Maryland’s $157 million counterclaim: ACC recruited B1G schools

[larryredbull]

It's really not about "reasonableness" - it's about whether the exit fee represented a fair estimate of the damages that the ACC expected to incur as the result of one of its members leaving. Given what they knew about their TV contract, bowl tie-in's, and other available schools to backfill a departing member, the ACC will have a very hard-time justifying that fee. Especially given that no school has actually been harmed financially - except, you know, UConn/Cinci/USF.

The ACC contract with ESPN is worth $3.6 billion over 12 years. That works out to an average of $17.1 million a year per school for 12 years or a total of $205.20 million per school. A $52 million exit fee is 25% of Marylands total over 12 years and 1.4% of the ACC's total compensation. In this context, $52 million is not an excessive amount and quite reasonable.

The ACC could easily argue that Maryland (a founding member) was a integral part of the ACC and a factored into ESPN's payment to the ACC. In fact the reason the Big Ten took Maryland was their position in the all important DC TV area. As you mentioned, the damages dont actually have to occur but were "expected" to incur.

 

[billybud]

A liquidated damage in a contract is usually an agreed upon approximation of future damages when the actual future damage can not be known in any detail.

Certainly Maryland will argue that there is no or little actual monetary damage.

The ACC might well argue, in this day of markets, networks, etc...the value of the loss of market...the same market that made Maryland attractive to the Big Ten.

 

[WestHartHusk]

As I posted earlier...same sentiment different words...


"
Sure...if the judge finds that the exit fee is not a reflection of approximated damages but rather designed to be a punitive measure, there is plenty of precedence that the court will find the exit fee to be not valid."

When I posted several posts later I used finding the fee "reasonable" as a one word short hand way of saying what I already had posted.

Gotcha. We are on the same page.

 

[itgoeslike]

Here's another analogy. . .

Once upon a time there was a selling group called the Atlantic Cotton Consortium, which had 14 cotton farmers as members. Business was OK, but several competing consortiums were making a bunch more money and were positioned to make even more in the coming years. The consortium's executive director caught wind that 1 or more of its members may be departing to join one of the competing selling groups. Losing 1 or more members could affect revenue as well as the viability of the entire group (not to mention the executive director's salary). He knew he couldn't boost revenue to compete with the other consortiums, so he came up with a plan that would make it so painful to leave, that no member would ever try, or so he thought. The executive director hastily calls a membership meeting to be attended by all the head farmers. With the consortium's legal counsel sitting in on the meeting, he gets all the farmers to agree to abide by the outcome of legislation passed. But instead of the typical waiting period, which allows farmers time to make adjustments, the legislation would be effective immediately. As the first order of business, a new bylaw was presented that essentially allows any farmer to leave the consortium, at any time, all they need to do is pay 3 years of sales revenue (a figure so high, it would likely prohibit any member from leaving). Two of the farmers balk and vote "no", citing (to themselves) the premise that no school should waive their right, in perpetuity, to self determination and its individual aspirations to be the best farmer it can be. It's simply unAmerican and the antithesis of Southern hospitality. But, the executive director knows that he only needs a 3/4 majority of votes in order for the bylaw to pass. The remaining members, many who have vested interests in maintaining the status quo, vote "yes", effectively entrapping all membership into eternal indentured servitude on behalf of the consortium. Or so they thought. . .

 

[btstimpy]

Here's another analogy. . .

Once upon a time there was a selling group called the Atlantic Cotton Consortium, which had 14 cotton farmers as members. Business was OK, but several competing consortiums were making a bunch more money and were positioned to make even more in the coming years. The consortium's executive director caught wind that 1 or more of its members may be departing to join one of the competing selling groups. Losing 1 or more members could affect revenue as well as the viability of the entire group (not to mention the executive director's salary). He knew he couldn't boost revenue to compete with the other consortiums, so he came up with a plan that would make it so painful to leave, that no member would ever try, or so he thought. The executive director hastily calls a membership meeting to be attended by all the head farmers. With the consortium's legal counsel sitting in on the meeting, he gets all the farmers to agree to abide by the outcome of legislation passed. But instead of the typical waiting period, which allows farmers time to make adjustments, the legislation would be effective immediately. As the first order of business, a new bylaw was presented that essentially allows any farmer to leave the consortium, at any time, all they need to do is pay 3 years of sales revenue (a figure so high, it would likely prohibit any member from leaving). Two of the farmers balk and vote "no", citing (to themselves) the premise that no school should waive their right, in perpetuity, to self determination and its individual aspirations to be the best farmer it can be. It's simply unAmerican and the antithesis of Southern hospitality. But, the executive director knows that he only needs a 3/4 majority of votes in order for the bylaw to pass. The remaining members, many who have vested interests in maintaining the status quo, vote "yes", effectively entrapping all membership into eternal indentured servitude on behalf of the consortium. Or so they thought. . .

