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‘Lockout Insurance’ ruling could lead to antitrust issues for owners

Doug Farrar
Shutdown Corner

 

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Now that the former NFLPA (currently termed "The Players", we suppose) have filed a lawsuit seeking to enjoin the NFL's owners from locking them out (as the owners have already done), the next step is for both sides to appear in the Minneapolis court of U.S. District Court Judge Patrick Schiltz, though it could still come before Judge David Doty, the same man who took the owners' $4 billion in lockout insurance money generated through renegotiated TV contracts away from them, leading to two weeks of mediation that ultimately fell apart. At that time, Doty struck down a previous ruling by Special Master Stephen Burbank in which it was decided that the players had not satisfied a burden of proof that the owners were acting against them in minimizing certain profits in exchange for one-sided considerations and a breach of fiduciary duty.

But when Doty overturned the Burbank ruling, he also did so with very specific language that could be seen to open the door to the antitrust rulings the players desire. Regarding the NFL's specific contract violations so obvious even Burbank could not ignore them:

(Note: All references to the "SSA" abbreviate the White Stipulation and Settlement Agreement; the 'Reggie White Ruling' which led to the CBA and what we have known as free agency since 1993).

On February 1, 2011, the Special Master found that the NFL violated Article X, § 1(a)(i) when it granted NBC an additional regular season game in the 2010 season and granted ESPN an additional right in the 2010 season in exchange for an amended work-stoppage provision. Op. 46, 15—16. The special master granted the Players $6.9 million in damages for the NBC violation, and determined that the Players had not met their burden of demonstrating damages with respect to the ESPN violation.

Doty saw things differently in both cases.

The record shows that the NFL undertook contract renegotiations to advance its own interests and harm the interests of the players. The NFL argues that the SSA does not require it to act in good faith in 2011 or subsequent seasons, that lockouts are recognized bargaining tools and that it is entitled to maximize its post-SSA leverage. The court agrees. However, under the terms of the SSA, the NFL is not entitled to obtain leverage by renegotiating shared revenue contracts, during the SSA, to generate post-SSA leverage and revenue to advance its own interests and harm the interests of the Players. Here, the NFL renegotiated the broadcast contracts to benefit its exclusive interest at the expense of, and contrary to, the joint interests of the NFL and the Players. This conduct constitutes "a design ... to seek an unconscionable advantage" and is inconsistent with good faith.

And as to the owners' contention that they put lockout insurance provisions in renegotiated contracts to help satisfy debt structures that could have killed some teams in the event of revenue stoppage, Doty threw the concept right back in their faces.

The NFL also argues that the broadcast contracts were renegotiated to avoid defaulting under certain loan covenants. That fact alone substantiates value to the NFL without a corresponding increase in total revenues. Moreover, the value of the renegotiated contracts far exceeds the amount needed to satisfy loan covenants, and the DirecTV contract creates a financial incentive to institute a lockout. Further, the decision to lockout the Players is entirely within the control of the NFL, thereby rendering a debt default also entirely within its control. Lastly, the debt covenants are of the NFL's own making.

The risk of debt default brought about by a lockout does not excuse or justify a breach of the SSA. Therefore, construing the good faith obligation as modified by "consistent with sound business judgment," the NFL breached the SSA by failing to act in good faith so as to maximize total revenues for each SSA playing season.

So, in effect, Doty ruled that the owners violated a series of  SSA/CBA provisions that they had to adhere to, whether they opted out of the CBA in 2008 or not.

Where does the antitrust language come in? When Doty ties the current SSA violations to 'restraint of trade' found in the ruling that set up the SSA in the first place.

The NFL rankles under the restriction to its enormous market 6 power imposed by the White settlement after the jury in McNeil found that the NFL had abused its power in unlawful restraint of trade. The facts underlying this proceeding illustrate another abuse of that market power wherein various broadcasters of NFL games were "convinced" to grant lucrative work-stoppage payments to the NFL if the NFL decides to institute a lockout. Typical work stoppage provisions anticipate a strike by players, not a work stoppage created by the NFL itself. Whether the contract provisions insuring these payments might ultimately be deemed unenforceable because of their potentially collusive nature is not an issue before this court, but the court does consider the abuse of the NFL's market power when finding that it did not act in good faith to benefit both itself and the Players, as required by the SSA.

This is how packed the Doty ruling is — in one footnote on page 21, he ties the abuse of power in the case that set up the SSA (and the antitrust language therein) to the owners' abuse of power in the renegotiations of the TV contracts. Then, he specifies the unusual nature of the current lockout by reminding everyone that it is an action in response to no other work stoppage action. Then, and just for good measure, he throws in the word "collusive" … and the concept of collusion is one that should have every owner in every sport sweating heavily.

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Doty summed up the flaw in Burbank's ruling in a way that also summarized the flaws in the NFL's recent actions.

The special master failed to analyze the total capabilities and the market power of the NFL because he found it "difficult to believe that" the parties intended best efforts to "require the NFL to seek additional consideration for rights already under contract." This is another example of importing corporate law to a sui generis agreement that was forged at the anvil of litigation, threatened repercussions and hard bargaining. Moreover, although the rights fees for the 2009-2010 seasons were already agreed upon, the renegotiated contracts materially changed almost every other aspect of the previous contracts. Further, the NFL gave digital rights in 2009 and 2010 without incremental payments to convince two broadcasters to agree to work stoppage provisions.

More potential antitrust/restraint provisions exist in Doty's take on the way the NFL strong-armed the networks.

The NFL used best efforts to advance its CBA negotiating position at the expense of using best efforts to maximize total revenues for the joint benefit of the NFL and the Players for each SSA playing season. Moreover, at least three networks expressed some degree of resistance to the lockout payments. As it renegotiated the contracts, the NFL characterized network opposition to lockout provisions to be a deal breaker and "clearly a deal" it would not consider … To the contrary, the evidence shows that maximizing total revenues for SSA seasons was, at best, a minor consideration in contract renegotiations. Therefore, the court finds that the NFL breached Article X, § 1(a)(i) in extending or renegotiating its broadcast contracts.

Finally, in Item 3 of his Conclusion, Doty sets forth the parameters by which an injunction may be applied in the case of relief for the breach of contract, and this might also apply to the way in which he chooses to bring down an injunction against the lockout.

The court orders that a hearing be held concerning relief to be granted to the Players arising from the NFL's breach of the SSA. The hearing shall consider the award of both money damages and equitable relief, including injunction. District of Minnesota Local Rule 7.1(b) will dictate briefing schedules and related procedures.

It's rare that you can go back and see just how a judge's mode of thought and action might apply to his future rulings, but Doty's language in overturning the Burbank ruling is a fascinating trip into the mind of a jurist that the NFL's owners should not want to see coming from any distance. And even if a different judge hears the case, it would be very surprising if Doty's language was not used in relation to these issues.

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