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By: Joshua Calo on Nov. 26, 2014
In early October 2014, fans, analysts, and players excitedly discussed the possibility of a “Beltway World Series” between the Washington Nationals and the Baltimore Orioles. While neither team ultimately advanced to baseball’s fall classic, baseball fans still have the opportunity to observe the local rivals in a different type of matchup. In July 2014, the Orioles and Nationals filed cross-petitions with a New York trial court in a legal battle over licensing fees for the Nationals’ television broadcasting rights.[i]
The New Team on the Beltway
The underlying dispute predates the Nationals’ move to Washington, D.C. In 2002, Major League Baseball (MLB) franchise owners collectively purchased the financially distraught Montreal Expos, and began seeking a new home and new owners for the team.[ii] Two years later, the MLB announced that the Expos would relocate to Washington, D.C. and become the Washington Nationals.[iii]
Peter Angelos, Orioles’ owner, vehemently opposed the move because he feared that the Nationals would diminish the Orioles’ market and cut into his revenues.[iv] Furthermore, the Orioles possessed exclusive broadcasting rights to the television territory of Maryland, Virginia, and District of Columbia.[v] Consequently, Angelos exercised considerable leverage against MLB while negotiating the Expos’ relocation to Washington.[vi]
On March 28, 2005, the MLB and Orioles agreed to share the Orioles’ television territory with the Nationals. In exchange, the Nationals were required to license its telecast rights to the Mid-Atlantic Sports Network (“MASN”) – a regional sports network 90% owned by Angelos and the Orioles.[vii] Additionally, the agreement entitled MASN to pay the Nationals broadcasting rights fees that were considerably below market value during the team’s first seven years in Washington – ranging from $20-$29 million annually.[viii]
The Ongoing Legal Battle
The agreement required MASN to begin paying the Nationals “fair market value” for their telecast rights starting in 2012.[ix]
After more than two years of failed negotiations, the parties went before the MLB’s Revenue Sharing Definitions Committee (“RSDC”) – an arbitration panel of representatives from the New York Mets, the Pittsburgh Pirates, and the Tampa Bay Rays.[x] On June 30, 2014, the RSDC determined that the “fair market value” for the Nationals’ broadcasting rights would range from approximately $50-65 million per season for the 2012 through 2016 seasons.[xi]
On July 2, 2014, MASN filed a “Notice with Summons” in the Supreme Court of New York, seeking to “vacate or modify” the RSDC’s decision.[xii] On July 25, 2014, the Nationals responded by filing a cross-petition to confirm the RSDC’s decision.[xiii]
MASN contends that the RSDC’s decision should be vacated because the arbitration “was rife with procedural and substantive abuses and deficiencies.”[xiv] In support of this assertion, MASN made the following three allegations:
- 1) The same law firm concurrently represented the Nationals, the teams of the three arbitrators, and the MLB during the course of the arbitration, and that none of the parties disclosed the “nature or extent” of the concurrent representations.[xv]
- 2) Both the MLB and the arbitrators had a direct financial interest in the RSDC’s decision because the Nationals’ broadcasting rights fees are subject to the league’s revenue sharing agreement.[xvi]
- 3) The RSDC inappropriately diverged from the agreement’s prescribed methodology for determining the “fair market value” of the Nationals’ broadcast rights fees.[xvii]
Conversely, the Nationals assert that the RSDC’s decision is binding under the agreement, and that MASN has no legal basis for vacating or modifying the award.
In support, the Nationals argue that the agreement required the parties to “negotiate in good faith” to establish the fair market value, and provided for a “mandatory negotiation period” and “non-binding mediation.”[xviii]
Because the parties were unable reach an agreement through negotiation and mediation, the Nationals claim that the agreement required the RSDC to determine the fair market value through “final and binding” arbitration.[xix] Moreover, the Nationals contend that the RSDC applied the correct methodology, and that MASN merely disagrees “with how the RSDC applied the correct formula.”[xx]
Can MASN Show Corruption or Fraud?
