Late last week CrossFit, Inc. filed a lawsuit against Reebok for at least $4.8 million. CrossFit claims Reebok changed how it calculated royalty payments associated with e-commerce sales and then tried to cover it up. On top of that, CrossFit assets Reebok did not spend $51.75 million in advertising per the two parties’ contract.
The contract in dispute is the 2010 agreement whereby Reebok became the title sponsor of the CrossFit Games and exclusive licensing partner of CrossFit. In that agreement, Reebok agreed to pay CrossFit a royalty on all CrossFit-branded apparel. While the royalty was generally a flat 10% against net sales (retail price minus any discounts), Reebok allegedly only paid 50% of that on e-commerce sales beginning in 2013.
In 2016, CrossFit audited Reebok’s books. During this time, Reebok proposed changes to the royalty calculation and called it the “Adidas group” method. CrossFit contends that this was an attempt to cover up the reduced royalty calculation and payment.
Later that year in August 2016, CrossFit found errors in Reebok’s royalty calculation. Reebok responded by saying that the two parties agreed to a net sales definition in which only 50% associated with ecommerce sales is applied to royalty payments. CrossFit says it never agreed to that definition.
In December 2016, Reebok then proposed an amendment changing the royalty calculation. CrossFit never signed it.
Then in February 2017, Reebok confirmed it had changed the royalty payment on ecommerce sales and that resulted “in a payment shortfall of $1.65 million.” However, Reebok never paid this amount to CrossFit.
But in the 1st quarter 2017 royalty payment, Reebok followed the agreement and paid the correct royalties, per CrossFit. That did not last long, though. According to CrossFit, Reebok reverted back to the 50% ecommerce royalties method in the 4th quarter and then went even further. Reebok apparently applied this 50% of net sales calculation to all direct-to-consumer sales.
As for Reebok’s marketing obligations, CrossFit states that Reebok has not provided any credible evidence that Reebok has spent $51.75 million from 2011 to 2017. CrossFit states that Reebok has failed to keep accurate and complete financials.
On top of all this, CrossFit also claims that Reebok failed to stock gear on store.crossfit.com and instead focused on driving sales to reebok.com. The reason? Reebok only had to pay 5% on reebok.com sales versus 10% of sales on store.crossfit.com.
Because of all of this, CrossFit is suing for at least $4.8 million. CrossFit says “at least” because they claim it is impossible to truly calculate exactly how much is owed because Reebok’s records that have been provided are insufficient.
All of this is happening just weeks before the start of the 2018 CrossFit Games. Will any of this dispute impact the Games? On top of that, Reebok’s agreement with CrossFit runs through the 2020 CrossFit Games. Stay tuned to find out how this is all resolved.
To read the entire lawsuit, click here.