HHP: MASN/Nats/Orioles case (Inside the Courtroom)

[Can_of_corn]

Thanks for reporting. Let's hope the judge sides with MASN/Orioles and MLB and Washington are forced to live within the contract they previously agreed to in good faith.

I don't think that is an option.

Best case is the arbitration ruling is thrown out and they get an untainted body to judge.

[spiritof66]

No, he's not. He attended just out of his own interest in the matter. But he is a lawyer.

A little fuller description. I was a lawyer in New York for 34+ years before retiring at the end of 2012.

When I started reading about this case, mostly via the Hangout, I began to see that many of the issues it raised closely tracked those in cases I had worked on during my career, and I limited my review for fear of driving myself crazy by getting caught up in a case I had no role in.

I'm not sure why, but a few weeks ago that sound judgment deserted me, and I started looking closely at a few aspects of the case. Sure enough, the experience drove me something like crazy, especially today when about 17 times I wanted to jump and say (to both sides), "No, don't argue that, argue this." I managed to restrain myself and get out of there without my head exploding, but it was close. It was interesting, though.

[Can_of_corn]

Glad to hear they didn't need to escort you out.

[WEAVERMAN]

A little fuller description. I was a lawyer in New York for 34+ years before retiring at the end of 2012.

When I started reading about this case, mostly via the Hangout, I began to see that many of the issues it raised closely tracked those in cases I had worked on during my career, and I limited my review for fear of driving myself crazy by getting caught up in a case I had no role in.

I'm not sure why, but a few weeks ago that sound judgment deserted me, and I started looking closely at a few aspects of the case. Sure enough, the experience drove me something like crazy, especially today when about 17 times I wanted to jump and say (to both sides), "No, don't argue that, argue this." I managed to restrain myself and get out of there without my head exploding, but it was close. It was interesting, though.

Keep up the good work.

[spiritof66]

It was kind of like watching Buck have De Aza hit in the late innings, one run behind and men on base, without being able to scream at or even talk to the screen.

[spiritof66]

Here are some of my thoughts about the MASN dispute. After spending time in the past couple of weeks ? too much time, if truth be told ? reviewing the submissions in the case, I realized that I didn?t fully grasp what was really going on because the parties weren?t directly talking about that. I wrote much of what follows in attempt to get that understanding, from the ground up. I thought I would share it here for consideration by anyone who might be interested. My apologies in advance for any typos.

As I mentioned in my post on Monday after the court hearing, the principal arguments in this case now concern the consequences of the procedures that underlie the decision by MLB?s Revenue Sharing Definitions Committee, especially the roles of the Proskauer Rose law firm, and away from the determination of rights fees by the RSDC. My attention and what follows focus on the rights fees ? essentially, on how the Orioles got screwed by the RSDC. I have not studied closely and have little to say on the procedural issues.

Background

Cable telecast fees. Media fees ? the amounts teams obtain for exclusive local rights to telecast and broadcast their games ? probably are the principal source of revenue inequality among MLB teams. The Royals or the Pirates can aspire to come close to the Yankees, Red Sox or Dodgers in attendance (though at much lower ticket prices), but cannot hope to bring in the sorts of revenues for the rights to have their fans watch and listen to their games on TV and radio. Since the 1980s, fees for cable television have dominated these revenues.

Originally, most teams (Ted Turner?s Braves being the prominent exception) sold their cable rights directly to unaffiliated cable systems or their programming affiliates. Eventually, clubs found a way to avoid having some of the enormous, and increasing, profits generated from cable coverage of their games siphoned off by middlemen: they formed programming companies, called regional sports networks (?RSNs?), built around cable rights to their games (usually in combination with an NBA or NHL team?s games), in which the MLB team or its principals, or some of them, owned a controlling interest. If you look at the 2013 Bloomberg valuations of MLB teams (http://www.bloomberg.com/infographics/2013-10-23/mlb-team-values.html), you?ll see that the most of the more valuable, larger-market teams held significant interests in RSNs and that for many teams the value of those interests (shown in orange) is a significant part of the franchise?s value.

