In hindsight, Doty’s ruling was a no-brainer
We’ve had a chance to read every word of the 28-page ruling issued Tuesday afternoon by Judge David Doty, and once we got to the end we realized that, for a change, we had pegged this one from what the hip in the crowd would call “jump street.” (Fortunately, we ain’t hip.)
The union’s challenge to the so-called “lockout insurance” provision in the league’s renegotiated network contracts arose in June 2010, while I was driving to New York for the first-ever PFT summit meeting.
“When I saw the posting on my Sprint device during a Cracker Barrel break somewhere between Chambersburg and Harrisburg, I suspected that the effort simply reflected the union’s frustration that the owners have found a way to ensure that payments can still be made on the significant debt from the purchase of franchises and/or the construction of stadiums in the absence of games actually being played,” a nine months younger version of yours truly wrote at the time.
“But then it occurred to me during the early portion of the second act of Jersey Boys, when the guys were trying to figure out how to pay off Tommy DeVito’s $150,000 debt to Norman Waxman. The entire player compensation model arises from the league’s ability to generate revenue. So the league arguably -- if not actually -- has a fiduciary duty to maximize revenue. By securing leverage-building terms like ongoing payments during a work stoppage, the league necessarily has failed to maximize revenue, since the right to ongoing payments in the event that games aren’t being played has an inherent value that could have been converted to dollars and cents paid to the league, and shared with the union.”
Without delving any farther into legalese, that’s exactly what Judge David Doty found. The league had a responsibility to max out the money on behalf of the NFL and the players. The league instead embarked on a strategy of inserting and/or beefing up language that would require the networks to continue to make payments even if there’s no product, and that would make the repayment obligation by the league as favorable as possible.
But don’t take our word for it (as if you ever would). Consider this series of quotes from the ruling, followed by our take on each one.
Out of respect for those of you who don’t care, we’ll engage in that exercise after the proverbial jump.
Quote: “Existing broadcast contracts effectively prevented the NFL from collecting revenue during a lockout in 2011 because the contracts did not require broadcasters to pay rights fees during a lockout or required the NFL to repay lockout fees in 2011.”
Interpretation: Though language requiring ongoing payments during a work stoppage has been present in network deals for years, the league faced a problem in 2009. Hoping to set the table for a lockout (real or feigned), the league needed to get the right language into the deals. So the league embarked on renegotiating and extending the contracts with the goal, at least in part, of inserting language to ensure that the money will be paid in 2011, and that it won’t have to be paid back until a later date, it at all.
Quote: "[S]ome of the NFL’s loan obligations include ‘average media revenues’ covenants which provide that an ‘event of default’ occurs if average annual league media revenues fall below a specific value.”
Interpretation: The league needs the TV money to keep coming during a lockout to avoid defaulting on some of its loans. Even if the money otherwise can be raised to pay the bills, a significant drop in the TV money potentially becomes a “default,” which triggers all sorts of problems for the league.
Quote: “The NFL worried that its creditors could argue that a default event had occurred if the NFL locked out the Players in 2011, the same year that some broadcast contracts were set to expire, and that a default would give the Players bargaining power in labor negotiations.”
Interpretation: The league knew that the TV contracts had to be extended and beefed up to permit the money to keep flowing in a 2011 lockout. (And if a lockout wasn’t planned, there would have been no need to beef up the language.)
Quote, as to the deal with DirecTV: “Of the total amount payable in the event of a canceled season, 42% of that fee is nonrefundable and the remainder would be credited to the following season.”
Interpretation: Of the money that the NFL would collect from DirecTV during a 2011 lockout, only 58 cents of each dollar would be repaid. Thus, to the extent that men like NFL general counsel Jeff Pash have insisted that these payments constitute loans and nothing more, Pash has overlooked the fact that 42 cents of every dollar paid by DirecTV during a lockout would be free money.
Quote: “DirecTV would have considered paying more in 2009 and 2010 ‘to have [the work-stoppage provision] go away.’”
Interpretation: The league left money on the table with DirecTV that could have and would have been shared with the players.
Quote: “If a work stoppage occurred in 2011, the final year of the [pre-2009] contract, the NFL had to repay CBS and FOX that same year.” (The same provision existed in the NBC contract.)
Interpretation: Without an extension of the TV deals, any money paid by CBS, FOX, or NBC would have been due and payable in 2011, defeating the purpose of using that revenue to pay other bills.
Quote, as to the CBS, FOX, NBC, and ESPN contracts: “If an entire season is canceled, the contracts extend for an additional season.”
