MLB ARBITRATION IN THE ORIOLES-NATIONALS

CABLECASTING LAWSUIT

IS THIS WHAT YOU SHOULD EXPECT FROM MANDATORY ARBITRATION?

Charles H. Martin, JD, MBA@Every1sGuide, #LawyerballLaw, Lawyerball.com

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The Montreal Expos Move to Washington, D.C.

• In 2005, the Montreal Expos National League baseball club moved to Washington, D.C. to become the Washington Nationals. Pursuant to the Major League Rules, the relocation was approved by a 29-1 vote of the Major League Baseball (MLB) clubs. At that time, the Expos were owned by all thirty MLB clubs, who had bought the club to avoid its bankruptcy and its elimination as a franchise.

• The single vote against relocation was cast by the owners of the American League Baltimore Orioles. This club played their games only forty miles from D.C. About 20% of their fans came from the Washington area. Peter Angelos, the principal owner of the Orioles, complained that the Nationals’ proximity to his club would cause it great financial harm. He threatened to sue Major League Baseball to stop the move, even though (unlike some other clubs) he had no territorial right to exclude the Expos/Nationals from operating in Washington, D.C.

MLB and the Orioles Settle The Threatened Lawsuit With the “Television Agreement”

• On March 28, 2005, Major League Baseball, the Montreal Expos, The Baltimore Orioles and their cable sports channel (Mid-Atlantic Sports Network or “MASN”) signed an agreement to eliminate Peter Angelos’s threats to sue MLB over the Expos’ relocation to Washington, D.C. The agreement (“Television Agreement”) gave the Orioles owners the unique right to cablecast the games of the new Washington Nationals, in addition to their own baseball games.

• The Television Agreement provided that the Nationals would own 10%, and the Orioles 90%, of MASN initially. The Nationals’ ownership would increase to 33% over 28 years, but the Orioles would always own at least 67% of MASN.

• The Television Agreement provided for low cablecasting rights fees, to be paid by MASN equally to each club for the first five years of the contract, starting at $25 million each and increasing to $29 million each.

The Television Agreement Resets the Cablecasting Rights Fees Every Five Years

• After every five year period, the Television Agreement provides for a reset of the cablecasting rights fees paid to each club to reflect current television market values. If the clubs cannot agree on the new rights fees amounts, they are to be set by a three-person arbitration panel composed of representatives of three other MLB clubs that are members of the MLB Revenue Sharing Definitions Committee (“RSDC”).

• The RSDC normally determines the value of MLB club regional television contracts for the purpose of revenue-sharing arrangements that make smaller market clubs more competitive with larger market clubs.

• In 2012, the RSDC (composed of Mets, Rays, and Pirates representatives) determined the new 2012-2016 rights fees amounts. Release of this determination was withheld until 2014, however, while MLB tried to broker the sale of MASN to the COMCAST cable group.

RSDC Sets 2012-2016 “Fair Market Value” of the Rights Fees Based on Projected Revenues and Comparable Profit

Margins

• In the 2012 RSDC Arbitration, the Orioles argued that the rights fees for each club should be $34 million for 2012. The Nationals argued that the rights fees for each club should be $109 million for 2012.

• The RSDC determined the rights fees market value based on 1) projected MASN revenues and costs over the 2012-2016 period, and 2) the range of typical MLB regional sports channel profit margins. The RSDC predicted that MASN’s 33% operating profit would decline over the period as new, higher rights fees matched those in the comparable television markets of the Atlanta Braves, Cleveland Indians, and Texas Rangers.

• The RSDC noted that the Orioles had already received “significant returns” from higher than normal margins that had increased the value of the Orioles’ equity ownership of MASN. It rejected the Orioles’ argument that MASN should be assured a perpetual 20% operating profit margin.

The RSDC “Splits the Difference” between the Orioles and Nationals Proposed Rights Fees

Amounts• The RSDC concluded that MASN’s 2012-2016 operating profit

margin would be only 5%, because 1) its 2007 margin was only 6.2% when sports television content was less valuable, and 2) the Orioles’ right to receive from MASN fees equal to any fees received by the Nationals would further reduce MASN’s profit margin.

• Applying this methodology, the RSDC awarded these rights fees to each club: 2012 - $53,170,018, 2013 - $56,253,879, 2014 - $59,347,843, 2015 - $62,611,974, and 2016 - $66,744,384.