The teams controlling RSNs found it advantageous to sell their cable rights to these RSNs at bargain prices. Let?s take a hypothetical team, the Gothams, 60% of which is owned by Mr. Brenner and 40% of which is owned by other investors. Assume that if the Gothams sold their cable television rights to the highest bidder, they could get $75 million a year. Now Mr. Brenner and some other investors set up an RSN. The RSN pays the Gothams a cable rights fee of $50 million a year for cable telecasts, $25 million below the rights fee that could have been obtained in an arm?s-length transaction. Mr. Brenner and the Gothams have accomplished a few things. They have diverted the value of $25 million per year from the minority owners of the Gothams to the owners of the RSN. The RSN potentially can monetize that value ? by borrowing money or bringing in other investors ? in ways that would be less readily available, if available at all, if that value remained with the Gothams. Finally, the Gothams have moved $25 million from their local revenues, which since at least 1997 have been subject to MLB?s revenue sharing rules, to the RSN?s revenues, which do not have to be shared.

The RSDC. Baseball set up new rules for revenue sharing in 1996. Around that time, it formed the RSDC, composed of three MLB CEOs or principal owners, to deal with the problem of these below-market rights fee charges reducing the revenues to be shared with other MLB teams. One possible way to accomplish that would have been to determine, in compliance with business valuation principles, the fair market value of those rights if they were sold by a willing seller to a willing (and unaffiliated) buyer, and require that a team charge 90% (or 100% or 80%) of that amount. Making such determinations would be uncomfortable as well as complex process: the RSDC would have to consider and adjust other teams? tights fees by making franchise-by-franchise assessments and comparisons of factors that affect the value of teams? television rights, such as on-field success, fan loyalty, and the amount in cable subscription fees that the local population will pay to watch the team.

It?s pretty clear that the RSDC has never assessed the fair market value of cable rights in a way that comports with valuation principles. Instead, with the support of Bortz Media, it has developed an approach that can be characterized as allowing teams to cheat MLB by undercharging affiliated RSNs, but not by too much. The bottom line is that the RSDC will let a team get away with below-market fees so long as the RSN enjoying the advantage of those low fees has an operating margin of 20% or less, and sometimes if it?s more than that. The RSDC is indifferent as to whether the operating margins are 3% or 18%. When the rights fees are so low that the value transferred to the RSN makes those margins exceed 20%, the RSDC inquires further, though it?s not clear to me what its inquiry consists of in those instances.

The Settlement Agreement. After the Rangers left Washington in 1971, the Orioles tried to build a following there. Those efforts intensified with the planning and construction of OPACY, and it?s been estimated that fans from Washington and its suburbs represented 30% or more of the Orioles? attendance. When MLB took over the financially strapped Montreal franchise in 2002 with plans to move it, the view that the national pastime should have a franchise in the nation?s capital picked up steam. No one other than the Orioles seems to have expressed concern about the consequences of slicing into the Orioles fan base, and presumably that consequence was seen as great idea by the Orioles? division rivals.

In 2004, the MLB clubs approved by 29-1 the move of the Montreal franchise to Washington. The Orioles objected vigorously and threatened to sue, claiming exclusive rights to televising local games in and around Washington. In March 2005, the Orioles RSN, the Nats (still owned by MLB), the Orioles and MLB entered into a settlement agreement that provided certain advantages to the Orioles through the arrangements for cable television rights. The settlement agreement created MASN, gave it exclusive rights to telecast the Nats? and Orioles? games, and gave the Orioles majority ownership of MASN (85% at the outset, declining over time to 67%). The agreement mandates that MASN will pay the same rights fee to each team. It sets the rights fees to be paid by MASN to each of the Nats and Orioles for each year from 2005 through 2011.

For rights fees after 2011, the agreement provides that, if MASN cannot agree with the Nats or Orioles, even after mediation, the RSDC shall determine ?the fair market value of the [r]ights using the RSDC?s established methodology for evaluating all other related party telecast agreements in the industry.? Notwithstanding the imperfect wording of this provision (as discussed below), the intention of the parties? in agreeing to it is clear: if there?s a dispute, the RSDC will set the rights fees paid by MASN in a way that?s consistent with its review of rights fees in agreements between other MLB teams and affiliated RSNs. In other words, the owners of MASN will be permitted to divert value from cable rights to their affiliated RSN to the same extent as other MLB teams.

There are two problems with the details of this provision. First, it fails to acknowledge and account for the fact that it is requiring the RSDC to adhere in a dispute resolution to a methodology that it otherwise has applied and would be expected to apply in a different context; it would have been better to note and explain that difference in contexts. Second, I find it odd to refer to what the RSDC does as an ?established methodology? for determining fair market value. What the RSDC had in June 2005, and still had in 2012, is was (a) a standardized approach for determining whether to permit a team to maintain under-market rights fees from a related RSN, and (b) a consistent policy that such under-market fees giving an RSN net operating margins up to 20% are permissible, and that fees resulting in higher margins are suspect.

