Sports Sponsorships In Cannabis: The Long Legal Road Ahead – Cannabis & Hemp

If legal cannabis isn’t already a key facet of American
culture, it is well on its way. The multibillion-dollar industry is
already ubiquitous in politics, and consumers are increasingly
seeing various types of marketing from cannabis brands, from
billboards to magazine ads to organic content on social media. It
may not be long before sports fans see more of their favorite
athletes talking up CBD products for pain management or even see a
dispensary chain claim naming rights for a stadium.

The next big marketing frontier for cannabis brands is
professional sports sponsorships. And in some respects, it makes
sense that athletes might be natural brand ambassadors for an
industry focused on pain management and mental health relief. But
there are obstacles unique to the highly regulated cannabis market
that, paired with the already legality-heavy proposition of
sponsorship deals, mean a long road ahead. Here are some key
considerations for cannabis and CBD brands looking to a future of
sports sponsorships.

The Current Climate

Many leagues have already embraced sponsorship deals with CBD
brands, from NASCAR to the United Soccer League. The four pillar
sports in the U.S.—the National Football League, the National
Basketball Association, the National Hockey League and Major League
Baseball—have already relaxed their rules and testing
protocols related to athletes and cannabis. In 2019, the NFL
reached an agreement with the players’ union to study the pain
management benefits of cannabis and in 2020, the NFL announced
players will no longer be suspended for positive tests and
increased the threshold of allowable THC for positive tests. And
stars like powerhouse tight-end Rob Gronkowski and former Denver
Nuggets Al Harrington in retirement have attached their names to
cannabis and CBD brands.

After dismal profits through the COVID-19 pandemic, the
“Big Four” sports leagues may want to consider opening an
entirely new sponsorship category via cannabis and CBD. Additional
pressure might come from athletes themselves, who want alternative
treatments for pain and anxiety. As the public looked in from the
outside as the MLB negotiated a new collective bargaining agreement
and as leagues renegotiate CBAs generally, player pressure could
continue to move the needle on league acceptance of cannabis
products.

If sports leagues are expecting to allow cannabis sponsorships
in the future, they are likely waiting for federal approval for
cannabis

As much as this means less stigma for cannabis, it also
illustrates the constant fragmentation that makes it difficult for
cannabis businesses to operate like other companies. While the NFL,
NBA, NHL and MLB have all eased up on players’ use of the
substance, they haven’t embraced CBD sponsorships the same way
other leagues have and currently won’t allow their athletes to
seek CBD or cannabis sponsorship deals as individuals. Piecemeal
state legalization, strict advertising rules, enduring federal
prohibitions and a lack of FDA approval are the biggest barriers
specific to the cannabis industry. And, while the “Big
Four” leagues are not signatories to the World Anti-Doping
Agency (WADA) Code, applying their own anti-doping policies,
don’t look for cannabis sponsorships or endorsements of Olympic
sports or athletes any time soon—WADA prohibits
in-competition use of cannabis, although it is conducting a
scientific review of the status of cannabis in 2022, indicating a
softening may be forthcoming.

Paired with the issues typical to sport sponsorships generally,
cannabis companies have much more to consider when seeking
sponsorship deals.

Threshold Sports Sponsorships Considerations Relating to
Cannabis and CBD

As a threshold matter, if sports leagues are expecting to allow
cannabis sponsorships in the future, they are likely waiting for
federal approval for cannabis and specifically, FDA approval for
CBD products. The agency decided not to allow companies to market
full-spectrum CBD as a dietary supplement in August, and formal
guidelines may be years away as medical and scientific data
materialize either supporting or negating the health claims. In the
meantime, companies and their spokespeople cannot claim certain
health benefits in advertising without FDA approval.

Cannabis itself is also still a schedule 1 drug under the
federal Controlled Substances Act and has historically been listed
among most leagues’ anti-doping bans, although as discussed
above, it appears attitudes might be beginning to shift. Even in
states where adult use and medical cannabis are legal, taxes are
high and advertising rules are incredibly strict. They also vary
from market to market. When Connecticut legalized cannabis in 2021,
state Attorney General William Tong moved to have all billboards
advertising Massachusetts dispensaries removed for violating the
state’s cannabis marketing restrictions. With a web of
intersecting, and at times conflicting, state regulations at play,
national marketing campaigns are highly challenging. The
crisscrossing markets on game days and the national exposure of
most athletes in the Big Four leagues will likely implicate
multiple jurisdictions, and multiple sets of advertising
regulations that don’t always mesh. And, even if a policy
decision were made to allow some territory-restricted sponsorship
deals in the cannabis space, it’s unclear if and how cannabis
sponsors could exercise even local broadcasting rights—a key
value driver for any sponsorship deal.