It isn't the executive director who orchestrated anything in this case. It was one of the two parties that you claim balked who orchestrated the Exit Fee and terms. Remember, the Exit Fee was added to the ACC bylaws specifically by motion made by Maryland. Maryland balked at increasing the value of the Exit Fee that was proposed in the next meeting, but it is in fact Maryland's idea. In addition, there was no hasty meeting organized, just the normal annual September meeting that other business like the announcement of Notre Dame had to wait for. And Maryland isn't blocked. They can pay the exit fee and still have self determination and individual aspirations riding off into the sunset. in fact, there really isn't much choice. Thier seat has already been taken by another.

 

[btstimpy]

As stated over and over...

The main issues will be..

1...the issue of whether the exit fee is deemed to be punitive vs reasonable.

2...whether the ACC followed the internal procedures set forth in their bylaws to affect a valid amendment.

Those are the decisions to be made in the case. So what is all this sideshow about subpoenas for Pitt's records about conversations with Big Ten schools? It's grasping. Pitt wasn't even a member of the ACC when Maryland announced its exit.

 

[itgoeslike]

It isn't the executive director who orchestrated anything in this case. It was one of the two parties that you claim balked who orchestrated the Exit Fee and terms. Remember, the Exit Fee was added to the ACC bylaws specifically by motion made by Maryland. Maryland balked at increasing the value of the Exit Fee that was proposed in the next meeting, but it is in fact Maryland's idea. In addition, there was no hasty meeting organized, just the normal annual September meeting that other business like the announcement of Notre Dame had to wait for. And Maryland isn't blocked. They can pay the exit fee and still have self determination and individual aspirations riding off into the sunset. in fact, there really isn't much choice. Thier seat has already been taken by another.

The executive director (commissioner) wouldn't be doing his job if he wasn't taking steps to advance the stability of the conference.

As stated before by other posters, the first issue really boils down to whether formal process and notice was followed by the ACC. Based upon reports, representatives of FSU complained about being blind-sided and being put on the spot, which appears to give some credibility to Maryland's position. Whether process was followed should be fairly easy (loaded term) to verify, but so far it appears to be an open item (unless you have information to the contrary). As an aside, it's my understanding that ND was pushing for enhanced conference "security" to conincide with its joining the conference. I suspect the two actions were linked. It may have even been a prerequisite.

Secondly, even if all processes were followed, the bylaw can still be found to be excessive, punitive, malicious, not applicable, etc. Each and every day, judges, mediators and arbitrators rule on partnerships and business relationships gone bad. They typically get settled out, provided laws weren't broken.

It is somewhat irrelevant that Maryland proposed a lesser amount at an earlier date. It could be found that lesser amount is fair and reasonable. In any event, the new, higher amount and the process surrounding it will have to stand on its own merits. I personally find it hard to believe that a fee that is nearly 3X a member's annual revenue was conceived solely to cover the costs associated with a member leaving. What transpired in the previous months to drive up these "exit" costs? Hint: It wasn't the costs that changed.

Lastly, the fact that the ACC has been so aggressive makes me question the strength of the GOR. I guess it's possible that Maryland has made headway in challenging the legitimacy of the exit fee in its entirety, although that is unlikely. At least from afar, it looks like both parties would be best served if they settle in the next 60 days. I think the amount ends up being equal to the funds currently being withheld by the ACC, which is a little over $30M.

 

[Pat125]

The big difference is that UWV set the precedent in the Big East that leaving early was possible through some form of negotiation/payment. Lville, Pitt and Cuse just followed their precedent with the BE. The schools that left did the negotiating. That the BE leadership caved to UWV is not Swofford's fault. The BE let people leave early, they just had to pay for it. The BE also did not have a Grant of Rights issue that the ACC has. The ACC is not the BE when it comes to teams leaving and is standing firm over the fee.

The only hope that MD has for prevailing is that the ACC did not correctly follow their bylaws. That they bypassed some notification period, debate period or something like that. That is how the BE lost their increased fee lawsuit against BC (which in hindsight was a minuscule amount). The questionably enacted part of your argument is the only possible out for MD if the ACC was stupid enough to not learn from the BE. While the amount may seem excessive, the burden of proof is on MD that it was not enacted properly or that injures MD irreparably. Since MD is joining a conference that pays them more, the second argument is unlikely to prevail. And if the ACC followed the bylaws to the exact letter, then MD has nothing. MD subpoenaing Pitt and Wake this past week regarding their reaching out to B1G teams kind of shows that MD is really reaching for almost anything at this point.