• In total the RSDC awarded each club $298,128,098 for 2012-2016 versus the total of $170,000,000 for each club that the Orioles had offered, a difference of $128,128,098 for each club.

• Although the Orioles would receive a higher amount of rights fees under the RSDC award, it would be equal to the Nationals’ fees; while the Orioles would own 80-85% of the equity value of MASN, which would be higher if MASN paid lower rights fees to each club.

MLB Tries and Fails to Sell MASN to Comcast from 2012 to 2014. MLB Issues the Rights Fees

Arbitration Award. • The MLB/RSDC Arbitration Panel reached its conclusion in the

MASN rights fees dispute shortly after holding a hearing in April 2012, in which the clubs and their witnesses participated. Rather than issue the award, MLB Commissioner Allan H. (Bud) Selig tried to broker the sale of the MASN sports channel to the cable giant, Comcast.

• MASN had an estimated market value at that time of more than $500 million. If Selig had been able to get Comcast to buy MASN, the Orioles owner, Peter Angelos, would have been able to receive 83-85% of the market value of MASN immediately. MLB and the Nationals would have been able to avoid the costly and risky litigation that developed after the sale fell through.

• The regional cablecast rights fees received by MLB teams increased substantially, however, during the period from 2005 to 2014, reducing the appeal to Comcast of ownership of a cable sports channel televising MLB games.

• MLB issued the 2012 arbitration award on June 30, 2014.

The Orioles Petition a New York State Trial Court To Vacate the MLB/RSDC Arbitration

Award• On July 2, 2014, the Orioles initiated an action in the New York

State Supreme Court, County of New York, seeking to vacate the RSDC arbitration award. The Nationals filed a Petition to Confirm the award on July 24, having failed to get the MLB Commissioner to confirm it.

• The Orioles asked that, if the award were vacated, the parties should be ordered to redo the arbitration before an entity other than MLB. They made four specific arguments in their filings with, and hearings before, Justice Lawrence Marks:

• 1) the award was obtained through corruption, fraud or undue means,

• 2) the award exceeded the arbitrator’s scope of authority, or was made with manifest disregard of the law,

• 3) there was prejudicial misconduct by the arbitrators, and• 4) there was “evident partiality” against MASN and the Orioles

in the arbitration, because

The New York Judge Vacates the MLB Arbitration Award for “Evident Partiality” from a Law Firm’s

Multiple Roles• a) MLB lent the Nationals $25 million in 2013 as a partial

advance payment of their future rights fees award in order to help their cash flow, and

• b) the participation of the Proskauer Rose law firm (MLB Commissioner Rob Manfred’s former employer) as counsel to MLB and the Nationals in the arbitration, and to the three clubs on the arbitration panel in three unrelated matters.

• Justice Marks rejected the first three arguments and the first “evident partiality” argument as grounds to vacate the award. He agreed, however, with the last argument that the arbitration involved “evident partiality” against the Orioles, because the Orioles had objected at the beginning of this “inside baseball” arbitration to the participation of the Proskauer Rose firm in the arbitration in the multiple roles of

• - the simultaneous advisor to MLB i) in the arbitration, and ii) in unrelated legal matters like the reorganization of the MLB Commissioner’s office.

Justice Marks Criticizes MLB for “Evident Partiality” in Ignoring Orioles’ Objections to Law Firm Multiple Roles

• - advisor in unrelated matters to each of the MLB clubs represented on the arbitration panel; and

• - the legal advisor to both the Washington Nationals and the Baltimore Orioles in the rights fees arbitration.

• The Proskauer Rose law firm responded to the Orioles’ objection by withdrawing as the Orioles’ counsel in the arbitration. MLB refused, however, to disqualify the firm from advising any other participants in the arbitration, including the Nationals.

• Justice Marks decided that “What [MASN and the Orioles] did not agree to…was a situation in which MASN’s arbitration opponent, the Nationals, was represented in the arbitration by the same law firm that was concurrently representing MLB and one or more of the arbitrators and/or the arbitrators’ clubs in other matters....”

Justice Marks Criticizes MLB for “Evident Partiality” in Ignoring Orioles’ Objections to Law Firm Multiple Roles

• Justice Marks wrote that “…it might have been a simple decision...to confirm the award if MLB, as administrator of the arbitration, had taken MASN’s objections seriously, and actually done something about it.”

