UCLA turns up heat on Under Armour with updated lawsuit over sponsorship deal
By Holden Wilen, Baltimore Business Journal, 6-4-21
UCLA is putting additional pressure on Under Armour Inc. by updating an ongoing lawsuit over the abrupt termination of a sponsorship deal to reflect the sportswear maker's recent settlement with the U.S. Securities and Exchange Commission. In its amended complaint, UCLA says the SEC's decision to slap a $9 million fine on Baltimore-based Under Armour (NYSE: UAA) lends credence to its argument that it was misled about the company's financial health when negotiating a $280 million sponsorship deal in 2015 and 2016. The fine was the result of a federal probe looking into Under Armour's accounting practices that had been ongoing since 2017.
"The SEC found that Under Armour covered up its slowing sales, and fined it accordingly," Mary Osako, vice chancellor for strategic communication at UCLA, said in a statement. "During that same time, Under Armour misled UCLA about its 'strong' financial position to convince us to enter into a massive sponsorship deal, despite UCLA receiving lucrative offers from more established brands. It worked, but it isn’t right. UCLA will continue to right the wrong on behalf of our student-athletes and our Bruin community." A spokeswoman for Under Armour declined to comment. As part of the settlement with the SEC, the company did not admit or deny the probe's findings.
UCLA sued Under Armour last year after the company terminated what was supposed to be a 15-year deal after less than three years. Under Armour claims the Covid-19 pandemic "upended" the deal and that it legally terminated the contract by invoking a force majeure clause. UCLA says Under Armour just wanted to get out of a deal it decided it could no longer afford. Then, Under Armour agreed to the settlement with the SEC in May. The SEC ultimately determined Under Armour misled investors about the basis for its sales growth in 2015 and 2016, violating federal antifraud provisions and certain reporting provisions of federal securities laws. Under Armour pulled forward approximately $408 million in orders from the third quarter of 2015 through the fourth quarter of 2016, according to the SEC's cease-and-desist order. A "pull forward" generally includes a customer sale that is executed earlier than originally planned. Under Armour allegedly used the technique to keep a long streak of consecutive quarters with at least 20% year-over-year sales growth alive.
The time period covered by the SEC order is also the exact same period when Under Armour executives were wooing UCLA administrators with the hope of signing a long-term sponsorship deal with the university. "Under Armour chose not to explain that to UCLA what it was doing," the university's amended complaint reads. "Instead, Under Armour untruthfully and misleadingly represented — to UCLA directly, and in public statements — that it occupied a strong financial position and was growing fast, as part of its attempt to sway UCLA in its favor. It worked. Relying on Under Armour’s representations, UCLA selected Under Armour as its business partner despite lucrative offers from more established competitors."
As previously reported by the Baltimore Business Journal, one of those offers was a 12-year, $213 bid from Adidas, UCLA's previous apparel provider. UCLA officials did not become aware of the possibility that Under Armour was making efforts to manipulate its reported revenue until November 2019, when the company disclosed the federal probe following a report by the Wall Street Journal, according to the lawsuit. During the negotiations of the sponsorship agreement, announced in May 2016, UCLA claims Under Armour executives repeatedly touted that revenue was growing at a rate of 20% or more per quarter due to strong sales of its products, according to the lawsuit.
Kevin Plank, Under Armour's executive chairman and then-CEO, highlighted the streak "as a point pride" during a dinner hosted by the company for UCLA Athletics leadership a month before the deal was announced, according to the lawsuit. The following day, the UCLA representatives met with other senior Under Armour executives at the company's headquarters in Locust Point. "They made a presentation that highlighted Under Armour’s financial performance and included a graph that showed the company’s revenue growth," UCLA said in the lawsuit. "Again, the executives emphasized the streak of quarters with at least 20% growth." The university said Under Armour’s statements "were of critical importance" in its decision-making process. UCLA "needed to be certain that Under Armour would be a reliable partner" before locking into a 15-year commitment. In reviewing the offers from various companies, UCLA relied on Under Armour's reported financial statements and had to trust they were accurate.
"Had UCLA known that Under Armour was making false or misleading representations about its financial position revenue growth, and that Under Armour was covering up slowing demand for its product sales by artificially inflating its revenue, UCLA would never have entered into the agreement in the first place.
Source: https://www.bizjournals.com/baltimore/news/2021/06/04/ucla-turns-up-heat-on-under-armour.html
Happier times back in 2017 when the deal was announced:
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