On the merits, the Nationals appear to have a much easier path to victory. This case is about a contract and the terms of that contract are clear and unambiguous.
The agreement expressly provides that the RSDC’s determination shall be “final and binding,” and may only be challenged on the narrow grounds of “corruption, fraud or miscalculation of figures.”[xxi]
It seems unlikely that MASN could establish corruption or fraud on the part of the RSDC. First, MASN’s challenge to the methodology applied by the RSDC essentially amounts to an ex-post disagreement with the RSDC’s judgment as to what its “established methodology” entails.[xxii] Furthermore, MASN’s allegations concerning the “partiality of the arbitrators” seem particularly deficient since the Orioles’ expressly agreed to such arbitration.[xxiii]
MASN’s path to vacating the award most likely hinges on showing that the MLB exercised improper influence over the RSDC’s arbitration process. For example, it is an undisputed fact that the MLB made a $25 million loan to the Nationals with the expectation that the Nationals would repay the loan after the dispute with MASN was resolved.[xxiv] Moreover, MASN recently focused its discovery efforts on exploring Commissioner-Elect Rob Manfred’s role in the arbitration process.[xxv]
As a practical matter, it’s unclear how much MASN would benefit from vacating the RSDC’s award. Even if MASN is successful, it is still required to pay the Nationals “fair market value” for broadcasting rights. Given the Nationals’ recent success, the size of its market, and the increasing size of broadcasting rights deals throughout the MLB – such as the Philadelphia Phillies’ recent $100 million per year deal, the RSDC’s $50-65 million annual award hardly seems outlandish.[xxvi]
[i] The actual legal entities that are parties to the present lawsuit are TCR Sports Broadcasting and the Washington Nationals. TCR does business as MASN – a Regional Sports Network that televises both Orioles and Nationals games. The Orioles own the supermajority stake in MASN, and TCR’s president is the son of Orioles owner Peter Angelos. As one article described, “MASN’s interests are thus the Orioles’ interests . . . although they are not the same entity legally.” Consequently, TCR Sports Broadcasting is widely referred to as either “Orioles” or “MASN” in connection with this lawsuit. See Mark Brown, Orioles, Nationals Showdown Over MASN Boils Down to Influence of Commissioner-Elect Rob Manfred, Camdenchat.com (Nov. 12, 2014, 10:00 AM), http://www.camdenchat.com/2014/11/12/7194099/masn-court-case-orioles-nationals-rights-fees (providing “standard reminder” of legal entities named in lawsuit).
[ii] See Island Fever: Expos Playing 22 in Puerto Rico, ESPN (Nov. 22, 2002, 6:48 PM), http://a.espncdn.com/mlb/news/2002/1120/1463782.html (reporting that Expos were purchased by other 29 MLB franchises in 2002, were operated by Commissioner’s office, and that Commissioner appointed committee “to find a permanent solution for the Expos”).
[iii] See Expos Finally Found a New Home, ESPN (Sept. 30, 2004), http://sports.espn.go.com/mlb/news/story?id=1891484 (reporting that MLB announced on September 30, 2004 that Expos would relocate to Washington following season). In 2006, the MLB sold the Nationals to a group led by D.C. real estate developer Ted Lerner. See Lerner Selected as New Nationals Owner, ESPN (May 4, 2006, 12:45 PM), http://sports.espn.go.com/mlb/news/story?id=2432187 (reporting that Lerner agreed to purchase Nationals from MLB).
[iv] See Stephen Dixon, A Channel Worth Changing? The Individual Regional Sports Network: Proliferation, Profits, Parity, and the Potential Administrative and Antitrust Issues That Could Follow, 33 J. Nat’l Ass’n Admin. L. Judiciary 302, 322 n.65 (2013) (recounting Angelos’ opposition to professional baseball team in Washington).
