By Charles Bennett, J.D.
Image rights contracts increase players’ taxes, and teams can breach them without any liability to the player. Over the last ten or so years many European teams have begun signing players to image rights contracts in addition to the players’ salary contracts. Teams get significant tax advantages from image rights contracts and often pressure agents and players to sign them. Many agents and players do not understand the full legal ramifications in terms of tax liability and enforcement, and sign the image rights contracts without much thought. But that needs to change because many teams are now using the BAT to avoid their obligations in the image rights contracts.
How Image Rights Contracts Work
Here’s how image rights contracts work: Typically a player will sign an original contract with a team for a salary amount net of all taxes. Let’s use, for example, a contract worth $200,000. After the player signs the original contract, the team will approach the player with two additional contracts, a league contract and an image rights contract. The league contract is sent to the league in which the team plays and is a way for the team to report paying the player less than it actually does. The image rights contract is a payment for the player’s intellectual property rights so the team can use the player’s name and likeness on its website and other marketing materials.
The league and image rights contracts will purportedly pay the player the full amount of the original contract, but will break up the payments into different amounts. Again for our example we’ll use 50/50. The league contract will pay the player $100,000 directly and the image rights contract will pay $100,000 to an image rights company, typically in a tax haven with beneficial tax laws. Once the team pays the image rights company, the image rights company then transfers the money to the player.
Because the original contract calls for payment to the player net of all taxes, the team must pay the taxes on the full $200,000. So the team pays the taxes due on the money transferred directly to the player and pays the taxes due on the money transferred to the image rights company. The team gets tax benefits because the $100,000 paid to the image rights company is for intellectual property rights––not individual income––and the rates are typically half or less that that due on the payments made directly to the player.
Taxes Due by the Player
The first problem with this scheme is the taxes due by the player. For American players, taxes are due on income from whatever source derived. Unlike in most foreign countries, income earned by US citizens outside the US is taxable within the US. But American players can present a tax certificate to the IRS proving that taxes were paid on their income in a foreign country and receive a credit for those taxes. The team pays the taxes in the team’s home country, and the player receives credit for those taxes from the IRS via the tax certificate. Because most of the individual tax rates in Europe are higher than those in America, the player ends up not owing the US government any taxes on the money paid directly to him.
The problem arises with the money transferred to the player from the image rights company. Although the team paid taxes when it transferred the money to the image rights company, the US government does not consider that money earned by the player until the player actually receives it. Only when the image rights company transfers the money to the player is the money considered earned. Thus the player gets no credit for the tax payments made by the team for the money paid to the image rights company and must pay individual taxes in the US on the money received from the image rights company.
Enforcement of the Image Rights Contract
The second problem with this scheme is enforcement of the image rights contract. The image rights contract is between the image rights company and the team. The player is not a party to the contract. He simply assigns his rights to the money due from the team to the image rights company. Therefore, the player has no standing to enforce the contract when the team fails to pay. The image rights company must pursue the team, and rarely does.
You may be asking why the player cannot simply enforce the original contract. Often the image rights contract is signed after the original contract and actually supersedes the original contract. Most of the original contracts include provisions that make modification of the original contract only possible by a subsequent writing signed by both parties. The image rights contract is exactly that because the player assigns his rights to the image company by signing the image contract. The player has unknowingly given up his right to enforce the original contract and pursue the team. And the team has ducked liability for one half (in our example) of the payment due the player.
BAT Refuses to Allow Players to Enforce Image Rights Contracts
In the first few years of the BAT, the arbitrators often ruled that the player did have standing to arbitrate a claim against the team from the image rights contract. The arbitrators ruled the image rights contract arose from the original contract. The original contract typically contained the broad BAT arbitration provision that includes any dispute arising from the original contract. The image rights contract could not exist but for the original contract, so the BAT arbitrators ruled the player could hold the team liable for any breach. In effect, the image rights contract arose from the original contract.
In the last couple of years that trend has changed dramatically. Now BAT arbitrators are throwing out more and more of the players’ claims for teams breaching the image rights contracts. The players are left with no recourse against these teams.
Agents need to be aware of these problems and make sure to include provisions in the image rights contracts that allow players to bring BAT arbitrations against teams for any breach or flat out refuse to sign them.
Charles Bennett is the CEO and Executive Director of the IBPA and currently clerks at BFSN Law while awaiting his results from taking the Texas Bar in July 2014. Mr. Bennett played professional basketball in Europe from 2001–2008 and graduated cum laude from SMU Dedman School of Law in May 2014.
Email him at cbennett@playersassociation.org, find him on LinkedIn, follow him on Twitter at @IBPA_Basketball, and follow IBPA on Facebook.