• He offered examples of possibly satisfactory MLB actions, included encouraging the Nationals to use other lawyers, screening Proskauer’s arbitration lawyers from other firm lawyers who advised MLB or any clubs during the arbitration, directing the arbitrator panel clubs to fully disclose any potentially conflicting representations by Proskauer of them, or updating the parties on MLB’s own continuing and increasing use of Proskauer as an advisor.

• As the judge wrote “Yet MLB did nothing, except assure [MASN and the Orioles] repeatedly that their concerns would be preserved and not waived by their participation before the RSDC.”

Justice Marks Orders the MLB Arbitration Award Vacated. The Orioles Appeal His Refusal to

Disqualify MLB as an Arbitration Forum

• Justice Marks concluded that “this complete inaction objectively demonstrates an utter lack of concern for fairness of the proceeding that is ‘so inconsistent with basic principles of justice’ that the award must be vacated.”

• Despite winning their argument to vacate the 2014 arbitration award, the Orioles in December, 2015 filed an appeal of the judge’s decision to not disqualify MLB as an arbitration forum, because “no potential RSDC member can be neutral and impartial: the RSDC as a forum is conflicted and thoroughly compromised.”

• MLB responded that it had hired new lawyers from the firm Sullivan & Cromwell to advise it for the next RSDC arbitration before a panel composed of representatives of the Milwaukee Brewers, Seattle Mariners, and Tampa Bay Rays. It set a date in August, 2016 for the new MLB arbitration hearing.

Justice Marks Orders the New MLB Arbitration Stayed Pending the Appeal

of His Decision• In addition, the Nationals confirmed that their new lawyers

for the new arbitration, the Quinn, Emanuel firm, neither represents MLB, nor any members of the new MLB arbitration panel or their clubs.

• On July 11, 2016, Justice Marks denied the Nationals’ motion to compel the Orioles to proceed with MLB arbitration, and granted the Orioles’ motion to stay arbitration pending their appeal, because “the parties should not be arbitrating, again, without a final determination on the arbitral process or forum.”

• It might be 2017 before a New York State appeals court determines whether the trial judge’s vacating of the 2014 MLB arbitration award, and refusal to disqualify MLB as a future arbitration forum, was correct. Depending on that decision, it might be longer before another arbitration panel decides the rights fees amounts for the 2012-2016 period.

What Are the Questions Raised and Lessons Learned From the Orioles-Nationals

Cablecasting Arbitration?• Given that under the Federal Arbitration Act “judicial review of

arbitration awards is extremely limited”, how should the future of mandatory arbitration be viewed by the parties in this case, and by employees, consumers and businesses?

• Q: Should the Nationals try to settle this case to avoid receiving less money in a new arbitration?

• A: No. Justice Marks denied all the Orioles’ arguments that the substance of the MLB arbitration award was wrong. If the Nationals and MLB have eliminated the lawyer conflicts that the judge said were unfair to the Orioles, the same award methodology is likely to be applied to find the “fair market value” of the rights fees, with the same result. It will also be a precedent for the 2017-2021 rights fees determinations that are about to begin. Their only reason to settle might be a proposal from the Orioles that approaches the amount of the previous MLB arbitration award, discounted by the likely costs of future litigation delays in having a court order the award to be paid in that amount.

What Are the Questions Raised and Lessons Learned From the Orioles-Nationals

Cablecasting Arbitration?• Q: Should the Orioles try to settle this case to avoid

receiving less money in a new arbitration?• A: No. The Orioles are likely to be directed to pay the

same amount in rights fees in the next arbitration that they were ordered to pay in 2014. Every day that they delay that order, and its enforcement, by litigating and appealing in courts, is a day that the rights fees money stays in their pockets, and finances their team. The Orioles should not count on goodwill from the Nationals for a possible agreement to set future rights fees by a formula that preserves the current disproportionate value of MASN equity compared to other baseball cable sports channels.

• The Orioles are unlikely to be required to pay interest on the rights fees to account for the time period since the fees were scheduled to be paid according to the Television Contract. “Pre-judgment interest” is usually awarded only on money owed in an undisputed amount. The “fair market value” of the cablecasting rights fees is clearly a disputed amount.

What Are the Questions Raised and Lessons Learned From the Orioles-Nationals

Cablecasting Arbitration?

• Q: How should MLB negotiate franchise relocations, and conduct arbitrations of owner disputes to avoid these types of court delays and reversals?