Interpretation: In order to get the payments during a 2011 lockout, the league agreed to push all contracts back for a full year, delaying the commencement of new deals, which routinely entail a dramatic increase in rights fees.
Quote: “Initially, FOX expressed reluctance to pay rights fees during a work stoppage. The NFL considered opposition to the work stoppage provision a ‘deal breaker.’”
Interpretation: This wasn’t some ancillary, throw-in term. It was one of the primary motivations for extending the network deals in 2009, and that supports the union’s claims that the NFL has been plotting a lockout for at least two years.
Quote: “In the event of a work stoppage, Verizon is obligated to pay a non-refundable rights fee.”
Interpretation: More evidence of free money, not a loan.
Quote: “The NFL and each NFL team shall in good faith act and use their best efforts, consistent with sound business judgment, so as to maximize Total Revenues for each playing season during the term of this Agreement.”
Interpretation: From Article X, Section 1(a)(i) of the CBA, it’s the standard that applies to the NFL when negotiating contracts with partners who will pay the league money relating to or arising out of the performance of players in NFL games.
Quote: “The phrase ‘consistent with sound business judgment’ qualifies, and is qualified by, the [CBA] requirement that the parties act in good faith and use best efforts to maximize total revenues for the joint benefit of the Players and the NFL. Indeed, ‘consistent with sound business judgment’ allows the NFL to consider its long-term interests provided it does so while acting in good faith and using best efforts to maximize total revenues for each [CBA] playing season.”
Interpretation: Heavy on legalese but very important to the outcome of the case, Judge Doty is setting the table for the eventual ruling by putting the “sound business judgment” term in perspective.
Quote: “‘Sound business judgment’ does not allow the NFL to pursue its own interests at the expense of maximizing total revenues during the [CBA]. Therefore, the special master committed legal error in his interpretation of ‘sound business judgment,’ which effectively nullified pertinent terms of the [CBA].
Interpretation: Special Master Stephen Burbank had concluded that the league didn’t violate the CBA because it was using “sound business judgment” in preparing for a possible work stoppage. Judge Doty concluded that Burbank applied the term too narrowly, allowing the league to focus only on its own interests, and not the players’ interests, when applying “sound business judgment.”
Quote: “Broadcast contracts are an enormous source of shared revenue for the Players and the NFL. Under the [CBA], the Players rely on the NFL to negotiate these contracts on behalf of both the NFL’s own interests and the interests of the Players. In May 2008, the NFL opted out of the final two years of the CBA, and recognized that a lockout in 2011 would help achieve a more favorable CBA. Thereafter, the NFL sought to renegotiate broadcast contracts to ensure revenue for itself in the event of a lockout.”
Interpretation: This is the money quote, literally and figuratively. Judge Doty is basically reaching the same conclusion that we reached during the second act of Jersey Boys in June 2010. The league and the players share money. The league goes out and gets the money. The league’s obligation is to max out the shared money, and not to strike a side deal that benefits the league and hurts the players, especially when the league necessarily left shared money on the table.
Quote: “The NFL next argues that any injury to the Players’ interests will occur after the termination of the [CBA]. The court disagrees. As a result of the broadcast contract renegotiations, the NFL demanded and received ‘material[ly]’ different, immediately effective work-stoppage agreements.”
Interpretation: This is a classic example of overlawyering. In an effort to “win” the case, the NFL’s counsel advanced an argument that exposes an unhealthy attitude toward the league’s supposed partners. Basically, the league’s lawyers argued as a fallback, “Yeah, we may have screwed the players. But they won’t feel the screwing until the CBA has expired. So we’re really not screwing them in an impermissible way.” Judge Doty didn’t buy the argument; by insisting on payments during a 2011 lockout, the league agreed to lower fees in 2009 and 2010. The players therefore were damaged by their inability to receive 59.6 cents of every extra dollar earned.
Quote: “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.”
Interpretation: The ultimate message mirrors what we said in June. “So the league arguably -- if not actually -- has a fiduciary duty to maximize revenue. By securing leverage-building terms like ongoing payments during a work stoppage, the league necessarily has failed to maximize revenue, since the right to ongoing payments in the event that games aren’t being played has an inherent value that could have been converted to dollars and cents paid to the league, and shared with the union.”
Bottom line? Despite any huffing and puffing and complaints about Judge Doty and anything else the league will say, the league was in the wrong. Once the league agreed to share revenue with the players and to use “good faith” and “best efforts” in generating that revenue, the league assumed an obligation to generate as much revenue as possible -- and never to trade possible revenue for a term that helped the league and hurt the players.