At this point, legal bills are running in the millions for both sides. Time to negotiate a settlement. Only lawyers win at this point. ACC gets 75% of the fee ($39mm). Both sides claim a win.

06029, I understand that WV was the first to break the 27 month rule. But Bowlsby wasn't as hypocritical when four of the B12 teams left. Sure, WV's move allowed the four that followed them to also break the 27 month rule. That shouldn't have stopped Swofford from insisting Syracuse, Pitt, Notre Dame, and Louisville follow the Big East bylaws. So any hypocrisy by Bowlsby came nowhere the hypocrisy exhibited by Swofford. And as a bonus, we all got to witness Swofford lick the boots of one of them.

btstimpy, I have no idea of knowing if Dr. Loh knew about the new exit fee proposal one day or 15 days before. Even if it was one day before, like it was apparently for Dr. Barron, of course he's going to debate it and fight against it. What choice would he have. The fact still remains that there was clearly not enough time to deliberate the change, and enough time for the change to become effective. It may well be that all the proper procedures were somehow followed. But what happened was highly unethical, and probably illegal. Now it's up to a court to see if that is indeed the case. And regardless of what you think of Dr. Loh, imagine if Virginia was in this situation instead of Maryland. I would find it very surprising if Dr. Sullivan would just bend over and agree to pay $52 million. And I would be surprised if you think she should do that. If she did, I am fairly certain that she would be negotiating her own exit fee with UVa's governing board.

It goes like, excellent analogy. That pretty much depicts what happened here.

 

[CL82]

Lastly, the fact that the ACC has been so aggressive makes me question the strength of the GOR. I guess it's possible that Maryland has made headway in challenging the legitimacy of the exit fee in its entirety, although that is unlikely. At least from afar, it looks like both parties would be best served if they settle in the next 60 days. I think the amount ends up being equal to the funds currently being withheld by the ACC, which is a little over $30M.

I don't think so. Maryland needs the cash and has less to lose in discovery. I'd guess the number would need to less than $20M to make it worth considering. I really think that Maryland has a strong argument due to the fact that the league was enriched rather than damaged by their exit. I can't see a court letting the ACC "liquidate" damages that don't exist.

 

[billybud]

I do think that Maryland is on the hook for $20 million....they agreed. .( in fact it was their President who configured it) that this amount was the approximation of liquidated damages.

Unless a court would find that this sum was "punitive" (highly unlikely), there will be no need to prove actual damage. That is what the clause is for, to preclude having to do so.

 

[btstimpy]

06029, I understand that WV was the first to break the 27 month rule. But Bowlsby wasn't as hypocritical when four of the B12 teams left. Sure, WV's move allowed the four that followed them to also break the 27 month rule. That shouldn't have stopped Swofford from insisting Syracuse, Pitt, Notre Dame, and Louisville follow the Big East bylaws. So any hypocrisy by Bowlsby came nowhere the hypocrisy exhibited by Swofford. And as a bonus, we all got to witness Swofford lick the boots of one of them.

btstimpy, I have no idea of knowing if Dr. Loh knew about the new exit fee proposal one day or 15 days before. Even if it was one day before, like it was apparently for Dr. Barron, of course he's going to debate it and fight against it. What choice would he have. The fact still remains that there was clearly not enough time to deliberate the change, and enough time for the change to become effective. It may well be that all the proper procedures were somehow followed. But what happened was highly unethical, and probably illegal. Now it's up to a court to see if that is indeed the case. And regardless of what you think of Dr. Loh, imagine if Virginia was in this situation instead of Maryland. I would find it very surprising if Dr. Sullivan would just bend over and agree to pay $52 million. And I would be surprised if you think she should do that. If she did, I am fairly certain that she would be negotiating her own exit fee with UVa's governing board.

It goes like, excellent analogy. That pretty much depicts what happened here.

If Teresa Sullivan tried to cut an under the table deal with the Big Ten, SEC, Big XII, or any other conference and blindside the Board of Visitors like what happened at Maryland, she'd have a stadium full of folks show up on the lawn demanding her resignation just as fast as the faculty did trying to re-instate her when the Board Fired her in 2012. That's not going to happen with her and the current players at UVA. It's more open, and recent events dictate it to be. The President isn't going to blindside the major donors, and the athletic department is actually profitable. She isn't going to blindside the ACC either. From what I've witnessed, she's of stronger character.

