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Judge Doty Delivers Blow to NFL

March 2, 2011
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Yesterday, the National Football League Players Association (“NFLPA”) won an important decision in United States District Court in Minnesota when Judge David Doty ruled that the National Football League (“NFL”) had violated the Reggie White Stipulation and Settlement Agreement (“SSA”) by renegotiating television rights and securing $4 billion of television revenue in the event of a lockout. Just as the collective bargaining agreement (“CBA”) does, the SSA serves to govern the relationship between the league and the players and was the result of the lawsuit filed by Reggie White and other players when the players association last decertified. In the NFL, the CBA and the SSA mirror each other and promote the same principles and goals. Both will end on March 4, 2011. As with any case, it is important to understand what happened leading up to litigation, what the judge ruled, and what the ruling means. With these three questions in mind, I proceed to analyze the case.

What lead to litigation?

It’s no secret that the owners were unhappy with the current CBA in the NFL. Evidence of this sentiment lies in the fact that in 2008 they opted to end the CBA earlier than its intended length. This was their contractual right that they bargained for in 2006, so nothing improper occurred. Regardless of whether you believe that the owners desired a lockout as the NFLPA argued, it is fact that as early as July 2008 the NFL began negotiating television rights contracts with the intention of being able to make money in the event of a lockout. This is evident in the fact that non-payment during a lockout was a deal breaker in many of their negotiations even when broadcasters were willing to pay more money in years preceding the potential lockout. Using their bargaining power and insistence on payment in the event of a lockout, the league was able to secure $4 billion in revenue for 2011 from DirecTV, ESPN, NBC, CBS, Comcast, Verizon, and FOX. Pursuant to the terms of the contracts, the NFL would have to repay all but $421 million to these parties, but this repayment would only occur in seasons after the lockout. Thus, the league and its owners would have access to $4 billion in 2011 for operations and business.

What did the judge decide?

The question in this case was whether the owners had violated the SSA. Specifically, the court focused on Article X, Section 1(a)(i) which reads as follows:

“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…”

The NFLPA argued that the NFL did not use good faith and best efforts to maximize total revenues for each playing season during the term of the SSA. It made this argument based on the fact that the NFL negotiated new contracts and renegotiated existing contracts with the intention of being able to have money for a potential lockout.

First, Judy Doty decided that “‘sound business judgment” does not allow the NFL to pursue its own interests at the expense of maximizing total revenues during the SSA.” The lower court ruled for the NFL partly on the basis that the commonly used “business judgment rule” protected business decisions made by management. Judge Doty decided that the business judgment rule did not apply in this instance because the rule is made to protect management from shareholders’ claims that a business judgment was unwise. This protects the decisions that management makes as long as they’re not fraudulent in nature. The rule did not apply here because management and shareholders are on the same side in business, but Judge Doty pointed out that the NFL and its players actually have an adversarial relationship in that they can have competing interests. Thus, an analysis of “sound business judgment” does not look to the NFL’s efforts to act in the interest of their business but rather based on the NFL’s ability to adhere to the SSA and “maximize total revenue for each playing season.”

Second, the judge looked at the NFL’s good faith, or honest, performance of their duty with best efforts, a good faith obligation to act according to its capabilities. The judge found that the NFL did not act in good faith and with best efforts to adhere to the SSA and maximize revenue for each playing season. The facts make this determination simple. Several parties negotiating with the NFL were hesitant to pay during a lockout, so the NFL allowed them to receive extra value in the years leading up to 2011. These companies did not pay for the extra value while the players played and instead agreed to pay during a potential lockout when only the owners would benefit. Thus, Judge Doty found that good faith was not used because the NFL wasn’t maximizing revenue, and best efforts were not used because the NFL has significant bargaining power as a successful league and did not use it for the benefit of the players. Judge Doty held that “the NFL may consider its long-term interests but not at the expense of maximizing total revenues for each SSA season for the joint benefit of itself and the Players.”

Why does this case matter?

There are two ways of looking at this decision – the small picture and the big picture.

The small picture looks strictly at the current NFL labor environment. This is a significant blow for the NFL and the owners and thus a significant win for the players. The owners are frequently said to be able to weather lockouts better than players because they’re “billionaires,” but this ruling takes $4 billion out of their pockets. As much money as owners have, they still have loans to pay on stadiums and contracts with vendors, employees, retailers, etc. If the economics of the league are as broken as the owners claim, missing a season and losing revenue surely will not help. Owners just lost a key element of survival. Players on the other hand have weakened the owners. For the reasons stated above, owners will be reluctant to lose a full season, engage in long and costly litigation, and continue to play hardball. Players have also succeeded in perhaps changing the public perception of the fight. Those hearing about the decision and understanding it will see that the NFL did in fact fail to adhere to their agreement, and they violated the SSA in order to protect themselves during a lockout. This decision weakens the owners, strengthens the players, and is more likely to lead to a quicker settlement.

Big picture, this is an interesting decision for leagues. Judge Doty has held a league responsible for thinking about the players if it agrees to do so – bizarre, isn’t it? A league will not be able to claim that long term planning allows it to act differently than usual if that long term planning is not for the benefit of the players. Leagues may be more careful in the way they create agreements with players, and players will hold this decision out as an example of when a league was found not to uphold the language of the agreements. As with any case defining broad language such as “good faith” and “best efforts,” this decision will be used in the future to potentially argue that a league with great bargaining power should be able to do better by its players.

In fact, this decision in my opinion is not a difficult one because the language of the SSA is clear and the facts clearly show that but for the league’s insistence of money during a lockout, their broadcasting partners would have paid more money or received fewer rights in order to not pay during a lockout. The league made paying during a lockout a deal breaker. This same case would be very interesting without the additional idea of a lockout. What if a retired player decided to sue the league alleging that it did not accept the best television deals while he was playing which in turn affected his potential salary by lowering league-wide revenues. Could the NFL be punished for accepting ESPN’s money if Versus was offering more? The lockout and backdrop of scheming owners makes this case easier.

– Jason

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