29 May 2015

MASN Dispute: Final Arguments

Abstract: It appears that the court is giving credence to MASNs arguments and that MASN may win this lawsuit. Given that the alternative is having legal battles for the foreseeable future, it makes sense for the sides to agree to a compromise. One compromise could be that MLB is reimbursed for the $25 million it loaned to the Nationals; MLB agrees that the Nationals should be eligible for revenue sharing and everyone agrees that the established methodology is Bortz.

The final arguments for the court case between MASN and the Nationals were held on May 18th. If MASN, the Nationals and MLB are unable to come to a settlement, then Justice Marks will decide at a later date whether to uphold or vacate the RSDCs decision.  Eric Fisher from the Sports Business Journal has suggested that the loser will simply appeal to the NYS Court of Appeals, the State’s highest court, and that this case is far from over.

The fundamental points of the dispute have previously  been explained by Federal Baseball and Camden Chat. To summarize, MASN argued in court that the RSDCs decision should be vacated because the established methodology wasn’t used, MLB was biased due to the $25 million dollar loan they gave to the Nationals and because there were ex parte communications between the RSDC and Proskauer. The testimony on Monday further fleshed out the relevant points and provided insight into Justice Marks’ thoughts. The best starting point is why MASN felt the established methodology wasn’t implemented in this case.

MASN claims that the arbitration panel made a decision in error because they didn’t use the “established methodology” otherwise known as the Bortz Methodology. The RSDC uses the Bortz Methodology to determine rights fees for all other team-owned RSNs and therefore should use the same for MASN. MASN argues that if MLB decides to change its methodology, then they need to do so for all team-owned RSNs and not just for MASN.  The Bortz Methodology has not forced any team-owned RSN that has ever earned a 20% baseball profit margin to accept less than a 20% baseball profit margin. NESN, a team-owned RSN, received a 21.9% baseball profit margin proving that some team-owned RSNs receive more than a 20% baseball profit margin according to the RSDC and the Bortz Methodology.

Justice Marks wanted to know why the settlement agreement didn’t explicitly state that the Bortz analysis needs to be used and whether this case is different than other team-owned RSNs due to the Orioles’ control of most of the network. He also asked whether MASN would be happy if the decision was vacated and sent back to the RSDC with a direction to apply the Bortz Methodology.

The Nationals argument consisted of two points. The first is that the “established methodology” made no reference of the twenty percent baseball profit margin and therefore MASN doesn’t deserve that profit margin. The second is since the RSDC decision was closer to the Orioles request rather than the Nationals request that the decision must be fair to MASN.

Justice Marks noted, like Camden Depot, that the Nationals request was larger than what the Yankees actually receive. It is difficult to tell what would be an acceptable answer to that question, but it is reasonably certain that answering “absolutely” was probably not the best answer. Justice Marks concluded that the Nationals were in-fact high-balling the figure and it is likely that he doesn’t agree with their argument.

The main debate about this point is whether the “established methodology” should be Bortz and therefore MASN should receive at least a 20% profit margin like every other team-owned RSN or whether MASN doesn’t deserve a 20% profit margin because the “established methodology” wasn’t defined in the contract and therefore the RSDC can choose its methodology as it pleases.

I question whether it would make sense for the contract to promise MASN a 20% baseball profit margin. This agreement will last in perpetuity and promising MASN a 20% baseball profit margin would make it impossible for MLB or MASN to adjust the contract. It seems more reasonable to include language that would treat MASN like any other team-owned RSN and therefore allow flexibility.

There has been an overwhelming amount of evidence introduced that suggests MASN deserves a baseball profit margin of at least 20%. The Nationals submitted an article from SNL Kagan that states that the average RSN profit margin has increased from 30% in 1995 to 40% in 2014. Ed Cohen, a senior Nationals official, stated that MLB gave him a presentation where they stated that the RSDC decision was inefficient because it caused hundreds of millions of lost value to both clubs referring to the loss of asset value due to MASN receiving a 5% baseball profit margin instead of a 20% baseball profit margin. All of the pro formas written by Allen and Co on behalf of MLB to determine terms for a possible sale of MASN presume this new network would receive yearly profit margins between 30-40%.

This is crucial because the RSDC decision hinges on the argument that RSN profits are going down and therefore MASN should receive reduced baseball profit margins. If team-owned RSN profit margins are increasing and every other team-owned RSN receives at least a 20% baseball profit margin, then this indicates that there are problems with the RSDC decision.

