On April 19, Lance Armstrong was in the news again as he reached a settlement with the United States Postal Service for $5 million in a false claims suit that sought $100 million. The case, called Landis v. Armstrong, featured detailed accounts of the doping that professional cyclists take in order to compete at the highest world level — but what is most interesting to me is how a criminal fraud charge arose from a licensing agreement.
After all the revelations about Armstrong’s doping came out, the World Cycling Organization took away his Tour de France medals, and the U.S. government came up with a litany of criminal indictment allegations to recover the money paid to Armstrong.
The lawsuit was started by Lance Armstrong’s teammate Floyd Landis, who stands to receive 25% of the $5 million settlement because he was a qui tam plaintiff. A qui tam lawsuit is the mechanism that the Whistleblower Protection Act provides for actions on behalf of the federal government. When a qui tam plaintiff’s whistleblowing leads to a recovery of money, he or she is entitled to a share of it (that’s $1.25 million for Landis — who also admitted to doping). Qui tam cases are found most often in the context of tax fraud.
A celebrity endorsement is meant to increase not just the sponsor’s revenue, but its reputation and branding. Accordingly, every celebrity license agreement contains a morals clause, which typically says “If you’ve done something that shows moral turpitude, or at least broken the law, we can terminate this contract.” The strength of the morals clause largely depends on the bargaining power of the sponsor in these situations.
The moral of this story is that when you do business with powerful partners, there could be powerful, unanticipated consequences upon the discovery of a breach of contract. In this case, it turned out to be a felony prosecution for not merely breaching the sponsorship agreement, but receiving money (licensing fees) by allegedly defrauding the U.S. government.