What's more likely to happen is an angry mob showing up to fire her and the Athletic Director if they sit by tolerating another year of the performance just gone through in 2013 by the football coach. The two of them are standing behind this football coach that many are concerned won't be able to cut it long term.

 

[itgoeslike]

I don't think so. Maryland needs the cash and has less to lose in discovery. I'd guess the number would need to less than $20M to make it worth considering. I really think that Maryland has a strong argument due to the fact that the league was enriched rather than damaged by their exit. I can't see a court letting the ACC "liquidate" damages that don't exist.

The B1G agreed to front-load payments to Maryland to take some pressure off the school. I happen to think MD would be ecstatic to pay $20M but is still prepared to settle for an amount above $20M. I doubt they spend too much more money chasing something below $20M. With regard to discovery, messy is OK when it provides some leverage, until it gets too messy.

 

[CL82]

The B1G agreed to front-load payments to Maryland to take some pressure off the school. I happen to think MD would be ecstatic to pay $20M but is still prepared to settle for an amount above $20M. I doubt they spend too much more money chasing something below $20M. With regard to discovery, messy is OK when it provides some leverage, until it gets too messy.

We'll see. I think their counsel has positioned them very well.

 

[itgoeslike]

We'll see. I think their counsel has positioned them very well.

I'm not necessarily adverse to that outcome, although based upon the BE settlements they likely pay something.

 

[Pat125]

If Teresa Sullivan tried to cut an under the table deal with the Big Ten, SEC, Big XII, or any other conference and blindside the Board of Visitors like what happened at Maryland, she'd have a stadium full of folks show up on the lawn demanding her resignation just as fast as the faculty did trying to re-instate her when the Board Fired her in 2012. That's not going to happen with her and the current players at UVA. It's more open, and recent events dictate it to be. The President isn't going to blindside the major donors, and the athletic department is actually profitable. She isn't going to blindside the ACC either. From what I've witnessed, she's of stronger character.

What's more likely to happen is an angry mob showing up to fire her and the Athletic Director if they sit by tolerating another year of the performance just gone through in 2013 by the football coach. The two of them are standing behind this football coach that many are concerned won't be able to cut it long term.

Actually, your depiction of what you believed happened at Maryland and how you believe it would be different at Virginia is beside the point and irrelevant to the case. So let's try this. Suppose Everything was the same, but Dr. Sullivan did follow the proper procedures with UVA and decided to exit the ACC. I doubt that she would hand over $52 million without a fight. I'll take your word about Dr. Sullivan's character, but her voting for an exit fee that amounts to extortion does leave a question in my mind.

Anyway, nice win by the bb team last night.

 

[CL82]

I'm not necessarily adverse to that outcome, although based upon the BE settlements they likely pay something.

Keep in mind that the Big East settlements were small dollar amounts and were in exchange for an early exit. The dollars are bigger and MD isn't asking for an early out.

 

[billybud]

WVU paid $20 million...to get out early.

 

[buddy]

btstimpy, I am a UMD grad and fan, so it will be no surprise my take is a bit different from yours.

I agree with your first statement that members are bound to bylaws that pass even if they oppose. That's not in dispute. The problem here is that it appears that the increased exit fee proposal was not given a proper amount of time to be deliberated amongst the conference presidents, and to have it effective immediately. Even if the bylaws allow such important proposals to be rammed through, and if the immediate effective date was also allowed by the bylaws, they have to be legal. For example, if the presidents passed a bylaw that ACC member fans are allowed to throw batteries at their opponents athletes, this would not be allowed. In my opinion, an exit fee of $52,000,000 is way too excessive, and perhaps illegal, besides being unethical. So, the NC court will have to decide if the bylaws were, in fact, followed, and if they were, if such an exit fee is legal. And from what I heard, this may have been done to appease Notre Dame to keep schools from leaving. If true, this makes the exit fee smell even more.

What is galling about this is how Swofford insists Maryland follow the bylaws that were questionably enacted, while not insisting that the last four members they poached from the Big East honor the Big East bylaws of the 27-month notice. I suppose that this is irrelevant to the case at hand, but does expose Swofford's gross hypocrisy. Somehow, he found nothing wrong with poaching seven teams from another conference, but has a hissy fit when one school leaves his conference.

It is unfortunate that the ACC decided to drag this out. In the interest of fairness and sportsmanship, Dr. Loh, Dr. Sullivan, and the other ACC presidents should have met in executive session, without Swofford, and hammered out an agreement, such as allowing Maryland to leave with the $20,000,000 exit fee that they agreed to in the past, shake hands, wish each other luck, and move on.