The RSDC?s Decision

The RSDC, consisting of the principal owners of the Mets, Pirates and Rays, rendered its decision in June 2014. It?s not clear who made the substantive decisions that it reflects. But the Nats acknowledge that the document was ?drafted by? MLB?s staff, and its rationales likely were formulated and written by sophisticated lawyers on that staff. The decision has elements of inconsistency, illogic and incomprensibility. I have no idea whether that reflects the craftsmanship of those drafters or their incompetence.

I could write ten pages on the problems with the reasoning in the RSDC?s decision, but I won?t. I?ll just make a couple of points. The decision asserts that the RSDC has a methodology for determining the fair market value of these payments. But it recognizes in a footnote that it is doing something different here from what it ?normally? does, so that this decision ?does not constitute precedent of the RSDC.? It describes that ?established methodology? as involving ?a myriad of factors,? with citations to rulings I have not seen. But then it basically resorts to what I understand to be the methodology used above, based on the operating margins of MASN.

The key to the decision is the RSDC?s setting of the rights fees to leave MASN with an operating margin of around 5%. The RSDC acknowledges the use of 20% as a permissible margin in other cases, but says it has ?never adopted a bright line rule that broadcasters will not enter rights fee agreements that would reduce their operating margin below 20%.? But the issue shouldn?t have been whether the RSDC had expressly adopted such a rule. Rather, the issue should been how it has treated other teams? arrangements for rights fees with their affiliated RSNs. That treatment is not discussed in any coherent or meaningful way.

The RSDC then offers a number of justifications for setting MASN?s margin at 5%, each of them specious and, it appears from the materials I have seen, inconsistent with what it has done in prior assessments of fees paid by teams to related RSNs. For example, it gives weight to MASN?s 8% margins in 2007, when the RSN was still starting up. It does not consider that these margins grew to 26%, 25%, 31% and 33% in 2008. And, after rejecting the fees paid by other teams on the grounds that the situations are not comparable to this one ? and they?re not ? it says that after it jiggers the figures those fees ?verify? its conclusion.

What?s at Stake

The rights fees to be paid to each of the Nats and Orioles in each year under the RSDC?s decision are set forth below, along with the rights fees argued for by the Orioles that I could find, all rounded to the nearest $100,000. (Under the settlement agreement, the Orioles and the Nats receive the same rights fee each year.)

[table=width: 500, align: center]

[tr]

[td]Year[/td]

[td] Rights Fee to Each Team

as Set by RDSC[/td]

[td] Rights Fee to Each Team

as Argued by MASN [/td]

[/tr]

[tr]

[td]2012[/td]

[td]$53.2 million[/td]

[td]$34.0 million[/td]

[/tr]

[tr]

[td]2013[/td]

[td]$56.3 million[/td]

[td] [i can't find this amount][/td]

[/tr]

[tr]

[td]2014[/td]

[td]$59.3 million[/td]

[td]$39.3 million[/td]

[/tr]

[tr]

[td]2015[/td]

[td]$62.6 million[/td]

[td] [i can't find this amount] [/td]

[/tr]

[tr]

[td]2016[/td]

[td]$66.7 million[/td]

[td]$45.7 million[/td]

[/tr]

[/table]

Let?s compare the impact on the Orioles of the rights fees set by the RSDC relative to the amounts proposed by MASN with the use of 20% operating margins for it.. In each year, the Orioles would receive about $19 or $20 million more in rights fees. I?ll use $20 million to make the arithmetic easier. That $20 million would be additional local income, subject to revenue sharing with the other MLB teams. While I can?t deduce the precise amount that would be shared, my best estimate is that the Orioles would lose a net of about 30% of that amount (34% revenue sharing less a 3.3% recovery of shared revenues); it may be more. That 30% reduction would leave the Orioles with a net $14 million gain in rights fees per year, after sharing, compared to the MASN proposal. MASN, meanwhile, would lose $40 million each year by having to pay increased rights fees. I don?t know enough about MASN?s non-operating costs or finances to assess how much of that $40 million would be immediately available to MASN?s owners, but I will assume it all would be. During this period, the Orioles would own, on average, 75% of MASN, so the cash available to it each year would be reduced by about $30 million as compared to the MASN?s proposal. Subject to errors in my assumptions or reasoning, the cost of this decision to the Orioles, relative to MASN?s proposal to the RSDC, would be around $16 million a year. ($14 million ? $30 million = ? $16 million)