Specific Sponsorship Considerations Relating to Cannabis and
CBD

In addition to the above, the host of legal and business issues
generally applicable to sports sponsorships deals will likely take
on a different flavor with respect to cannabis and CBD.

From a commercial perspective, one of the key issues in any
sponsorship deal is whether a sponsor will receive exclusive rights
in a category. It’s important that sponsors take a critical eye
to how a league may have “sliced and diced” that
category. For example, a would-be cannabis sponsor may not be
expecting a competitor to take up rights in the CBD space. But
without close attention to how the sponsorship category is defined,
any oversight here could lead to sharing branding space with
unwelcome neighbors.

One of the key issues in any sponsorship deal is whether a
sponsor will receive exclusive rights in a category.

In highly regulated industry categories such as gambling/casino
and sports betting, league policies mandate strict compliance
obligations on the part of the sponsor. We should expect to see a
similar approach if leagues approve cannabis sponsorships. For
example, in gaming and sports betting, league requirements often
demand that sponsors notify the team or league of any compliance
issues—no matter how nonmaterial, and no matter if they
affect any rights or activities in the sponsorship territory. If
there are compliance violations, leagues and teams typically demand
immediate termination rights. The compliance and disclosure
obligations for a highly regulated sponsor can be onerous, and
sponsors risk losing their sponsorship investment even for trivial
issues that do not bear on the sponsorship. For example, should a
minor casino compliance violation in Las Vegas result in
termination of a sponsorship deal in New York? Similarly, if a
dispensary in Seattle operating under an interstate brand receives
a de minimus fine for an inadvertent sale to a minor, should that
result in termination of that brand’s sponsorship deal in
Colorado? While these types of compliance and termination
provisions are typically negotiable to something approximating
fairness, look for leagues to take a hard-line stance on compliance
issues, and expect that some teams may mandate deal terms that are
take it or leave it.

Similarly, leagues and teams often demand strict morals
provisions allowing them to terminate if they determine, in their
sole discretion, that the sponsor or its activities might cause
reputational harm to the team. Although cannabis is rapidly
destigmatizing, one might argue that the industry is at least
historically aligned with illegality and perhaps inherently aligned
with other “sin” industries like gambling, alcohol and
tobacco. Teams and leagues know what they are getting into when
they accept sponsorship money from these industries, and cannabis
sponsors should demand that any such “morals” provisions
be exercised by teams only reasonably, in good faith, and with an
opportunity for the sponsor to cure any alleged issues.

Further, just like gaming and sports betting operators, cannabis
businesses are restricted from marketing to minors. While state
laws are a hodge-podge, sales to individuals under the age of 21
are generally prohibited, and cannabis businesses are also
generally restricted from marketing to individuals under the age of
21, or even from publishing marketing materials that appeal to
children—a subjective standard. These rules, of course, are
likely to restrict the type of signage and activation that can
occur in stadia. It also poses issues from a digital
marketing and data-sharing perspective. Sponsors and teams often
negotiate specific activations via social media, websites and email
marketing lists. But the parties must keep in mind compliance
issues regarding these activations, including taking care to scrub
relevant marketing databases of users under the age of 21 and,
possibly, “self-excluded” individuals. The gaming
industry is familiar with self-exclusion sign-ups, which permit
individuals to opt out of relevant marketing and be disallowed from
entering gaming establishments. The cannabis industry may not be
far behind. In 2020, the Illinois General Assembly introduced
HB4134, which if passed would have permitted self-exclusion from
targeting mailings, advertising and promotions and from entry into
dispensaries. While this bill died, it’s conceivable that we
will see efforts to pass similar bills.

Finally, in 2020-21, sponsors, teams and leagues collectively,
and regardless of industry, combed through the thorny issues of the
COVID-19 pandemic. We can expect to observe a continuing trend of
extra scrutiny paid to force majeure and so-called “make
good” provisions for missed games or unavailable benefits.

Originally published by Cannabis Industry Journal

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