July 15, 2012 by Charlie Eisenhood in Analysis, Featured, News with 17 comments
Ultiworld has obtained an exclusive copy of the Connecticut Constitution’s Territory License Agreement with the American Ultimate Disc League. This document is the legal lynchpin of the AUDL’s lawsuit against the team, which was filed in June.
The contract — which can be viewed in its entirety below — centers around Section 5 (“Restrictive Covenants”), which describes the 100 mile radius around Hartford, mapping the Constitution’s (licensee) territory in the AUDL (licensor). The section reads:
[quote]Licensor agrees that during the term of this Agreement and for a period of five (5) consecutive years immediately following the termination of this Agreement, regardless of the cause of termination, Licensor will not by himself/herself or on behalf of any other person, firm, partnership or corporation engage in the business of establishing, running and/or operating a ultimate disc league or team within a one-hundred (100) mile radius of the Defined Territory or any other territory of Licensee.[/quote]
We will leave the interpretation to our legal analyst. He is a rising third year law student at a top school expecting to continue doing corporate practice. “Basically,” he writes, “reviewing menial contracts and looking for flaws is part of my day job.” He has requested anonymity.
His analysis follows. It should not be considered legal advice and should not be used to replace consultation with a trained legal professional.
What’s good for the Constitution?:
Let’s begin with Section 5. Helping the Constitution is the repeated reference to “territory” in the agreement. Section 1.A.3.b says that “protected territory” is an “asset” granted to the Constitution. It’s also important to think about the intent of the contracting parties. The intent of Section 5 seems to be to grant the Constitution a “protected territory.” While the specific language in the clause can be subject to commentary and criticism, the general idea of leagues (and teams) intending some barriers to entry can be told with a simple story. Investors would be wary of buying into a league whose incentive is to sell another franchise next door, so the investor demands contractual protection. The league wants to increase the value of the franchises it does sell, thus it offers a 100-mile radius. It’s difficult to understand the purpose of the term “territory” if it does not mean “exclusive territory,” as the Constitution has argued it means.
If the territory is exclusive per the Constitution’s interpretation, their interest in the exclusive territory appears to survive past their existence as a team. There is more discussion of this below, but the minimum term of the license is five years (Section 1.C.1). Furthermore, Section 5 states that the territory restrictive covenant is binding on the league “for a period of five” years after the termination regardless of the cause of termination (i.e., even if the Constitution are in the wrong and in breach). The league may have, therefore, given the Constitution a valuable hold-up right: The ability to block a New York franchise even if they cease operation. It should be noted that a broad interpretation of that type of clause might be deemed an invalid restraint on trade or in violation of public policy and thus contractually unenforceable.
But what of the AUDL’s claims that the Constitution have, in the past, agreed to New York and Boston franchises? As reported earlier this week, the general contracting presumption is that verbal statements made between parties do not supersede an unambiguous written agreement. That presumption is strengthened by two other clauses in this Agreement: 6.B and 6.E. 6.B reads:
[quote]This agreement constitutes the entire agreement and understanding between the parties to this agreement and supercede [sic] any prior agreement and understanding relating to the subject matter of this agreement. This agreement may be modified or amended only by a duly authorized written instrument written and executed by both parties.[/quote]
Clauses like these are common in agreements because contracts often go through many drafts, and many things that are said during negotiations are less important than the final, signed deal. Theoretically, the final agreement signed by both parties is the best each side was capable of negotiating for and should be honored. It is also an evidence problem to try to discern things like, “Who was present and listening at which league presentations regarding the New York and Boston teams?”
What’s good for the League?
The actual language of Section 5 is arguably not cut-and-dry. The particular language represents questionable lawyering on behalf of the Constitution, given that one word is notably absent: “licensing.” The league has agreed to not do a lot of things in the Constitution’s territory, but did not specifically state that they would not “license” other teams. Given that this entire agreement is a license for the Constitution, they should have known to insist that “licensing” be added, along with “establishing, running and/or operating,” to the list of restricted activities. If I am filing the complaint for the league, this is what I’m arguing.
Of course, you’re probably thinking that “establishing, running and/or operating” has to include the act of the league licensing a team. You’re probably right. But one has to wonder if the league has left themselves just enough wiggle room here if they did the sale to New York/Boston perfectly. First, we know that the “Licensor” (the league) is not “by [them]sel[ves]” starting up (establishing, running, or operating) the New York and Boston franchise. So the question is whether they are doing it on behalf of another person. A mere contract between the AUDL and a New York investor probably does not reach the level of doing it on behalf of someone else. One final interesting wrinkle: The word “license” is used throughout the agreement, including with reference to the territory, but it is never qualified with the word “exclusive” (“exclusive license” is nowhere in the Agreement).
At the end of the day, I’d still rather be the litigator on the Constitution’s side. But it may be a closer legal call than initially thought. I’m hoping that other legal-minded ultimate players can offer their commentary on this issue.