Now apply the same assumptions and numbers to the Nats. The rights fee gain from the RSDC decision, net of sharing payments and receipts, would be the same $14 million per year, and the annual loss of revenues from MASN ownership, on average, would be 25% of $40 million, or $10 million. So, if my reasoning and assumptions are correct, the Nats would gain $4 million a year by having the RSDC decision apply rather than MASN?s proposal. ($14 million ? $10 million = $4 million) That may be understated since the Nats, as minority owners of MASN, do not control its cash payouts. Nonetheless, it appears that, to the Nats, the current fight is largely about non-economic factors, like falling in line with MLB?s authority or reducing the funding available to operate a direct competitor. As far as annual revenues are concerned, the significant impact of the RSDC?s decision would fall on the Orioles. They would lose about $16 million annually because, unlike every other MLB team, they would not be afforded the ability to shelter a hunk of cable television proceeds from revenue sharing so long as their affiliated RSN?s operating profit is 20% or less.

The Pending Motions

When parties agree to have a dispute arbitrated by specified rules and procedures, they are contractually bound by the result reached in the arbitration. As a general matter, courts have no authority to vacate or alter arbitration rulings, and must make them enforceable if asked.

At the outset of the arbitration, the Orioles offered three arguments as to why the RSDC?s ruling should be vacated. But they have, as I heard the discussion today, combined and reduced the number of those arguments to three, as follows:

1. The proceeding before the RSDC lacked the impartiality required in an arbitration, principally because the Nats? lawyers, as counsel for MLB and for members of the RSDC, had[/indent] a relationship of trust with the decision- makers. An important ancillary fact is the intimate involvement of MLB?s staff in the work on this decision. This procedural impropriety is further demonstrated by MLB?s incomplete disclosures of their relationship with Proskauer when the issue arose, and by the RSDC?s improper refusals to hear certain evidence presented by MASN and the Orioles, to cross-examine expert witnesses, and to provide certain information sought by MASN and the Orioles.

2. The RSDC failed to apply its ?recognized ?established methodology for evaluating all other related party telecast agreements in the industry.? This deviation renders the decision outside the authority granted to the RSDC under the settlement agreement. The RSDC?s departure from its contractual task constitutes manifest disregard for the law governing this dispute.

3. If it vacates the court?s authority, the court has the authority to direct that the rights fees be determined by a different body. The court should do that here because the Commissioner of MLB, who has asserted the final approval to resolve the rights fee dispute, has a stake in its outcome by virtue of MLB?s loan to the Nats of $25 million, to be repaid through proceeds from the RSDC?s decision.

Most of the argument before Justice Marks on Monday concerned the factual details and legal standards concerning Proskauer?s representations and relationships, much of it based on charts and lists that are not publicly available. Many of the factual details were lost on me, but the judge was plainly concerned and unsettled by Proskauer?s roles and their possible effect on the RSDC proceeding. The principal response by the Nats and MLB was that MASN and the Orioles expected that this proceeding would be ?inside baseball? (a pun that they seemed quite taken with) and that the involvement of Proskauer, MLB staff and anyone else was fully consistent with that expectation. The argument that I thought should have been made in response (but wasn?t) is that MASN and the Orioles knew that the deck might be stacked against them, since the RSDC members have teamed that would benefit from increased revenue sharing, and that?s what makes the contract provision requiring them no adhere to their established methodology for other teams? right fees so critical.

The Nats? lawyer also argued for a rule requiring that the prejudice be shown directly shown, and Justice Marks said that such a rule made no sense to him. The Nats and MLB also tried to show that Peter Angelos? lawyer, Alan Rifkin, had more potential for improperly influencing the proceeding than Proskauer. The judge seemed not to follow that line of argument. Both the Nats and MLB argued that MASN and the Orioles erred by asking that the problem created by Proskauer?s representation of the Nats be solved by disqualifying the Nats from the case, and they should have asked for substitute arbitrators instead. I couldn?t gauge the court?s reaction.

Justice Marks seemed to be wrestling with evaluating, and even deciding how to evaluate, the question of whether, and how much Proskauer?s role as the Nats? lawyer prejudiced MASN and the Orioles. I believe that?s the central issue on which his decision will turn.

