Amidst the very public fallout of Adidas AG's multi-billion dollar sneaker deal with Kanye West, a private legal battle has emerged involving a $100 million-a-year marketing fund. The fund, which Adidas claims the rapper diverted $75 million from, has now come to light as the two sides engage in a heated dispute over their failed partnership.
Initially, details of this conflict were tightly guarded until they were accidentally revealed during a related court hearing in May. Bits and pieces of the dispute have also been revealed in legal filings. According to Adidas, Kanye West and his fashion brand Yeezy LLC allegedly mishandled almost all of the marketing funds, including unauthorized use.
This dispute is now being conducted through an arbitrator as Adidas claims that Kanye West single-handedly brought their promising venture to "economic rubble." The sportswear giant is seeking an accounting of the funds along with the return of $75 million, minus any amount that can be proven to have been used for legitimate marketing purposes. They are also seeking unspecified monetary damages.
In response, Kanye West has accused Adidas of copying his designs to create their own lower-priced shoes. Adidas, on the other hand, claims full ownership of all Yeezy shoe designs. The conflict became public when Adidas filed a motion in federal court to freeze the $75 million, fearing that Kanye might dissipate or move the funds out of reach.
This partnership unraveled in October after Kanye publicly criticized Adidas executives and went on a series of controversial rants. The fallout has caused significant operational and legal headaches for Adidas, impacting their financial position. The company is now trying to recover some revenue by selling $1.3 billion worth of leftover Yeezys and donating some of the proceeds to charity.
Additionally, shareholders have filed a lawsuit against Adidas, alleging that former management failed to disclose issues between the company and Kanye West, and seeking representation of a larger class of investors.
The contract between Adidas and Kanye West is a 53-page licensing and endorsement agreement signed in 2016. It includes confidentiality provisions to keep the details of the agreement and the Yeezy business confidential. One provision requires Kanye's company to return any unused or misused marketing funds received from Adidas in the previous year.
Under the terms of their deal, Kanye's business received royalties from every pair of shoes sold, which constituted a significant portion of his earnings. In 2020 alone, his payouts exceeded $200 million. In addition to royalties, he also received a marketing fee of $51 million, approximately 3% of net sales, to promote the shoes.
The exact usage of the marketing funds remains unclear. Kanye has claimed that in 2019, he used funds for marketing on his Sunday Service, a gospel choir tour that performed at various locations. He estimated that it cost around $50 million.
Following the revelations during the court hearing, US District Judge Valerie Caproni ordered both parties to disclose previously redacted information related to the marketing payments. She denied Adidas's request for a freeze on the funds, and the dispute is now back in private arbitration.