Monday, July 28, 2014

American Apparel 1, NFL 0

As many readers (and all of my friends) know, I am a bit of a sports fan.  Having been a college athlete (field hockey, at Brown University, for trivia buffs), I focus most of my attention on college games.  I even served on The University of Tennessee's Athletics Board for a few years.  But my Dad and I used to watch professional football and baseball a lot together when I was a kid (still do, when we are in the same place at the right time), so I also maintain a casual interest in professional sports.

I also have an interest in fashion, especially women's fashion (maybe less well known, except by close friends).  I have friends in the industry and find aspects of it truly fascinating.  I even used to subscribe to Women's Wear Daily, the fashion industry trade rag.  I am the faculty advisor to the College of Law's Fashion and Business (FAB) Law student organization.

This personal background is prelude to my interest in two current events stories that I see as parallels.  I am trying to sort them through on a number of levels. Maybe you can help.  Here are the top lines of each story.

  • Last Thursday, the National Football League (NFL) suspended Baltimore Ravens running back Ray Rice for two games, fined him $58,000 dollars, and asked him to seek counseling after its investigation of an incident relating to a video in which Rice was depicted dragging his then-fiance, now wife, by her hair after punching her in the face (allegedly rendering her unconscious).
  • The very same day, American Apparel (AA) announced a new slate of directors who will assume positions on the AA board in early August as a result of investor intervention and a boardroom blood bath following on lagging profits and continuing investigations of allegations of sexual misconduct (most of it, as I understand it, not new news) against AA's founder and former CEO and director, Dov Charney, whose management roles at the firm were suspended by the board back in June.
With news releases on the same day for both stories  I couldn't help but notice the differences in the ways that the NFL and AA had treated these two allegations of VIP malfeasance.  Although it may be unfair to compare the two sets of incidents (which are, in fact, different in many respects), both are cases involving governance issues surrounding allegations of embarrassing behavior involving public figures important to the respective entities.  The Rice allegations are substantiated by video evidence and appear to be significantly more serious as a matter of potential illegal activity.  If true, the publicized facts about the Rice case are the foundation for criminal domestic violence charges.  The publicized facts relating to the allegations of sexual misconduct by Charney are not the subject of video evidence and may or may not involve criminal activity.  Yet, the institutional, employment-related punishment of Rice by the NFL is but a slap on the hand, as numerous commentators already have pointed out (including here and here), and the institutional, employment-related punishment of Charney by AA relegates a firm's founder, who also served as a director and its chief executive officer, to the role of a consultant.  The difference in governance reactions was, to me, striking.

One might point out that the risks to the respective governance bodies are different in these two cases.  Among other things, based on the publicized facts, Rice's actions were wholly personal activities, and Charney's may have involved conduct in connection with his managerial activities.  Also, Rice is one among many key players in the NFL, while Charney is a unique, even iconic, figure at AA.  These differences likely play into the risk management assessments of the two entities.  

But non-legal risks, including reputational effects, also should be considered in an institution's risk calculus.  I find it sad and hard to swallow, but the NFL's actions may just be a signal (despite the current negative press) that the NFL's leadership has determined that its reputation and profits will not be significantly negatively impacted by Rice's alleged actions--while AA's leadership, especially when pressed by key investors, came to a contrary conclusion with respect to Charney's alleged actions.  In this regard, I note with favor the recent comments, published by The Guardian, of my co-blogger Marcia Narine.

Perhaps applicable governance rules also play a role here.  Leaving aside any governance actions that may occur at the team level (based on publicly available information, the Ravens team is owned and operated by a limited partnership), it seems important to note that the NFL is an unincorporated non-profit association and AA is a publicly traded Delaware corporation.  Accordingly, the governance rules applicable to the NFL and AA come from different legal traditions and sources.

As I understand it (and I am no sports lawyer, so please correct me if I am wrong), each NFL team must agree to be bound by the terms and provisions of the NFL's Constitution and Bylaws.  The NFL's authority to discipline league team players is exercised by the Commissioner (or, in certain circumstances, the NFL Executive Committee) and derives from the NFL's Constitution and Bylaws.  Absent any provision articulating fiduciary duties in the Constitution and Bylaws, specific contracts or agency law would be the source of any fiduciary duties that the Commissioner and Executive Committee would have.  Unless a particular contract governs the matter (and without an in-depth analysis), the NFL member teams (for which the NFL has been organized and is operated) are the likely primary beneficiaries of any agency-law-based fiduciary duties applicable in connection with the NFL's formal disciplinary actions.  Unless I am missing something, the NFL teams are unlikely to assert a breach of fiduciary duty claim against the NFL Commissioner or Executive Committee based on the failure to stringently punish a key player on a league team.  If anything, the teams may believe that they suffer more financial hardship when key players are ineligible to play than they do by fielding players who are sexually violent.  That belief may be accurate, at least in the short term.  But the long-term effects of these types of incidents on the NFL are harder to assess and benchmark.  Perhaps it's time for consumers to rise up and speak, as they did when Michael Vick's dogfighting allegations surfaced back in 2007 . . . .

By contrast, AA's governance rules derive primarily from the General Corporation Law of the State of Delaware (as well as any relevant provisions in AA's certificate of incorporation and bylaws).  The board of directors of AA owes fiduciary duties to AA that benefit AA's stockholders (and potentially others).  On the corporate governance part of its website, AA states as follows: "American Apparel takes very seriously the responsibility to observe high standards of ethical conduct to protect the interests of the corporation, its shareholders, and its stakeholders. The officers and board of directors of American Apparel are dedicated to overseeing the operation of the business and affairs of the corporation to promote long-term shareholder value."  Stockholders did complain about Charney's alleged indiscretions and engaged AA in serious conversations about the governance of the firm in that context (among others).

