September 26, 2011
Athletic Conference Exit Fees and the Law of Liquidated Damages
Thinking about college football today, and, yes, this does have a business law tie.
Intercollegiate athletic conferences have been plagued lately by a string of defections. The Big 12 alone has lost three members in a little more than a year: Colorado to the Pac 12, Nebraska to the Big Ten, and, most recently, Texas A&M to the Southeastern Conference. Pittsburgh and Syracuse recently announced that they are exiting the Big East conference to join the ACC.
One way to stem such departures is to increase the exit fee a school has to pay when it leaves. The higher the exit fee, the better the deal the new conference has to offer to make a change worthwhile. Shortly before it lured Pitt and Syracuse from the Big East, the ACC reportedly raised its exit fee from between $10-13 million to $20 million. This has led some sports commentators to call on other conferences to increase their fees, to prevent further defections. For example, Kirk Bohls, a writer for the Austin American-Statesman, calls for the Big 12 to hike its exit fees: “Exit fees must be beefed up. Write in language that states the very minute a Big 12 team announces it has accepted an invitation to a new conference, it has to write a check for $20 million to the Big 12. No out clauses, no exceptions.”
It’s important to keep in mind that these exit fees are, in essence, liquidated damages. Conference members pay the exit fee only when they breach their agreement to remain in the conference. Liquidated damages clauses like this are enforceable only if they are genuine attempts to estimate uncertain damages and not if they are penal in nature. That’s why the ACC can’t establish an exit fee of $500 million. No one would consider that a reasonable forecast of the damage the conference would suffer if one of its members left. Courts would treat it as a penalty and strike it down.
That raises two interesting questions:
1. When the conferences set exit fees in the first place, how well are they documenting their status as forecasts of actual damages? Is there a full discussion of the likely damages if a member leaves, or do they just throw out some number they think will keep schools from leaving?
2. Don’t conferences that raise their fees have an even tougher burden, particularly if the original fees were set not too long ago? Presumably, the original fee was a reasonable attempt to approximate damages. If nothing has changed to increase the likely damages, is the increase just a penalty? Without a doubt, the risk that schools will leave conferences has risen in recent weeks, but that’s not the issue. An increase is justified only if the damages when they do leave has increased. That’s much less clear.
One justification for raising exit fees is that conference TV deals are spirally higher. Especially for the lower-tier schools in the conference, but also for mid-tier schools, the cost of departure of the top-tier schools could be high. That was the essence of Baylor argument. That argument would be even stronger if the agreements between the conference and the networks allows the networks to cancel upon the departure of certain schools, or of a certain number of schools. Given the current climate, such provisions may start appearing in the TV contracts.
Posted by: Gary Rosin | Sep 26, 2011 1:19:48 PM