Even if Justice Marks decides that the RSDC decision is erroneous, it doesn’t mean that he will vacate the RSDCs decision. The Nationals made the argument that as long as the RSDC made a decision in good faith, then the decision shouldn’t be vacated by the court. Their argument is that both sides agreed that the RSDC should be the arbitrator and part of the risk of arbitration is that the arbitrator may make a mistake. This is why the second and third arguments are important.

The second argument MASN made is that MLB was biased due to a $25 million loan that they made to the Nationals with the understanding that it would only be repaid from any additional funds that the Nationals may receive from an RSDC award. If the RSDC decided to issue a decision using Bortz then the Nationals would not need to repay the loan and the loan would be a gift.

Justice Marks stated that the delay was in the interest of both the Orioles and the Nationals. Since the RSDC decision was known, albeit not issued at that point, it was reasonable to give the Nationals that money to compensate them for the long delay in issuing the arbitration award. MASN attempted to counter by stating that the RSDC decision was still subject to the ultimate confirmation by MLB and that MASN deserved a formal opportunity to argue its case directly.  After MLB decided to loan the Nationals money and make repayment contingent on a favorable RSDC award then it was unlikely that he would rule against the RSDC decision because they had a $25 million stake in ensuring that the decision was upheld.

It seems unlikely that the Justice Marks will consider this a reason to vacate the RSDCs decision. The contract does state that the RSDC is in charge of making the final decision and therefore it isn’t clear whether the Commissioner would reverse their decision even if it was made in error. Furthermore, after years of discussion, it is reasonable to presume that MLB had plenty of time to understand both the Nationals and Orioles opinions and formulate their own opinion about the RSDC decision. If they agreed to make the loan then they probably felt the RSDC decision was acceptable. It is likely that whether the Justice decides that Proskauer’s involvement biased the result will be extremely relevant if not decisive. Most of the testimony was about this point.

Proskauer itself has had a long relationship with MLB and other major sports. The Sports Business Daily in 2001 discussed how Bud Selig often turns to Proskauer when he needs legal advice. When the baseball players’ strike of 1994 erased the World Series and dragged on for months, Selig brought in a former Proskauer lawyer, Randy Levine, to negotiate a settlement. Selig recruited multiple Proskauer labor lawyers to his staff and the article noted that those lawyers that leave to move into the offices of teams and leagues often refer business back to their mentors. Bradley Ruskin, the Proskauer lawyer that represented the Nationals in this case, has worked with MLB since at least 2000.

Dan Halem joined MLB as a Senior Vice President and General Counsel, Labor in 2007 after previously being a lawyer at Proskauer. MASN argues that Mr. Halem was very actively involved in the negotiations in this case and had a significant role. Likewise, Steve Gonzalez also joined MLB in 2007 after previously being a lawyer at Proskauer and had a role in the negotiations in this case. My understanding is that Proskauer became MLBs primary outside council in 2007 and at that point began to receive a significant amount of work from MLB.

A 2009 article from the Sports Business Daily, discusses how Proskauer has significant power in all four major sports leagues including MLB. Howard Ganz, the co-head of Proskauer’s Sports Law Group, represented MLB in its collective bargaining negotiations with the MLBPA. Howard Ganz noted that he “principally deals with the inside lawyers who are in charge of bargaining, such as Rob Manfred and Dan Halem (another former Proskauer lawyer) at baseball.” Rob Manfred stated that Ganz was at the table some of the time in 2002 and less so in 2006 but is deeply involved whether he is at the table or not.

Furthermore, Mr. Manfred was personally represented by Proskauer from 2001 to 2009 in the Phillips case. MASN noted that the Major League Baseball Collective Bargaining Negotiations ended on December 23rd, 2011 or about two weeks before this arbitration began and argues it was a huge career-builder for both Mr. Manfred and Mr. Halem and that they needed to work hand in glove with Mr. Laccese (the chairman of the Proskauer firm) to accomplish this, only to have him show up two weeks later for the Nationals in this arbitration. MASN also noted that during the arbitration process, Proskauer had 49 matters open for Major League Baseball; 27 of those involve the very same litigators, the very same Proskauer partners who were representing the Nationals in the arbitration.