Neither the NFL nor AA comes out of these incidents with a real victory.  Both entities face ongoing issues relating to these stories in the press and internally.   If one had to pick a winner in this race to the bottom, however, it would have to be AA.  For now, I score the match AA 1, NFL 0.

http://lawprofessors.typepad.com/business_law/2014/07/american-apparel-1.html

Business Associations, Corporate Governance, Corporations, Current Affairs, Joan Heminway, Marcia Narine, Sports | Permalink

Comments

Prof Heminway:

First, I hope that I don’t swerve too far afield from your posting. Boiled down, it seems you are using a business law professor’s lens to compare apples and oranges.

As a matter of useful trivia, former Justice A.A. Birch's son (A.A. Birch, Jr.) - a graduate of Father Ryan High School (Nashville), Harvard (government) (played lacrosse and basketball) and Vanderbilt Law School – serves as a NFL Senior Vice-President and legal counsel. He might be a “neat catch” as a guest lecturer if you could “lasso” him when he comes home to visit family.

[I interned with Justice Birch when pursuing my Masters in Criminal Justice in the early 1980’s when he was still on the criminal trial bench. In fact, I got to visit with him about two weeks before he passed (he and my wife were taking “chemo” with the same oncology group)].

As a former “jock,” I am quite sure you have insights into a locker-room behavior that non-athletes do not. I participated in football through my freshman year at MTSU (no talent, thought I better get an education (made the closest friends of my life to this day)). This was, of course, thirty years ago. Like you, I have tried to remain involved having served a term on the MTSU Blue Raider Athletic Association Board of Directors. Clearly, the “grade school to pro’s” encouragement and facilitation of a “perpetual juvenile” mentality establishes a basis in what is “acceptable” and certainly serves a function in the NFL’s “felicific calculus.” However, the fact is the “business models” are quite disparate.

I commend your insight when you posit: “If anything, the teams may believe that they suffer more financial hardship when key players are ineligible to play than they do by fielding players who are sexually violent. That belief may be accurate, at least in the short term. But the long-term effects of these types of incidents on the NFL are harder to assess and benchmark. Perhaps it's time for consumers to rise up and speak, as they did when Michael Vick's dog-fighting allegations surfaced back in 2007 . . . .”

I also find insightful your conclusion that the “NFL's leadership has determined that its reputation and profits will not be significantly negatively impacted by Rice's alleged actions--while AA's leadership, especially when pressed by key investors, came to a contrary conclusion with respect to Charney's alleged actions.”

Speaking strictly from my experiences and the sport of football, where else in society besides sports (perhaps non-sport entertainment) would the adolescent behavior encouraging a childlike aggression (ex., John McEnroe – “The Brat”) into adulthood be encouraged rather than discouraged? This was most obvious when the public with aghast with regards to the Incognito/Martin matter. However, what appears inappropriate in general society is often part of the intimacy of brotherhood in a locker room. What I can recount that was said and done, often with great affection, would “chill” the general public and – in the Martin/Incognito case - did “shock the conscience” of a general public. I prognosticated exactly what the results of the “public airing” would be. Martin would never be trusted in the locker room again and was traded (and will always be viewed with “jaundiced eye” in every other locker room – he “broke the code”) and Incognito appears to be looking to sign with the historic “bad boys” - the Oakland Raiders. Is it right? Probably not; but it is the reality of a football mentality.

Making no (highlighted and underlined!) excuses for the NFL and certainly not (highlighted and underlined!) Rice’s behavior (lucky her Dad or brother isn’t searching him out to adjust his future), I can tell you that the behaviors exhibited in films such as Semi-Tough and North Dallas Forty were far more my reality than fiction; and, for those who saw the “original, unedited” Brian’s Song, that type of relationship is reflective of the locker room (met Gayle Sayers about 15 years ago – at one time owned one of the nation’s largest catalog office supply companies, Crest Computer Supply Co.) and would “never” be tolerated or understood outside the close knit sport community or perhaps a military unit.

The NFL is, no doubt, a business with business concerns; however, for those who “play the game” it is a gladiator sport. The side effect of the behaviors encouraged improperly spill out into behaviors that are clearly in need of adjustment. The NFL, no doubt, is weighing the value of Rice in the marketplace of the playing field as distinguished from a “failing” CEO whose purported miscreant behaviors just serve as additional incentive to “move him out.” The difference is that Charney will make way for “the next best thing,” whereas, Rice is considered a valuable talent (until age or another similar event discards him).

Posted by: Tom N | Jul 29, 2014 8:17:30 PM

Thanks for these thoughts, Tom N, and especially for weighing in on a few of my musings.

You say: "it seems you are using a business law professor’s lens to compare apples and oranges." No doubt. I did, in fact, note the possible unfairness of the comparison in the post. But seeing the two news stories on the same day set me to thinking . . . .

Without challenging any of your observations (I have no desire or basis to do that), I can honestly say that they represent a depressing picture of the NFL. Nevertheless, I do appreciate your insights. There certainly is ugliness in men's sports outside NFL football (noting here your allusion to John McEnroe, e.g.) and in women's sports, too. But it seems that the male behaviors in NFL football have their own unique place in the Hall of Shame. I wish it were different, and I hope the NFL and team owners will wake up and force positive change.

Posted by: joanheminway | Jul 29, 2014 9:05:12 PM

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