Unfortunately, Maryland has also made mistakes throughout this process. While I agree with Dr. Loh that an exit fee is appropriate, I thought that $20,000,000 was too high. If the bylaws allow for a president to reconsider a bylaw (even though such actions would most likely end up in the circular file before being considered), and Dr. Loh failed to do so, that would be a mistake. I also believe that Maryland voting for Notre Dame half-a--ed membership was a gross mistake. If this happened before Maryland was seriously considering leaving, they should have voted against. Otherwise, they should have abstained. Maryland may not have followed their own procedures for switching conferences, and they may have (if they haven't already) to answer for that. But this mistake has nothing to do with the ACC. I also find throwing batteries at opposing athletes/fans and other unsportsmanlike or criminal activities disgusting, and more effort should be employed to deter this.

I was pro-ACC, but gradually became disenchanted. I think Notre Dame's partial admission sealed it. I think Maryland's move to BIG is a positive move. I understand that sometimes the devil you know may end up being not as bad. We'll see.

I like UConn9604's bet. It appears that depending on which of our argument is correct, the final judgment will be either less than $25,000,000 or greater than $50,000,000. Another possibility is that neither the ACC or Maryland really wants this to go to court, and settle for something in between.

Maryland, like Rutgers, hit the jackpot. It won't matter in the long run what Maryland has to pay. They will recoup this money many many times over.

 

[CL82]

WVU paid $20 million...to get out early.

I forgot about WVU. Keep in mind that half that amount was paid by the B12, so WVU paid $10M. Still it was a quid pro quo. Money for an early exit. What is MD getting by settling? There exit date isn't changing, so it is only the litigation cost, plus a what they perceive to be their worst case scenario less the agreed upon settlement times a beta. I don't think that's >$20M but who knows?

 

[billybud]

I forgot about WVU. Keep in mind that half that amount was paid by the B12, so WVU paid $10M. Still it was a quid pro quo. Money for an early exit. What is MD getting by settling? There exit date isn't changing, so it is only the litigation cost, plus a what they perceive to be their worst case scenario less the agreed upon settlement times a beta. I don't think that's >$20M but who knows?

Nobody in the BE settled for less then the exit fee...Maryland won't get away for less then $20 million..IMHO.

The ACC has no incentive to settle while they are withholding monies for football and basketball season normally paid out near June.

 

[WestHartHusk]

I think that is reasonable. Most of us on here have thought the original $20M would the number, maybe with a little upward movement (say, $25M).

 

[CL82]

Nobody in the BE settled for less then the exit fee...Maryland won't get away for less then $20 million..IMHO.

The ACC has no incentive to settle while they are withholding monies for football and basketball season normally paid out near June.

Different deals. The C7 traded monies received for the Big East naming rights. Cuse and Pitt traded monies due for an early release. What is Maryland getting for settling?

The MD counsel is changing the cost benefit of litigation. I think that they are positioned well. We'll see though.

 

[billybud]

I don't think it is even about the money for the ACC.....the question is what does the ACC get for settling?

 

[billybud]

I think that Maryland is positioned very poorly to avoid the $20 million exit fee...from a legal standpoint.

.....They agreed to that bylaw provision, their President drafted it as chair of the committee. They agreed that $20 million would stand in as the approximation of liquidated damages. The courts have been loathe to overturn such agreed upon liquidated damages and would be unlikely to call $20 million "punitive".

I think that they are positioned quite well, however, to avoid the $52 million exit fee.

 

[btstimpy]

I think that Maryland is positioned very poorly to avoid the $20 million exit fee...from a legal standpoint.

.....They agreed to that bylaw provision, their President drafted it as chair of the committee. They agreed that $20 million would stand in as the approximation of liquidated damages. The courts have been loathe to overturn such agreed upon liquidated damages and would be unlikely to call $20 million "punitive".

I think that they are positioned quite well, however, to avoid the $52 million exit fee.

The two numbers are 1.5 times operating revenue and 3.0 times operating revenue. Maryland voted for the 1.5 times, but Maryland did not vote for the 3.0 times. Those translate to $26 million and $52 million respectively. Don't expect the court to come up with another arbitrary number. The ACC thinks it followed proper procedure to change the multiplier from 1.5 to 3.0. Maryland is arguing that the ACC did not follow proper procedure to change it.

The two sides can settle at another number besides $26 or $52 million. But expect the court to pick one of those two if it gets to the court's judgement. One court has already ruled that the exit fee and the ACC's offset is not anti-trust and is not impeding Maryland's rights of association or harming Maryland financially. Therefore, don't expect the court to look at either of these numbers as excessive. Expect it to come down to process.