event promoter, so-called sporting event intellectual property generally includes venue advertising, competition broadcasting, sponsorship, licensing, media authorization, event logos, ticket revenues, sporting event merchandise and other such relevant rights. Accordingly, it can be seen that not all of the foregoing are covered by the concept of intellectual property as used in law. Then, how is one to understand “sporting event intellectual property”?

The “intangibility” of sporting event related legal rights and the “exclusivity” of sporting event venues easily lead to a link being made to intellectual property which likewise possesses “intangibility” and “exclusivity”. Accordingly, although a large number of rights that are inconsistent with intellectual property as conceived in law exists in sporting events, they have nonetheless given rise to the designation of “sporting event intellectual property” in practice.

时萧楠 SHI XIAONAN 天达共和律师事务所律师 Associate East & Concord Partners
时萧楠
SHI XIAONAN
天达共和律师事务所律师
Associate
East & Concord Partners

From the perspective of sports industry operational practice, so-called “sporting event intellectual property” is generally understood in industry circles as including commercial rights and interests, media copyright, ticketing and merchandise copyrights. If the foregoing are shoehorned into the legal concept, they would include the right to use the sporting event logo and name, naming rights, display rights, the rights to live broadcast and retransmit sporting event programs, sporting event ticket sales and merchandise use rights.When conducting due diligence on the sporting events of a target company, consideration needs to be given to the relevant rights and interests in the foregoing.

Right to use the sporting event logo and name, naming rights and display rights (commercial rights and interests). In current practice, when a sporting event promoter transfers event rights, it will usually specify the commercial rights and interests it is transferring by using the label of “commercial development rights”. Such rights, in essence, mean that the transferee seeks sponsors for the sporting event through commercial development and reaps the corresponding benefits therefrom. The consideration for such sponsorship is usually a licence to use the logo, name, image, official mascot, etc. of the sporting event, as well as so-called naming rights and the right to display the sponsors’ logos (placing the sponsors’ logos and names on advertising signs in the sporting event and related activity venues).

The right to use the logo, name, image, official mascot, etc. of the sporting event, as well as the naming rights, is based on intellectual property type licensing by the sporting event promoter of its copyrights in the logo, name, image, etc., including those under the Unfair Competition Law. The right to display the sponsors’ logos is, on the other hand, based on rights in rem type licensing of the sporting event promoter’s right to use the venue. Accordingly, these two types of licensing of a different nature should be analyzed and treated separately in due diligence.

Rights of live broadcast and retransmission of sporting event programmes (media copyright). As everyone knows, there has been considerable debate in Chinese legal circles in recent years over the issue of the legal nature of sporting event programs, but a consensus has finally essentially been forged in judicial practice through the efforts of Chinese courts. The right of live broadcast and the right of retransmission of sporting event programs are protected as audio and video recordings under the Copyright Law.

However, under normal circumstances, the sporting event promoter will authorize the live broadcaster to live broadcast in the location designated by it while simultaneously authorizing or prohibiting by way of a contract the live broadcaster from authorizing a third party to retransmit the sporting event program. Accordingly, when wishing to secure the right to retransmit the sporting event program, it is not only necessary to secure the right to live broadcast the sporting event from the live broadcaster, but also necessary to pay attention to whether the holder of the neighboring rights in the sporting event program has the right to directly authorize a third party to use the same. Accordingly, when conducting due diligence, it is necessary to pay attention to the consistency and linkage of the chain of authorization in the relevant contracts.

Ticket sales. Ticket sales are likewise an exclusive right owned by the promoter on the basis of its exclusive right to use the location where the sporting event is held. Generally, an event promoter will entrust ticket sales to a professional ticket selling company. Accordingly, when conducting due diligence, it is necessary to pay attention to the relevant contracts.

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Right to use merchandise (copyrights in merchandise). Although it is generally called merchandise copyright, nevertheless, in practice, in addition to protection through copyrights, protection may also be achieved through the registration of trademarks. With respect to sporting events that are held on a regular basis, the event promoter will sometimes register a trademark and, through the licensing of the registered trademark, proceed with merchandise development, while additionally using copyrights for protection purposes. In contrast, the registration of trademarks is difficult for sporting events that are not held on a regular basis. When conducting due diligence, it is necessary to clarify the above mentioned two legal rights based on the actual circumstances.

Zhang Qinghua is a partner and Shi Xiaonan is an associate at East & Concord Partners

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