July 19, 2012 by Charlie Eisenhood in Analysis, Featured, News with 0 comments
Below you will find a lengthy legal analysis of the AUDL lawsuit against the Connecticut Constitution and the Rhode Island Rampage. For skimming ease, important sections have been bolded. At the bottom of the post, you will find a full copy of the complaint.
If you have any legal questions, please post them in the comments or email us via the ‘Contact’ tab above. Our analyst will respond in a post later this week.
Our legal analyst is a rising third year law student who works in contract law. What follows is only analysis, not legal advice. It should not be used to replace consultation with a trained legal professional.
While the league raises legitimate legal arguments in its complaint, the facts favor the teams, especially with regards to the league’s claim that their own 100-mile radius clause is “unreasonable.” The contract also suggests that the league’s claim that the teams “waived” their radius is a stretch, but there are a lot of facts we still need to hear on that issue.
The AUDL suit, filed in Michigan Circuit Court, seeks declaratory judgment. This is a legal term; basically the AUDL wants the court to declare that the Constitution and Rampage have no right to enforce the radius restriction in the future.
While I would not say the move is especially unusual, it is interesting. The teams may have threatened litigation with the league, but people threaten litigation more often than they actually sue. Perhaps the league thought it would gain a procedural advantage by picking the forum (more below) or maybe the league thought they had more leverage by timing the suit in the middle of the season.
Nonetheless, one rough rule is that advancing to litigation ensures that the only parties guaranteed to win are the lawyers (collecting their fees). I wonder if there is a more behind-the-scenes picture as to why the league acted so proactively instead of bidding as much time as possible and hoping for a settlement.
Why Michigan? Though the league is incorporated in Nebraska, it is headquartered in Michigan (that is neither unusual nor illegal). I am no jurisdiction expert, but “long-arm statutes” are common in most states, including Michigan, which allow you to sue any party that does even tangential business in that state. The AUDL claims that the licensing contract between it and the teams were “made, executed, and performed at least in part in Macomb County, Michigan.” (Allegation 4).
The Constitution and the Rampage could argue that this is a stretch, perhaps even convince the court that it is not the ideal forum; we may hear something along the lines of, “It’s unfair to drag us all the way to Michigan to defend a contract suit that was signed for $100.” But jurisdictional statutes are purposefully broad, so don’t be surprised if this holds up.
The agreement between the parties contracts for Nebraska law to govern any disputes. It sounds confusing, but we have a Connecticut and Rhode Island team disputing territory in New York and Boston in a Michigan court, but we have to look at Nebraska state law to know what standard will govern.
Unenforceable, Contrary to Public Policy?
Lawyers conventionally lead with their strongest arguments, so looking at the complaint finally gives us a good idea of what the league is primarily claiming: the territory clause is unenforceable.
What does this claim mean? Courts will not honor every potential contractual clause, especially those that conflict with public policy. A simple example is that you cannot draft a contract to pay someone else $100 to kill me; if the other person refuses, you won’t be able to get the contract enforced by any court. The result would be like that provision (or entire contract) was never agreed to in the first place.
Why might unenforceability apply here? One public policy concern is free competition, so anticompete clauses (like the 100-mile radius covenant) are implicated. While it is somewhat interesting that the league claims the clause that they drafted runs so afoul of public policy that it can’t be enforced, the actual legal argument is not uncommon. And if the league wins on this unenforceability claim, the territory radius covenant will probably be completely stricken. In other words, if they win here then they’ll almost certainly win the case at large.
The legal standard that a court would employ to evaluate this claim is “reasonableness,” an ever-vague concept that probably means there are arguments on both sides. Here are the arguments that the league has made along with my analysis.
1. The radius is unreasonable because it injures the public. Because sports teams are important for the public, sports teams should be developed at all levels. Enforcing the radius limits public access to ultimate Frisbee.
Analysis: I suspect this will be a relatively weak argument. There is plenty of public access to professional sports teams, both with and without this territory enforcement. It is arguable that a nascent league such as the AUDL provides no great public benefits. Finally, the AUDL does not have a monopoly position on either sports or ultimate generally; nothing is preventing a new league from forming and satisfying a deprived and yearning New York public market.
2. Not allowing teams in Boston and New York is unduly harsh on the league because all professional leagues have and need teams in Boston and New York. The AUDL and other teams will suffer if the radius restriction is enforced.
Analysis: This argument reads as an attempt to claw pack on a contractual term by saying it was a bad deal. If the league needed teams in Boston and New York so badly, then they shouldn’t have contracted that right away. From an economic perspective, nothing is preventing them from reobtaining that right to license to those cities; they just need to pay Connecticut and Rhode Island enough to obtain a settlement.
3. The 100 mile radius is unreasonable because it is greater than necessary to protect the team’s interests. The teams already have exclusive licenses in their respective states, so there is no need for their license to reach to New York City or Boston.
Analysis: This argument may be the strongest argument that the league has in its complaint. There is a legal school of thought that a contractual restraint on trade should be “no greater than needed to protect [the party’s] interest.”