MASN noted that Commissioner Selig was represented by Proskauer in connection with his $22 million a year employment contract with Baseball at the same time that these arbitration negotiations started. Given the importance of this matter to Mr. Selig, it seems reasonable to suspect that this could make him inclined to listen to Proskauer advice while disinclined to hurt them by disqualifying them from the MASN arbitration. MASN also noted that Proskauer did legal work for the three teams on the RSDC.

This shows that Proskauer Rose is an extremely powerful law firm with significant influence over all of MLB, Mr. Selig and Mr. Manfred, and the relevant clubs over a long period of time and therefore allowing the Nationals to use Proskauer as their lawyers potentially gave them a significant advantage. Likewise, Proskauer Rose had an interest in ensuring that their clients didn’t lose a case completely to ensure that they receive future business from the Nationals and other MLB clubs.

It is worth noting that Justice Marks seems to agree with this argument. He stated that “Lawyers are not ordinary service providers. They are not like caterers. It’s a different relationship.” My understanding is that this means that lawyers are accustomed to giving their clients legal advice unlike an average service provider that simply doesn’t. There is difference of authority between a broker or a lawyer and a florist.
This explains why MASN was concerned about the fact that Proskauer was representing the Nationals as well as the clubs on the RSDC. MASN claims that it did agree that the RSDC would be the arbitrator and that MLB would potentially have a role, but they didn’t agree that Proskauer would be able to represent either side. MASN felt that the Nationals should have used counsel that wasn’t as connected to MLB as Proskauer and that this should warrant vacatur.

It’s important to understand that MASN only needs to meet the “reasonable person” standard to determine whether there was bias in this case. The definition of this is: "Evident partiality will be found where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration."
The Nationals argued that there needs to be direct proof indicating that there is evident partiality and that mere allegations of bias simply aren’t enough. My understanding is that Justice Marks disagreed with statements such as “You would never have something like that”, “Look, I can’t believe the rule is that extreme” and “You know something, if that’s the law, with all due respect, that doesn’t make any sense.”  They also argued that this is an RSDC arbitration and therefore one should expect close relationships between the parties and the arbitrators. It only makes sense that the parties would use the law firms that they are familiar with. I don’t believe that Justice Marks agreed with that argument either as he claimed that the law requires the extent of the Proskauer representation to be disclosed.

Justice Marks ultimately told the Nationals that MLB could have strongly encouraged Proskauer to get off the case and that doing so would have meant that there would be nothing wrong with the panel. He told MLB that “if I were the Nationals involved in this dispute, I could see why I would want to retain Proskauer to represent me in this proceeding. There might be a perception that they would have more influence over the outcome than some other law firm might have because they are so immersed in kind of what goes on in the day-to-day operations of Baseball. So it’s not a completely far-fetched premise.”

This seems to indicate that Justice Marks believes that allowing Proskauer Rose to represent the Nationals was problematic.

It seems to me that MASN has at minimum a case that the RSDC decision was made in error possibly due to Proskauer’s involvement and therefore it is at minimum plausible that Justice Marks will vacate the RSDCs ruling and send it to another venue for arbitration. If nothing else, MASN will be able to appeal an unfavorable decision to a different court which could possibly rule in their favor and would almost certainly delay any final verdict for years. Given the uncertainty in this case, it would seem reasonable for both sides to try to come to a settlement.

It seems reasonable to presume that MLB and the Nationals had little incentive to give concessions before this court case got to this point because they felt they had the stronger hand. It wasn’t clear whether MASN would decide to sue in order to have the decision vacated and it certainly wasn’t clear that MASNs case would be seen this favorably by the court. This explains why MASN was willing to consider the possibility of a sale and also potentially giving the Nationals a larger stake. At this point, it seems that things have changed considerably.

A fair compromise could look something like this. MASN could agree to reimburse MLB for the $25 million that they gave the Nationals in order to buy time to look into selling MASN to Comcast. While one could argue that they did this without MASNs permission or knowledge and therefore deserve nothing, it seems reasonable to argue that they had good intentions. Furthermore, it is unlikely that MLB will agree to any deal where they aren’t reimbursed for that money.

It is clear that MLB offered to give the Orioles a large share in MASN because they recognized the harm caused by placing another team into their television territory and the impact that this would have on the Orioles revenue. It is also clear that by doing this, MLB caused the Nationals harm because they don’t control their media rights. Therefore, this is a problem that should be addressed by MLB. MLB currently considers the Nationals’ to have the twelfth largest market in MLB. This is problematic for the Nationals because teams in the top 15 markets are not eligible to receive revenue-sharing payments and also need to pay more money for supplementary revenue sharing. A reasonable concession for MLB would be to agree that the Nationals shouldn’t be considered a large-market club unless they regain control of their television rights.

