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Wednesday, November 28, 2012

The ACC Sues Maryland over Exit Fee

The Atlantic Coast Conference filed a lawsuit in North Carolina state court on Tuesday seeking to enforce a $52,266,342 exit fee against the University of Maryland, following the recent news that the school was leaving the league to join the Big 10. The exit fee represents a sum three times the conference's annual operating budget for the 2012-13 school year, and was approved by the ACC membership in September, with both Maryland and Florida State University voting against the measure.

The Washington Post has obtained a copy of the ACC's complaint, available here. In the lawsuit, the conference alleges that Maryland president Wallace Loh -- a former dean of the University of Washington Law School -- has "refused to provide assurance" that the school would honor the exit fee. The complaint also points to statements made by Loh back in September, in which he contended that the ACC's exit fee could be legally unenforceable.

Indeed, Maryland can argue that the ACC's fee is an unlawful penalty under traditional contract law principles. Specifically, courts will generally refuse to enforce liquidated damages provisions (like the ACC's exit fee) when the clause goes beyond simply compensating the non-breaching party for its anticipated financial injury and instead unfair penalizes the breaching party (I have summarized the law regarding the enforceability of liquidated damages provisions in the related context of college football scheduling agreements and coaching contracts in a law review article available here on pages 21-23).

Maryland can thus plausibly argue that the ACC's exit fee -- set to three times the entire conference's annual operating budget -- goes beyond mere compensation and rises to the level of an unlawful penalty. The school can also point to the fact that the ACC's fee appears to be significantly larger than that imposed by any other conference in the country (the SEC notably has no exit fee). Meanwhile, expect the ACC to argue that the total damage inflicted on the conference by a defecting university is so significant, and yet hard to precisely calculate, that a $52 million fee is within the realm of being reasonable.

I anticipate that Maryland and the ACC will ultimately settle the case out of court, likely for less than the full amount owed (as Missouri, Texas A&M, Syracuse, and Pitt each did following their recent defections to new conferences). In fact, I suspect the ACC likely opted to file its suit on Tuesday in a favorable forum in hopes of obtaining some leverage in the ensuing negotiations, thereby preempting a potential suit by Maryland in a local state court. You may recall that West Virginia University and the Big East conference both filed dueling lawsuits against one another in 2011 after the school announced it was departing for the Big XII, lawsuits that were ultimately settled earlier this year. On the other hand, it is also possible that the ACC may refuse to settle for anything less than the entire $52 million in order to try to prevent other schools from leaving the league.

-- Posted by Nathaniel Grow @ 11/28/2012 01:00:00 PM -- Comments (12) -- Post a Comment

12 Comments:

Maryland may also have a corporate law defense to the complaint. The exit fee was increased from $20 million this spring by a resolution Maryland voted against. Depending on the state in which the ACC is incorporated, Maryland may have a right to walk away from the contract as a dissenting shareholder.

William Siebert -- 11/28/2012 1:59 PM

The ACC will undoubtedly challenge Maryland on the $52 million fee until the bitter end. The end result all of this conference realignment is to get four "mega-conferences" in football. That being said, the SEC, Big 10, Big 12 and PAC-12 are set up to be those four conferences. The Big East is done as a major conference leaving only the ACC to pick from as these "mega-conferences" expand to 16 teams.

If Maryland is allowed to leave at a discount, Florida State is likely to be the next domino with Boston College, Clemson and others will soon follow suit to be divided between the Big 12, SEC and Big 10.

This will cost the ACC far more than $52 million, and for the sake of the ACC, let's hope the courts uphold the agreed upon exit fee.

BLong -- 11/28/2012 2:17 PM

Interesting thought, William. Based on the ACC's complaint, though, it appears that the conference is organized as an unincorporated nonprofit association under North Carolina law. I'll admit I'm not sure whether or not Maryland would have a similar potential argument in light of that structure.

Nathaniel Grow -- 11/28/2012 6:39 PM

I think Maryland will have a very good argument that $52 Million+ is a Penalty meant to punish leavers instead of representing damage incurred by the league, especially since it's 3X their 2012-2013 operating budget.

I think Maryland's argument that it's a penalty is strengthened by the fact that the ACC was able to replace Maryland with another school (Louisville) very quickly.

J. Kaiser -- 11/29/2012 8:39 PM

I think the ACC will have a hard time arguing 52 million is a reasonable number for damages when it has already added Louisville to replace Maryland.

