As the legal fallout from a federal district attorney’s office charges of four assistant coaches at NCAA men’s basketball programs continues, all involved parties could be significantly affected. That includes Adidas.
Adidas has more than the involvement of a staff member in the newest NCAA bribery scandal to worry about.Its business as one of the major players in college apparel licensing could also be harmed as a result of the trials that are pending.
For any fans still unfamiliar with the situation, on Tuesday the U.S. attorney for the Southern New York district charged 10 individuals who in various ways were connected to NCAA men’s basketball programs with a litany of 11 different charges related to conspiracy and fraud.
Adidas director of global marketing James Gatto was one of those individuals who have been charged. In response to that, Adidas has put him on leave and hired its own counsel to conduct an internal investigation into the practices Gatto has been arrested for.
While there’s no good time for the director of your global marketing efforts to be arrested for corruption, the timing of this development invokes the cliché narrative of “flying too close to the sun” appropriate. Adidas had just turned in a performance in the sneaker market that made its brand the second-most popular in the world. Adidas sneakers sales have soared as those for competitors Nike and Under Armour dipped, allowing the athletic apparel giant to take a 13 percent cut of the global market away from its rivals according to sneaker business analyst Matt Powell.
In news even more relevant to the NCAA men’s basketball scene, Adidas had just re-upped its deal with one of the sports’ premier brands, Kansas University. The Jayhawks have agreed to remain an Adidas school through at least 2019.
The fallout from this situation on the campus of another Adidas school has already begun. On Wednesday, Adidas institution Louisville fired AD Tom Jurich and head men’s basketball coach Rick Pitino. While more consequences may be coming for Louisville before the book on this situation is closed years from now, for the time being, that seems to be the sum total of the immediate repercussions on Adidas campuses. The balance of the schools whom have had coaches arrested are either Nike or Under Armour institutions.
The fallout for Adidas’ brand, however, may only be in its infancy. While Danielle Lerner of the Louisville Courier-Journal reports that there is no specific language in the Cardinals’ contract with Adidas that would implicitly give the school an immediate out due to the current legal situation, the fact remains that the lack of language creates a legal grey area.
The question is whether venturing into that grey area is something that schools like Kansas and Louisville would do. Immediate divorces are highly unlikely. To exit their partnerships would probably require the schools to buy themselves out of the deals, unless they could successfully argue in civil court that the relationship with Adidas has done material damage to the school’s interests. That might be a difficult case to make and either way the cost would be significant considering legal fees. Many schools’ athletic budgets have tightened because of state budget cuts, to the point where legendary women’s head basketball coach Geno Auriemma has offered to work for free to help the school with funding. Shelling out the cash it would take to conduct a long court battle or pay for a buyout is improbable.
Additionally, there are logistical concerns. The college basketball season for both men and women is less than two months away. Arranging an Adidas exit not only with the company and the courts but with vendors as well, then finding a new apparel partner who could replace all the merchandise for both the school and fans in that time frame is impossible. While the immediate future should move forward as if nothing had transpired, that doesn’t mean that events in the long run won’t be affected.
Louisville is signed with Adidas through the summer of 2019, and it’s entirely possible that the Cardinals may simply opt not to extend their deal any further. A simple choice not to re-up such a deal would cost the school nothing in terms of cash, and allow Louisville to further a narrative of changing its culture that it has already began with firing Jurich and Pitino.
For other schools who are locked into longer-term deals, like Kansas and Georgia Tech, taking legal action to exit the contracts may make more sense. It’s likely that if the Louisville contract contains no language governing such situations, other contracts are similarly lacking. That wouldn’t preempt any legal fees, however. The question would be if the damage to the schools’ reputations is really serious enough that trying to wrangle a legal loophole would be a worthwhile venture.
In a more likely scenario, those schools could also opt to forgo that endeavor while planning to pass on possible extensions in the future. Much of whether or not Adidas begins to lose partnerships with NCAA institutions depends on whether it can convince leadership at those schools that Gatto’s conduct was an isolated issue, not a company-wide practice. Powell thinks that in like any other business, money will ultimately do all the talking.
“What athletic departments at these schools are ultimately looking for is to get as much money as they can from an apparel deal relative to the value of their brands,” Powell commented. “They don’t care much about which brand it is paying them. I can’t blame them for trying to get as much money as they can, but I think this situation has revealed just how inequitable the current system is and hopefully there will be measures taken to create a more equitable system in the future.”
Finally, there’s the issue of the potential public relations hit that Adidas could take in its consumer brands. Powell believes that Adidas won’t likely see a significant drop-off in its sneaker or athletic apparel sales as long as it is able to create a perception that Gatto went rogue.
“This is a relatively minor event [for Adidas],” Powell said. “I don’t see its sales being harmed significantly. I do think the amount of money that these companies are spending on these deals is exorbitant and they may not really be getting the best return on their investments. This may cause companies like Adidas to take a step back and re-evaluate whether these deals make sense for them.”
It’s uncertain right now what steps Adidas will take to provide more accountability for its representatives who work with NCAA athletes and negotiate these contracts with the schools. Other than announcing that Gatto has been placed on leave and an internal investigation has begun, the company has been understandably mum. If Powell’s words ring true, and apparel companies across the board begin to devote fewer resources to acquiring college apparel rights contracts, that would represent a significant change in trends over the past few decades that have seen the value of these contracts skyrocket. As Powell effectively relates, that money has played a part in the creation of this situation.
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Consequences could be serious for Gatto himself, as legal analyst Michael McCann says that maximum sentences for all the charges could result in as many as 80 years in prison. The consequences for Adidas, however, could be quite minimal depending on the job its public relations staff does from here. If Adidas is able to sell the public and school officials on its narrative that Gatto’s activity was contradictory to normal practice and rare within the company, there might be few if any long-term negative ramifications. The real long-term changes might come in Adidas’ own internal culture and practices in the college apparel industry. If those changes include more accountability for its staff involved in the space, that would be a win for athletes, coaches, fans and schools.