There is a precedent for this decision. The Oakland Athletics are considered to share the seventh largest market with the San Francisco Giants, but are allowed to receive revenue sharing funds until they receive a new stadium. If it is possible to agree that the Athletics should be able to receive revenue sharing funds until they have a new stadium, then it makes sense that the Nationals should be able to receive revenue sharing funds until they regain control of their television rights.

In return for all of this, MLB would need to agree that Bortz is the established methodology, that the RSDC decision should be vacated and that the arbitration should be administered by a neutral party like the AAA.

One problem with just sending the decision back to the RSDC is that the MLB now definitely has a bias to ensure that MASN pays the rights fees suggested by the RSDC to ensure that they are repaid for their $25 million to the Nationals. It is possible to argue that MLB wasn’t biased when they made the loan because the decision was already decided and they could have decided to publish the decision at any time. If the decision is vacated then that argument is no longer true and MLB has a stake in ensuring that MASN pays the inflated rights fees.

It would be reasonably simple for the RSDC to corrupt the Bortz Methodology to ensure that MASN pays elevated rights fees. One thing that they could decide is that MASN should be charging a higher subscriber fee and thus that MASN should be receiving higher revenue. By allowing MASN to receive a 20% baseball profit margin on unfairly inflated revenue would force MASN to pay inflated media rights fees. In short, there are a number of problems that could occur if the RSDC was allowed to decide the results of this arbitration instead of a neutral body.

It seems likely that MASN has a reasonable case to have the RSDC decision vacated. Without a compromise, it will take years for this situation to come to a resolution during which neither the Nationals nor MLB will receive the money that they claim they deserve. Therefore, it makes sense for each of the parties to work together to come to a mutually beneficial resolution.


Anonymous said...

I have read your extensive overview of the recent proceedings and let me gently suggest that you are ever so slightly biased towards MASN and the Orioles. From your piece, I read of no clear evidence of any misconduct on the part of RSDC nor was there anything unusual about the process. Having a judge reject an arbitration decision requires far more substance than this, and the fact that you see otherwise reveals your bias.

Steve said...

It is more like it indicates bias as opposed to reveal. And it may just be a misunderstanding of the process.

Matt P said...

Anonymous - Fair enough, let's look at it your way. Suppose that vacating an arbitration decision requires clear evidence of misconduct as opposed to a reasonable man standard. In that case, let's look at what actually happened.

Would you agree that this case began in July 2014?
Would you agree that the court has refused the Nationals claim to force MASN to pay the amounts in question prior to a decision and allowed MASN to post the money on bond?
Would you agree that the court refused to throw out the case on grounds that it was unlikely to succeed?
Would you agree that the court forced MLB to provide metadata about certain issues?
Would you agree that the court has failed to issue a decision in this case for weeks after hearing final testimony?
Would you agree that the court absolutely blasted a number of the Nationals' arguments in court while being sympathetic to MASN arguments? Unlike the other questions, this one is debatable. I would argue it's obvious but I suppose others could argue.

So, if clear evidence of misconduct is required to vacate the decision and the Justice doesn't think that this occurred then what exactly is going on? Why hasn't MASN lost this case already if at least isn't questionable? Why is this farce continuing?

There are only three answers that I can think of that can be used to answer these questions.

The first one could be that I simply am unable to explain MASNs legitimate arguments in a reasonable way. If so, then it's hard to argue that I'm biased but rather don't understand what's going on. But then, if you've read my material, you've likely read other material and can gauge whether that's the case.

The second one is that for some odd reason the court has decided to allow a case where MASN has no merit to drag on for nearly a year thereby causing 'significant' damage to the Nationals (and to be fair, $10 million isn't pocket change).

Or the third one could be that while you understand the burden of proof necessary to reject an arbitration decision, Justice Marks simply does not. I would not want to be the one making this argument.

You tell me. Is it reasonable to allow an arbitration case to drag on for so long if one side clearly doesn't have a case as you claim? Far more reasonable to presume that I'm right that Justice Marks considers MASNs argument to have merit based on what's actually happening.

But then again, maybe I'm just biased.