One other clause, regarding a warranty of financial ability, might also worry the Constitution. Section 3.B reads in full:
[quote]Licensee further warrants to Licensor that Licensee is contracting in good faith and has the financial ability to see through all obligations of ownership of an Eastern Ultimate Disc League team.[/quote]
This clause somewhat clouds the Constitution’s decision to suspend its season on the grounds that it couldn’t afford to both operate the team and defend the league’s lawsuit. Perhaps sadly, lawsuits are just one ordinary part of doing business in this country and the Constitution warranted that it had the financial ability to “see through all obligations of ownership.” The league could argue that defending a lawsuit is one such obligation.
Of course that argument would be a lot stronger if it was a lawsuit from a third party (imagine if an injured fan sued the Constitution, and the Constitution stopped playing games) than in the current situation, where the lawsuit may be a result of the league’s breach of contract.
Also, as discussed below, “obligations” is left overly vague. This argument would thus be somewhat of a reach for the league but it also may suggest that the Constitution’s (presumably legitimate but also public relations-motivated) tactic of claiming financial inability during the situation was risky.
What’s bad for the League?: If the league used this contract when selling the New York and Boston franchise, the league could be in violation of Section 2.A (Ability to License) with those prospective owners. The Constitution could be said to have a right in the territory that the League then licensed without the Constitution’s permission. It is important to note that the Constitution would not have a right to make this claim, as the potentially damaged parties are New York and Boston.
The other tricky issue is the precise language; while the Constitution may have a “right” to the territory, they do not have a mortgage or lien on it. “Pledge” or “Encumbrance” might be just broad enough, though, and it certainly seems to fall within the intent of the clause.
In other words, if the Constitution win the suit and get a judgment that the New York territory is theirs, don’t be surprised to see follow-up legal action on behalf of the New York owners.
What’s generally sloppy: A lot of it. It’s hard to know what other contractual agreements exist between the teams and the league; we should hope a lot more. There are too many ambiguities and problem areas in this contract.
For starters, the issue of team obligations is mostly left undefined. The Constitution must “honor all obligations” of the league but it’s never spelled out exactly what those are. There is likely an additional document that explains them.
Along those lines, there are no clear remedy provisions that would otherwise help slow down a litigation snowball. Section 1.C.2, the termination provision, states:
[quote]If Licensee shall violate any of its material obligations under the terms of this Agreement, Licensor shall have the right to terminate this Agreement upon fifteen (15) days notice unless Licensee completely remedies the violation within the fifteen (15) day period. [/quote]
This termination clause is wholly unsatisfactory as a way to mediate a dispute. It ought to more specifically outline obligations between them and contract for specific punishments (and ways to determine if punishment is warranted) that correspond to the severity of the breach. This is Contracts 101 stuff and it’s why you see arbitration as probably the dominant form of remedial resolution in Sports Law: it assigns an already-agreed upon (presumably neutral) forum/judge for the parties to quickly (and cheaply) move forward.
In this agreement, only the league is given a right to terminate and can do so for any material violation so long as they give the team a 15 day period to remedy. But in most disputes, the team is going to actually dispute the alleged violation. With no way to appeal to the other teams, a commissioner, or an arbitrator, any dispute between the team and the league was destined for an court battle that sours the relationship and makes it difficult to continue with business as usual.
For the Constitution, I would have preferred a specific remedy for the territorial violation. In general, the remedy for breach of contact is monetary damages. Thus, if the league were found to have violated Section 5 by selling a franchise to New York or Boston, the Constitution would generally be entitled to money from the league. But estimating the value of these damages is going to be extremely difficult. The Constitution would probably prefer an injunction that stopped the sale of a franchise to New York, but that would have been easier to obtain if the Agreement specified equitable relief and injunctions as the remedy for a violation of the restrictive covenant.
In general, the lack of well-drafted remedial sections in the contract suggests that both sides signed with excessive optimism that the relationship would only be rosy. It’s easy to look back once a dispute has begun and second-guess, but some standard language was omitted. The lack of a specified remedy in the case of a league violation or breach is probably the glaring omission that has made this dispute as ugly as it is now.
A few of the clauses seem nearly nonsensical. For example, Section 1.C.1 says that the term of the license is 5 years unless the team is not in existence for the full five years. In that case, the license is for the remaining life of the league. Thus, the Constitution could extend the life of their agreement by ceasing to exist. Essentially, this creates an incentive for them to cease if and only if the agreement (and territorial covenant) becomes valuable, which is precisely the opposite incentive of what makes sense.
Please share your thoughts with us in the comments or by email (firstname.lastname@example.org). The full document is below.
UPDATE: If you’re curious, the league legally changed its name from Eastern Ultimate Disc League to American Ultimate Disc League. The below Licensing Agreement is, therefore, still valid. You can look this up yourself on Nebraska’s Secretary of State website.