Penguins Sale Highlights Role of Arbitration in Ownership Disputes
The pending sale of the Pittsburgh Penguins to Fenway Sports Group is at issue in two ownership-level lawsuits that are running into a familiar obstacle: the power of a league commissioner to compel intra-team disputes into arbitration.
Last Friday, Pennsylvania federal Judge Marilyn Horan stayed a lawsuit brought by Wildfire Productions, a motion picture and tape distribution company that owns a minority stake in the Penguins. Wildfire maintains that FSG, which last November reached a deal to buy the Penguins from Team Lemieux (a partnership led by Mario Lemieux and Ron Burkle), aided and abetted a breach of fiduciary duty and tortiously interfered with contractual relations. Wildfire has also sued Team Lemieux in the Delaware Court of Chancery, claiming breach of contract and breach of fiduciary duty.
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Wildfire contends it was unlawfully excluded from sale discussions. The company insists it wasn’t afforded the same opportunities as other partners, in contravention of legal rights. The company seeks, among other things, an order that would declare the transfer of Team Lemieux’s interests to FSG “null and void.”
According to its federal complaint, Wildfire invested $5 million in the Lemieux Group between 1999 and 2000. The Lemieux Group is a limited partnership that took over ownership of the Penguins following a bankruptcy process. Wildfire says it owns 7.54% of the Lemieux Group’s partnership.
FSG and Team Lemieux reject Wildfire’s claims. “Wildfire,” FSG attorneys wrote in a court filing, “knew about FSG’s planned acquisition of a controlling stake in Lemieux Group LP for over six weeks before the Transaction closed. In that time, Wildfire never attempted to stop the close of the transaction.”
FSG attorneys also emphasize that the legal relationship between Lemieux Group partners and the NHL features the signing of a consent agreement in 1999. Pursuant to the agreement, the partners agreed to resolve various forms of conflicts through an arbitration process controlled by the NHL commissioner. “It is clear from the documents relied upon in the complaint,” FSG attorneys have asserted, “that there is a valid arbitration agreement that covers the claims asserted in this action.”
The NHL isn’t a defendant but has moved to intervene. The league seeks to compel the parties to arbitrate Wildfire’s claims.
As the league sees it, the consent agreement requires disputes “be resolved in accordance with Section 6.3 of the NHL Constitution and the NHL Commissioner shall have full and exclusive jurisdiction and authority to arbitrate and resolve” disputes. Section 6.3 lists a series of “disputes” that fall under commissioner Gary Bettman’s purview. One is a dispute that “involves two or more Member Clubs of the League or two or more holders of an ownership interest in a Member Club of the League.”
Arbitration as a method to resolve ownership disputes isn’t unique to the NHL. In 2020, the NFL successfully intervened in a federal lawsuit between Washington Commanders majority owner Daniel Snyder and three limited partners (Robert Rothman, Dwight Schar and Frederick Smith). The league noted that Commanders owners contractually consented to an arbitration process overseen by commissioner Roger Goodell. The dispute was resolved when the limited partners sold their interests to Snyder.
Leagues regard arbitration as a desirable form of dispute resolution for several reasons. Arbitration is confidential whereas a lawsuit is public. While evidence and testimony compiled in arbitrations are inaccessible to the public, sensitive trial documents are often downloadable on court websites. Owners suing each other can expose financial documents that leagues regard as private. Those documents might contain trade secrets or materials that advantage players’ associations in bargaining. Arbitration controlled by the league commissioner also is designed to produce outcomes that maximize league interests. In contrast, in a trial, a judge or jury focuses on resolving the specific legal dispute at hand.
Arbitration has also surfaced in lawsuits brought by team employees. Brian Flores and Jon Gruden might see their lawsuits against the NFL end prematurely if courts find they contractually assented, through employment agreements, to arbitration. Although arbitration decisions can be challenged in court, courts review those decisions with a high degree of deference.
The potential role of arbitration in the Wildfire lawsuits remains to be seen. The federal case will be stayed pending the Delaware case’s conclusion. Judge Horan reasoned that for Wildfire to establish that FSG broke the law in assisting Team Lemieux, it first needs to establish that Team Lemieux broke the law. If the defendants and the NHL have their wishes, however, both lawsuits will be dismissed and sent to arbitration.
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