In 2005, the Nebraska Supreme Court held* that franchise agreements, which often contain a territorial non-compete like the one here, should be evaluated under the “sale of business” standard. This is good news for the Constitution and Rampage, because courts often times tolerate broader restrictive covenants in connection with sales of business. If the same standard were applied to licensing, then the court would look to whether the “restraint is reasonable in both time and scope” in deciding whether to enforce the clause. Furthermore, Nebraska courts say a reasonable “duration and scope is dependent upon the facts of each particular case.”
The league argues that 100 miles is more than necessary and the good news for them is that they have articulated a legal rule which, on its face, appears to give them a chance to have this clause deemed unenforceable and struck. But the teams are going to be lining up enough factual evidence to strongly counter that argument and, in my opinion, have the far superior side here. Factually, there rumors are that nearly 40% of the Connecticut team comes from New York City; the establishment of a team there will almost certainly hurt the Constitution’s interests. The Constitution can easily argue that keeping solid players like Joe “Smash”, Isaiah Bryant, and Chris Mazur from a New York team is necessary if they want to compete for a championship.
But the idea of restricting player movement might come across as too anticompetitive, so what this could really come down to is fans and markets. The league claims “fans in Boston and New York are unlikely to travel” to watch the Constitution and Rampage. I am betting that the Constitution and Rampage will respond with figures showing that fans (perhaps the majority of their fans) do in fact travel from those cities to watch them play.
The mere fact that those teams are willing to fight a lawsuit suggests, at least to me, that they think maintaining the closest location to the New York and Boston markets is essential to their viability and success. The league is going to be forced to argue that the states of Connecticut and Rhode Island alone provide enough support for those franchises; I seriously doubt they are going to have the financial proof to back that claim up. For me, the logical fault with the league’s attempt to strike the covenant clause is their claim, on one hand, that teams in Boston and New York are essential to the league’s survival and, on the other hand, that the Rampage’s and Constitution’s need and potential to exploit those markets is minimal.
One final factor also tips the balance to the teams, in my opinion: sports leagues are necessarily more restrictive than fast food or tax return franchises. Since reasonableness is to be decided by the facts of the case and the businesses at play, we can see a possible distinction. To some extent, franchises and businesses normally want to keep increasing their numbers while most leagues are capped at 20-30 teams. Sport is a business that has a necessarily messy marriage with monopoly and anticompetition. While a 100-mile radius probably pushes the bounds of reasonableness in other contexts, I don’t think it does here.
Did Connecticut and Rhode Island Waive Their Contractual Rights?
The AUDL also claims that the two teams waived their rights to enforce the territory restriction through various communications and votes. The legal basis here is obvious: contracts are not written in stone and parties have the freedom to waive certain clauses through the life of the contract.**
The teams possess a powerful weapon on this issue, though: Section 6.B and 6.E of the original license agreement. The basic summary is as follows: the contract stated that it could only be altered in writing and anything said before signing was immaterial.
The league argues in the complaint that the Constitution and Rampage had actual knowledge of the expansion plans. But a list of “tentative franchises”, as the league called cities at the time, is arguably not strong enough to override the contractual language; the Constitution can reasonably argue that it thought those cities were possibilities until the moment that the league signed them away in the territory restriction clause.
The slightly more damaging claim is that the league had already sold franchises to New York and Boston (before said investors backed out) at the time it sold to Connecticut and Rhode Island, and that those two teams knew about it all. This argument comes across a bit foolishly: the league knew was breaching contracts between multiple franchisee owners from the very beginning, but the teams should have known about that, so therefore it is okay?
If the league could prove that the teams knew they never had the radius in the first place and still signed, that might be enough to constitute a waiver or to at least deny the teams the injunction they might want. But I don’t see anything in the complaint the definitively establishes knowledge on behalf of the Constitution and Rampage; they saw New York and Boston on a variety of lists, but were actual franchise licensing agreements provided to them? After all, the contract says that the teams were “relying solely on the representations . . . contained in this agreement . . . and not upon any [other ones].” That is tough language to overcome, though we need to know more.
Perhaps the biggest trouble spot for the two teams is an alleged vote that took place on April 30th and May 1st. The league complaint alleges that all of the team owners attended the meeting and voted on a league proposal that included teams in New York and Boston. Despite provisions requiring contract modification in writing, such an affirmative vote by the Constitution and Rampage could constitute a waiver of their rights.
But it will depend on the facts. For example, how much of the league proposal was considered a “tentative idea” of expansion (a term used in other places to describe cities including Boston and New York)? If it was a “tentative pitch,” the teams could argue that they were approving the idea of exploring those markets while still expecting just compensation if the league built in their territory.
Second, how many other items were being voted on at the same time? A waiver of a contractual provision generally has to be a “knowing waiver,” so the teams could argue that the weekend was something of a crash course that amounted to information overload (and that revision of important provisions like the territory restriction requires more professional communication).
The Constitution told Ultiworld that they did not believe New York was being presented as a possible team and was crossed off the list, which would be a huge factual win for them on this issue. Ultimately, when it comes to the waiver issue, we probably still don’t enough to make a great legal speculation.
*The two cases cited in this section are H&R Block Tax Services, Inc. v. Circle A Enterprises, Inc. (a 2005 Nebraska Supreme Court case) and Presto-X-Company v. Beller (a 1997 Nebraska Supreme Court case).
**Some courts, including the Nebraska Supreme Court (at least at times) take the view that provisions of a contract can be waived by acts or conduct even if the contract says that such revisions must be in writing.