• A: MLB conducts its business affairs with an eye to avoiding criticism in Congress of its unique antitrust exemption. The Supreme Court in 1922 granted the exemption on grounds that later Justices have found to be erroneous, but have refused to correct, leaving it to Congress to redress.

• The Orioles-Nationals case has exposed the peril of the MLB Commissioner’s office acting in multiple roles in “inside baseball” club disputes. The NFL Commissioner has been criticized for acting as investigator, prosecutor and judge in player disciplinary proceedings. The MLB Commissioner (or its main law firm) acted as arbitration administrator, MLB legal advisor, and as advisor both to the RSDC arbitrator clubs, and to the Nationals as an arbitration party. These are too many hats for one Commissioner (or his lawyers) to wear, and leads to inevitable appearances of conflicting interests.

What Are the Questions Raised and Lessons Learned From the Orioles-Nationals

Cablecasting Arbitration?• The MLB Commissioner should consider appointing

non-MLB arbitrators for future inter-club business disputes. It should avoid having any of the dispute parties, or the administrators, represented by a law firm that also advises MLB.

• Questions for Employees, Consumers and Small Businesses Required to Use Mandatory Arbitration for Their Contract Disputes –

• Q: If an employee, consumer or small business is required to use mandatory arbitration for contract disputes, can they get an arbitration award vacated like the Orioles did, because the arbitration was unfair in substance or in its procedures?

What Are the Questions Raised and Lessons Learned From the Orioles-Nationals

Cablecasting Arbitration?• A: Arbitration may have these advantages for both parties

over litigation: 1) it is faster and simpler, 2) it is usually less expensive, 3) arbitrators usually know more about the specific arbitration subject than judges, and 4) the party requiring arbitration might pay for the legal costs of the other party up to a certain amount.

• Employees, consumers and small businesses often object to mandatory arbitration, however, because –

• 1) the results of an arbitration are usually confidential, and cannot be a precedent for a future arbitration or litigation, 2) the arbitration is usually conducted where the party requiring it is located, 3) there is no right to a jury trial, 4) there is no class action right, and 5) cheap, quick and convenient small claims court litigation is prohibited by most arbitration clauses.

What Are the Questions Raised and Lessons Learned From the Orioles-Nationals

Cablecasting Arbitration?

• The most successful “fairness” argument available against mandatory contract terms, including arbitration, has been “unconscionability”. In AT&T Mobility LLC v. Concepcion, however, the U.S. Supreme Court in 2011 ruled that a mandatory arbitration clause that prohibited a class action for cell phone consumers claiming false advertising and fraud could not be invalidated as unconscionable.

• Other contract defenses remain available against mandatory arbitration clauses, such as lack of notice of the clause (especially in digital contracts), or an unreasonably distant or expensive arbitration forum. The burden of proof is on the party requiring arbitration to show there was adequate notice of the requirement.

What Are the Questions Raised and Lessons Learned From the Orioles-Nationals

Cablecasting Arbitration?• Contracts require mutual obligations, so when a retailer required

its customers to arbitrate their disputes, but allowed itself an “escape hatch” from arbitration, this clause was invalidated.

• When a mandatory arbitration clause denies a statutory right, such as under labor or consumer protection laws, a judge will often invalidate the clause.

• Consumer and employee advocates often argue that arbitrators (or their lawyers) are biased against the parties who have mandatory arbitration requirements imposed against them. They argue that this bias is often unconscious, but real, because the party requiring arbitration employs the same arbitrators or lawyers, who naturally view them favorably as a source of repeat employment. This was the argument that won for the Orioles in their appeal of the cable rights fees litigation. It has sometimes also succeeded for consumers, although the effort to prove bias by the arbitrator or a related law firm is rarely worth the effort for parties without deep pockets.

What Are the Questions Raised and Lessons Learned From the Orioles-Nationals

Cablecasting Arbitration?

• In 2010, Congress passed the Dodd-Frank Act, which requires the new Consumer Financial Protection Bureau (CFPB) to issue rules to restrict mandatory arbitration clauses in consumer financial contracts, if it finds it to be in the public interest for the protection of consumers. In 2015, the CFPB issued preliminary rules to prohibit mandatory arbitration clauses in consumer financial contracts that prohibit consumers from pursuing class action remedies.

• Even if the CFPB rules against class action prohibitions are implemented, however, they will only apply to consumer financial contract clauses. They will not apply to mandatory arbitration clauses in contracts for non-financial consumer transactions, or in employee or business contracts.

For More and Continuing Information

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