[v] See About MASN, MASNsports.com, http://www.masnsports.com/masn-news-information/about-masn.html (last visited Nov. 13, 2014) (discussing how MLB granted Orioles exclusive broadcast rights to team’s “home television territory,” which encompasses all of Maryland, Virginia, and the District of Columbia, as well as portions of West Virginia, Pennsylvania, and North Carolina).
[vi] See Jayson Stark, MLB Lays Out Incentive Plan for Angelos, ESPN (Sept. 28, 2004), http://sports.espn.go.com/mlb/columns/story?columnist=stark_jayson&id=1888266 (recounting that MLB offered Angelos lucrative incentives to “pull up his roadblocks and allow [the MLB] to move the Montreal Expos 40 miles down the highway from Camden Yards”).
[vii] See Verified Pet. to Confirm Arbitration Award ¶ 1, Wash. Nationals Baseball Club v. TCN Sports Broad. Holding, No. 157301/2014, 2014 WL 4146869 (N.Y. Sup. Ct. filed Jul. 25, 2014) (summarizing terms of agreement). See Maury Brown, Inside the MASN/Nationals Television Contract Dispute, Baseball Prospectus (June 25, 2012), http://www.baseballprospectus.com/article.php?articleid=17468 (detailing Orioles’ ownership stake in MASN).
[viii] See Verified Pet. to Confirm Arbitration Award ¶ 15, Nationals, 2014 WL 4146869 (detailing subsection 2.G of agreement addressing amount of Nationals’ rights fees from 2005 to 2011).
[ix] See id. at ¶¶ 16-17 (detailing subsection 2.I of agreement addressing “Future Rights Fees Determination” after 2011).
[x] See Eriq Gardner, Major League Baseball Embroiled in Explosive Legal War Over TV Deals (Exclusive), The Hollywood Reporter (Jul. 29, 2014, 12:33 PM PT), http://www.hollywoodreporter.com/thr-esq/major-league-baseball-embroiled-explosive-721927 (describing legal dispute and arbitration hearing).
[xi] See Verified Pet. to Confirm Arbitration Award ¶ 27, Nationals, 2014 WL 4146869 (summarizing RSDC Award).
[xii] See Supplemental Summons With Notice, Index No. 562044/2014, TCR Sports Broad. Holding v. WN Partner, LLP, at 3 (N.Y. Sup. Ct. filed Jul. 2, 2014) (“The nature of this action is a petition to vacate or modify . . . an arbitration award by the Revenue Sharing Definitions Committee of Major League Baseball dated June 30, 2014.”).
[xiii] See Verified Pet. to Confirm Arbitration Award, para. 6, Nationals, 2014 WL 4146869 (asserting that Nationals were exercising “their right to have the RSDC Award confirmed” by the court).
[xiv] See Pet. Mem. in Supp. of Appl. for Temp. Restraining Order and Mot. for Prelim. Inj. [hereinafter “Pet. Mem. in Supp. of TRO”], TCR Sports Broad. Holding v. WN Partner, LLC, Index No. 652044/2014, at 5-6 (N.Y. Sup. Ct. filed Aug. 7, 2014) (discussing arbitration process and award).
[xv] See id. (discussing arbitration process and award).
[xvi] See id. at 13 (discussing parties’ financial interest in the award). See Noah Frank, Nationals-Orioles MASN Dispute Goes Public, WTOP.com (July 30, 2014), http://www.wtop.com/41/3672113/Nationals-Orioles-MASN-dispute-goes-public (explaining that both Nationals and Orioles are required to share 34 percent of earnings from broadcast rights fees, and that Orioles are required to pay additional 34 percent “revenue-sharing tax” on profits from majority ownership of MASN).
[xvii] See Pet. Mem. in Supp. of TRO, TCR Sports Broad., Index No. 652044/2014, at 5-6 (“In the Award, the arbitrators failed to apply the ‘established methodology’ as mandated by the arbitration clause . . . . Instead, the Award backed into artificially inflated numbers, thereby diverting MASN’s profits to the Nationals and MLB and reducing MASN to an economically unsustainable 5% profit margin.”).