AMaffett -- 11/29/2012 8:44 PM

It's fair to say that the ACC, or any conference, has a legitimate reason for implementing a barrier to schools that breach a contract and leave the conference prematurely. An exit fee of $52 million, though, is excessive in my opinion and I suspect the ACC will have quite the uphill battle to add legitimacy to the number.

With conferences such as the Big East that have essentially imploded over the past 10 years, there is little doubt that the ACC feels threatened by conferences such as SEC, Big 10, Big 12, and PAC-12.

I also think that this will be settled out of court, much like the WVU, Big East lawsuit. However, it will be interesting to see if the Maryland move to the Big 10 will be as well received as WVU's move to the Big 12.

B.Furr -- 11/30/2012 12:47 PM

I saw a tweet this week that said (paraphrasing) that the ACC would spend $50 million to make $50 Million. The underlying reasoning is, as the comments above reflect, that if the ACC lets Maryland go for a reduced fee, it will lose other schools to greener (see: color of money) pastures.
As to the issue of the punitive nature of the exit fee, I think Maryland (and Florida State for future reference) did an intelligent thing when the exit fee was up. Both schools, went on record saying that the exit fee increase was punitive and both schools voted against the raise. If for some reason this thing does end up in court (see earlier tweet reference) I think that both school have provided support for themselves in asserting that the exit fee was, in fact, punitive.

atk001 -- 11/30/2012 2:09 PM

By replacing Maryland with Louisville as quickly as it did, the ACC may have hurt its argument about the significance of university defecting. However, the only argument it weakened is the difficult the league may have in replacing Maryland. The real purpose of the fee is to prevent the ACC from becoming the next Big East. For that reason, I think the ACC still has a better argument than many may think. Having said that, I would expect this to still settle but at a lower amount than what it would have been before the ACC’s addition of Louisville.

Jordan J

Anonymous -- 11/30/2012 3:18 PM

Maryland's argument is strengthened by the fact that the exit fee was only raised to its present level in the middle of this latest round of realignment, which gives the impression that the ACC was only trying to circle the wagons and make it prohibitively painful for any school to breach.

But this will end up just like WVU vs. Big East...the parties will settle it amongst themselves for a smaller fee, too much money at stake to leave it up to a judge. And then FSU will try the same thing...

baldwin.nate -- 11/30/2012 4:12 PM

I think that the ACC will have to fight this to the end because they do not trust Louisville. If the Big East did not raise their exit fees and notice period following the departure of West Virginia and TCU I think Boise State would have bolted by now. The Big 12 will eventually follow suit and expand and if the fees are not astronomically high (52 million) I think Louisville will leave once Clemson and Florida State begin to test the waters.

S. Neal -- 12/03/2012 9:59 AM

Pittsburgh and Syracuse were actually subject to a $5 million exit fee and a 27-month notice to leave the Big East Conference. They negotiated an exit fee of $7.5 million (GREATER than the agreed upon fee) to leave before the 27-month notice.

Many, you included, have said that the exit fee was negotiated for a lesser amount since they have seen reference to a $10 million exit fee and a 27-month notice to leave the Big East. The $10 million fee was implemented after Pitt and Syracuse gave notice and did not apply to them.

West Virginia negotiated a $20-million fee to leave the Big East even earlier, essentially 24 months earlier than if they had complied with the 27-month notice.

So, in all 3 cases, the universities paid more than the exit fee and the quid for the additional payment was a waiver of part of the notice period.

The ACC does not, I assume, have a notice period.

Christopher Bare -- 12/03/2012 12:35 PM

I do not think there is a legitimate claim that $52 million simply represents the damage that will be incurred by the league, given the facts.

The important thing to look at is what they are replacing Maryland with. As Maryland leaves, the conference is adding Pitt, Syracuse, and likely Louisville(if not already done). Those teams bring in $56.3 million, $73.3 million, and $87.8 million.

There may be a legitimate argument through this conference shift, including Maryland leaving, the conference will actually become more valuable. As the ACC is realizing a total net gain, it would be illogical to claim $52 million in damage.

Stapleton

Cite: http://www.al.com/sports/index.ssf/2012/12/alabama_and_auburn_stay_among.html#incart_river_default

Matt Stapleton -- 12/06/2012 6:38 PM