Yesterday, CrossFit announced they plan to take Reebok to federal court over a licensing and marketing dispute that’s developed over the last five years. This announcement comes from a press release published on PR Newswire yesterday afternoon, and for the full complaint, read here.
Editor’s Note/Update: Reebok representatives have sent a statement regarding the complaint, which we’ve included toward the bottom of this article.
In 2010, CrossFit and Reebok began a 10-year long agreement, which granted Reebok exclusive licensing rights to use the CrossFit branded name on apparel products. This agreement meant that Reebok was the only company that could brand things like fitness apparel, shoes, and other products with “CrossFit”, and this included forbidding CrossFit themselves from marketing, selling, and distributing some of their own CrossFit branded products.
For compensation per their agreement, Reebok had agreed to pay CrossFit royalties on the net-sales of their branded products, and to market those products per an annual marketing schedule/budget.
From the recent complaint filed by CrossFit, they state that in 2013 Reebok altered the way they calculated royalties without CrossFit’s knowledge or consent. CrossFit has stated that Reebok has been underpaying them per their initial agreement on royalties for the last few years.
In CrossFit’s complaint, they write, “Specifically, without ever advising CrossFit, Reebok unilaterally began calculating royalties based on a fictional “wholesale equivalent price.” To be clear, the “whole equivalent price” was a dramatic departure from the net sales calculation Reebok and CrossFit negotiated (and which Reebok has been using for two years) because it effectively gutted the royalties Reebok owed on certain sales channels by 50%.”
In the complaint, CrossFit writes that in 2016 they exercised their right to have a third-party audit Reebok’s books. After CrossFit exercised this request, they stated that it appeared Reebok tried to camouflage their underpayments and refused to provide “critical data” their auditor requested.
Then in 2016 after this audit request, Reebok proposed an amendment to the agreement that would ratify the previous’ years royalty miscalculations. CrossFit states they never agreed to this amendment.
In February 2017, CrossFit says Reebok acknowledged there had been a pattern of underpayments. In the complaint, CrossFit writes that Reebok admitted to this in a February 2017 document, which states they’d been making royalty payments, “by calculating royalty at 1/2 the net sales for the eCom channel… resulting in a payment shortfall of $1.65M.” (Emphasis added by CrossFit.)
For the first three quarters of 2017, CrossFit points out that Reebok had returned to their initially agreed upon royalty compensation, but eventually fell back to the wholesale compensation calculation again by Q4 of 2017.
CrossFit states that between 2013 and 2016, Reebok underpaid them by at least $4.8 million in royalties (including interest).
In addition to the royalty underpayments outlined in the filing, CrossFit has also drawn attention to Reebok’s marketing obligations that were made in the initial agreement. Since Reebok has the exclusive rights to market, sell, and distribute CrossFit branded products, both companies agreed upon an annual marketing budget that Reebok would use each year.
According to CrossFit, over the course of 2011-2017, Reebok’s total budget to market CrossFit-branded products and the CrossFit Games was supposed to be $51.75 million, and CrossFit states that Reebok hasn’t produced evidence and record for their use of this marketing-focused budget.
In addition to CrossFit’s complaints regarding royalty underpayments and failure to validate their marketing budget, CrossFit has suggested that Reebok has made more of an effort to specifically funnel customers to their Reebok store, as opposed to CrossFit’s, which would equate to less royalties paid to CrossFit. Also, CrossFit alleges that Reebok is slow to restock the CrossFit-focused store, yet keeps their store in-stock.
CrossFit’s complaint was filed in the United States District Court for the Northern District of California. As of right now, there’s no set date for the hearing, and developments of this dispute are still surfacing.
Reebok representatives reached out to BarBend with the following statement regarding the complaint:
“The allegations set forth in CrossFit’s complaint have no merit. We are disappointed that CrossFit chose to escalate a disagreement between longtime partners in an unreasonable manner that damages Reebok’s reputation. We will respond through the appropriate legal channels and we expect a favorable outcome. In the meantime, Reebok will continue to fully support the community of coaches, athletes, boxes and members who inspire us every day with their passion, energy and camaraderie.”
There’s still been no word on if any of this will have an impact on the 2018 Reebok CrossFit Games, and as more information releases, we’ll update this article accordingly.
Feature image from @reebok on Instagram