CrossFit takes Reebok to federal court
CrossFit announced today it was forced to bring suit against its exclusive licensing partner Reebok. The dispute stems from a unilateral change Reebok made in how it calculates royalties, efforts to hide underpayments from CrossFit and Reebok’s failure to comply with its marketing obligations under the licensing agreement.
The 10-year deal was signed in 2010 and gave Reebok the exclusive license to sell fitness apparel and footwear products bearing the CrossFit trademark. No one other than Reebok – including CrossFit itself – could produce clothes or shoes bearing the CrossFit trademark. In exchange, Reebok agreed to pay CrossFit royalties for the CrossFit-branded products and made a marketing commitment to help sell those products.
The agreement is widely seen as a significant part of Reebok’s revival; as CrossFit and the CrossFit Games have continued to see explosive growth, sales of athletic footwear and apparel affiliated with the CrossFit name have surged.
The complaint filed by CrossFit alleges that in 2013, Reebok began altering the way it calculated royalty payments. Reebok’s calculation method, which Reebok did not disclose to CrossFit – and which was contrary to the terms of the agreement – has resulted in millions of dollars in underpaid royalties to CrossFit. According to the complaint, from 2013 until 2016, Reebok continued this scheme, knowing that CrossFit was unlikely to detect the underpayments due to meteoric sales gains as popularity of CrossFit continued to grow and because Reebok was excluding relevant information from their royalty reports to CrossFit. Then, after CrossFit raised questions about Reebok’s royalty payments, Reebok’s efforts to camouflage its underpayments were revealed. This is not the first lawsuit against Reebok for failure to pay royalties.
The complaint alleges that CrossFit’s suspicions were confirmed in February 2017 when Reebok admitted that it had been making royalty payments “resulting in a payment shortfall.” For the first three quarters of 2017 – and for the first time since 2012 – Reebok paid royalties in accordance with the Agreement. Yet by the end of 2017, Reebok reverted to its previous royalty calculation scheme and to date, Reebok has never paid CrossFit for any portion of its admitted “payment shortfall.”
During this same period of time, between 2011 and 2017, Reebok was also required to spend $51.75 million on marketing. However, Reebok has failed and refused to produce any credible evidence of its marketing efforts and has instead provided only multiple, conflicting sets of royalty data and has not kept accurate, complete, and up-to-date financial records.
“Reebok signed a sweetheart deal before CrossFit was a household name and our growth helped make their brand relevant again,” said CrossFit, Inc. CEO Jeff Cain. “But it’s past time for them to meet the terms of our agreement and that’s all we are asking for today.”
CrossFit filed the lawsuit in United States District Court, Northern District of California. A copy of the lawsuit can be found online here.