[xviii] See Verified Pet. to Confirm Arbitration Award, para. 16-17, Nationals, 2014 WL 4146869 (describing agreement’s procedural requirements for negotiating future rights fees).
[xix] See id. at para. 17 (asserting that under section 2.J.3. of agreement, if parties “are unable to timely establish the fair market value of the Rights by negotiation and/or mediation,” then fair market value shall be determined by RSDC through “final and binding” arbitration).
[xx] See Id. (contending that MASN has no legal basis for vacating RSDC award).
[xxi] See id. at para. 4 (“The Parties agreed in their . . . Agreement not only that an RSDC decision would be ‘final and binding,’ but also that it could only be challenged on the limited and narrow grounds of ‘corruption, fraud or miscalculation of figures,’ none of which occurred here.”).
[xxii] Compare Pet. Mem. in Supp. of TRO, TCR Sports Broad. Holding v. WN Partner, LLC, Index No. 652044/2014, at 5-6 (N.Y. Sup. Ct. filed Aug. 7, 2014) (“What is more, the RSDC’s refusal to use the Bortz methodology was intentional. The RSDC has consistently used the Bortz methodology to determine the fair market value for related parties for close to a decade and a half.”), with Resp. Mem. in Opp. To Pet. Mot. for Temp. Restraining Order [hereinafter “Resp. Mem. in Opp. of TRO”], TCR Sports Broad. Holding v. WN Partner, LLC, Index No. 652044/2014, at 9 (N.Y. Sup. Ct. filed Aug. 7, 2014) (“[T]he RSDC explained in its Award that it considered and rejected MASN’s argument that the RSDC was bound to apply the ‘Bortz approach,’ holding that ‘even if the so-called ‘Bortz approach’ were as myopic as MASN and the Orioles now suggest, the . . . Agreement specifies that the [RSDC] Committee should apply the Committee’s established methodology for evaluating related party transactions, not Bortz Media’s preferred methodology.”).
[xxiii] See Resp. Mem. in Opp. of TRO, TCR Sports Broad., Index No. 652044/2014, at 7 (“Given the strong public policies favoring arbitration, a party seeking to avoid summary confirmation or to affirmatively vacate an arbitration award faces a ‘high’ burden in establishing that one of the few recognized, and narrowly construed grounds for vacatur applies.”). MASN alternatively seeks to vacate the award under the Federal Arbitration Act (FAA). See Pet. Mem. in Supp. of TRO, TCR Sports Broad., Index No. 652044/2014, at 8 (discussing MASN’s claim pursuant to 9 U.S.C. § 10(a)(2)). However, as the Nationals correctly note, the primary purpose of the FAA is to ensure “that private agreements to arbitrate are enforced according to their terms.” See Resp. Mem. in Opp. To Pet. Mot. for Temp. Restraining Order, TCR Broad. Holding, Index No. 652044/2014, at 8 n. 5 (quoting Volt Info. Sciences v. Leland Stanford Jr. Univ., 489 U.S. 468, 479 (1989)) (discussing purpose of FAA).
[xxiv] See Brown, supra note 1 (noting that National’s loan from MLB is “undisputed fact”).
[xxv] See Eric Fisher, MASN Case Postponed Following ‘Significant Discovery Battle’, Baltimore Bus. J. (Nov. 11, 2014, 6:38 AM), http://www.bizjournals.com/baltimore/news/2014/11/11/masn-case-postponed-following-signifcant-discovery.html (discussing ongoing “discovery battle” over documents concerning Manfred, and noting that MASN recently claimed Manfred functioned as “fourth arbitrator” on RSDC).
[xxvi] See Christina Settimi, MLB’s Most Valuable Television Deals, Forbes (Mar. 26, 2014), http://www.forbes.com/sites/christinasettimi/2014/03/26/mlbs-most-valuable-television-deals/ (discussing Phillies’ broadcasting rights fees arrangement).