Last Thursday (June 14, 2018) CrossFit, Inc. filed suit in California Federal Court against its exclusive licensing partner Reebok International, Ltd. In the complaint CrossFit alleges three counts against Reebok: (1) Breach of Contract; (2) Breach of Covenant of Good Faith and Fair Dealing; and (3) violations of Massachusetts State Law.
The Complaint outlines the percentages of sales that that Reebok is required to pay to CrossFit as royalties under the agreement and the shortfalls of Reebok to make those payments. Additionally, the Complaint provides Reebok’s annual marketing obligations to CrossFit, which are alleged to be unsatisfied. In short, CrossFit alleges that Reebok has “robbed CrossFit of the benefit of its bargain to the tune of at least $4.8 million in royalties and has tarnished what was once a golden opportunity for Reebok to revive its image and establish a long-term partnership with the highly valued CrossFit brand.” CrossFit alleges that it is unable to determine the exact amount of damages as “there is not a single year between 2013 and the present for which the various versions of net sales data that Reebok has provided to CrossFit is consistent.”
CrossFit also alleges that Reebok, through the operation of CrossFit’s online store, intentionally limited product offerings and marketing in an attempt to funnel more customers to Reebok’s online store to promote other Reebok products and avoid higher royalty payments to CrossFit. CrossFit believes that this is the reason that sales in CrossFit’s online store have fallen 44% over the past year compared to no drop at Reebok’s online store.
In short, it would appear from the allegations of the Complaint that Reebok attempted to alter the manner in which royalties would be calculated, and subsequently paid to CrossFit, without an additional agreement from CrossFit. Additionally, Reebok has failed to provide adequate financial documentation to show that it is in compliance with the marketing expenditure requirement of the agreement. Now this could be chalked up (no pun intended) to negligent accounting practices within Reebok, but Reebok’s apparent refusal to comply with audit requests from CrossFit would lead some to believe otherwise. Regardless of the underlying factors of the dispute, this is not good at all for the Reebok brand which was seemingly resurrected by the boom in popularity of CrossFit. Reebok’s exclusive contract with CrossFit is set to expire in 2020 and this lawsuit seems to indicate that it will not be renewed. As the old saying goes, “Pigs get fat, hogs get slaughtered.”