The judge had far less to say on the issue of whether the RSDC, by failing to apply its established methodology, acted beyond the authority conferred on them by the settlement agreement. He asked some questions about what the RSDC did in this and other assessments of cable rights fees, and seemed to understand the parties? arguments. He seemed to me to recognize how unusual it is for a court to vacate an arbitration decision because it was arrived at incorrectly. (I thought MASN and the Orioles missed an opportunity to make a strong argument about the agreement. Echoing Mr. Manfred?s post-decision email, the Nats and MLB asserted that MASN?s and the Orioles? contention that the settlement agreement required the RSDC to follow the approach devised and used by Bortz Media was belied by the absence of any reference to Bortz in the agreement. I find that argument very weak. What the settlement agreement was intended to do and did, clearly if imperfectly, was compel the RSDC to consider the cable rights fees to be paid by MASN just like it treated rights fees paid by other affiliated RSNs. In 2012, that treatment followed the Bortz approach, including the approval of fees that yielded operating profits to those affiliates of 20% or less. To specify Bortz Media, rather than to call on the RSDC to provide like treatment (whatever that might entail at the time of the RSDC?s consideration five or ten years down the road), would have been inferior contract drafting, potentially leading to confusion.

There was relatively little discussion at the hearing of the court?s authority, if were to vacate the decision, to direct that the determination be made a body or person other than the RSDC. Nonetheless, the court understandably seemed concerned by the unusual nature of that request by MASN and the Orioles.

Summary

I left the hearing just slightly more optimistic than I entered it about the prospect of a decision affording any relief to MASN and the Orioles. The judge seems to understand the issues and to be taking them seriously, and he was not reluctant to state his lack of receptivity to some of the Nats? and MLB?s positions.

[CWalston108]

A little fuller description. I was a lawyer in New York for 34+ years before retiring at the end of 2012.

When I started reading about this case, mostly via the Hangout, I began to see that many of the issues it raised closely tracked those in cases I had worked on during my career, and I limited my review for fear of driving myself crazy by getting caught up in a case I had no role in.

I'm not sure why, but a few weeks ago that sound judgment deserted me, and I started looking closely at a few aspects of the case. Sure enough, the experience drove me something like crazy, especially today when about 17 times I wanted to jump and say (to both sides), "No, don't argue that, argue this." I managed to restrain myself and get out of there without my head exploding, but it was close. It was interesting, though.

So.. are you willing to volunteer your services to help MASN win the case?

[Three Run Homer]

Thanks for offering your expertise to guide us through what's happening in the case.

I have to say that I have a bad feeling about where this is headed after reading your write up. I always thought that the conflict of interest argument was weak, because the O's should have known who would be on the committee and which lawyers represented who. I though that their strongest argument was that the RSDC violated the original contract by deviating so much from the Bortz methodology--even if the contract doesn't spell out "Bortz" it does say "established methodology" and the committee seems to have used unprecedented assumptions and methods to arrive at their numbers. But your take is that the judge is mostly focusing on conflicts of interest.

[spiritof66]

I tend to agree with you. But it wasn't driven by the judge. That's the argument -- they present it as impartiality, not conflict of interest -- that MASN and the Orioles emphasized in their last round of briefs and at today's hearing. I have my suspicions as to why they did that, but don't really know.

There were a lot of things about Proskauer's representations that the Orioles didn't know until after the decision. Where that gets you is another question.

[JayThomas]

Spirit, can't thank you enough for providing all this detail and opinion.

[spiritof66]

So.. are you willing to volunteer your services to help MASN win the case?

MASN and the Orioles have lots of problems in this case, but one thing they have no shortage of is lawyers. (That didn't prevent me from providing my comments to a couple of them yesterday. Politely, of course.)

[srock]

"...If you want to do something evil, put it inside something boring." - John Oliver

[Frobby]

Seems to me that MASN/Orioles have two big problems in this case:

1. They agreed to let the RSDC be the arbitrators. They really can't complain about their partiality after the fact.

2. They allowed the contract language about "fair market value" to be drafted in a very vague manner. It's a bedrock rule that it is for the arbitrators, not the courts, to interpret and resolve any ambiguities in the contract.

The combination of those two things makes it very tough for MASN and the Orioles. They made their own bed with regard to the wording of the contract, and now they have to lie in it.

[srock]

Seems to me that MASN/Orioles have two big problems in this case:

1. They agreed to let the RSDC be the arbitrators. They really can't complain about their partiality after the fact.

2. They allowed the contract language about "fair market value" to be drafted in a very vague manner. It's a bedrock rule that it is for the arbitrators, not the courts, to interpret and resolve any ambiguities in the contract.

The combination of those two things makes it very tough for MASN and the Orioles. They made their own bed with regard to the wording of the contract, and now they have to lie in it.

The one competitive advantage the Orioles have, lawyer'ing, and they screwed it up!

[weams]

The one competitive advantage the Orioles have, lawyer'ing, and they screwed it up!

MLB has a whole lot on money to freely spend on selling off a team that they owned. David got beat by Gothiath.