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Addressing the ACC/Big East Legal Issues
by Jeff Ouellet, 5/27/03

Editor's Note: Last week, TSL columnist Jeff Ouellet, who moonlights as an attorney when he's not writing for TSL (that's a joke, people), emailed and asked if we'd be interested in an article discussing possible legal courses of action that might arise from the ACC's raid of the Big East for Miami, Boston College, and Syracuse.

Would we? Heck, yeah, because nobody else is touching the topic. The only problem we foresaw was boiling down what would no doubt be some complex legal issues into a digestible format for the masses.

Jeff did a pretty good job of that, but this article is long, and we suggest clearing your head, turning off the phone, and concentrating as you work your way through it. Like any legal discussion, it has many facets and requires strong attention to follow. -- Will Stewart


Shortly after I began in private practice, a long time friend of mine mailed me a cartoon depicting "Simpsons" legal icon Lionel Hutz. From behind bars Hutz was making a pitch for his services to Homer Simpson, while selling Homer on the fact that "I�ve been in front of every judge in the state, often times as a lawyer."

Well, the recent series of events that has culminated in the ACC offering membership to Miami, Syracuse and Boston College has generated a great deal of discussion among Big East and ACC fans, including a fair amount of speculation as to the potential legal ramifications if the temerarious triumvirate took their proverbial ball and went to play in a new neighborhood.

Besides the fact the characters and personalities involved here seem like the perfect backdrop for a future Simpsons episode, I invoke the name of Lionel Hutz because, in some respects, evaluating the merits of these legal claims without all the facts and documents is foolhardy at best, downright moronic at worst.

Never one to shirk from a challenge that could lead to name calling, what follows is a brief summary of what I consider to be some of the relevant legal concepts that could, and should, influence the decisions being made by the existing Big East schools

Potential Claims

I.  Intentional Interference with Contractual Relations

Generally, and this can vary depending on the jurisdiction, in order to make out a prima facie case for intentional interference, a plaintiff needs to prove: (1) the valid existence of a contract between the plaintiff and a third party; (2) that the defendant knew of the contractual relationship; (3) that there was intentional interference by the defendant that induced a breach of the agreement or otherwise led to a termination of the relationship; and (4) the damage resulted to the plaintiff.

Obviously, the first prerequisite to having a claim here is establishing a contract. Some have suggested that the Big East sue the ACC for, essentially, encouraging UM, SU and BC to leave the Big East. The contractual basis for the claim would be the binding agreement signed by all Big East schools as they are admitted into the Conference (the "Charter"). Therefore, the argument goes, the ACC knew about the Big East Charter, encouraged the three schools to breach the Charter, and that resulted in damage to the five remaining Big East Schools.

However, despite the obvious appeal of such a claim, it likely would not be viable here. Why? Well, the Charter, as I understand it, has a buyout clause that permits members to leave if they meet certain criteria. That implicates the third criterion, the "intentional interference that leads to a breach." If those schools have the contractual ability to leave the Big East, it is axiomatic that the Big East can�t sue them for leaving. UM, SU and BC haven�t breached the contract; they merely exercised a right given to them in the Charter. Escape clauses are drafted to permit a party to leave when they get a better deal, and that would be what happened here.

With that being said, this claim could have some merit in a different context. For example, if the same claim was brought by the Big East based on a television contract, it might be viable. Hypothetically, assume ABC/ESPN had a contract to televise Big East games, and that contract was predicated on having all eight teams available for television games. In the event three of those teams are not available, the Big East is considered in breach of the contract and ABC no longer is obligated to pay under the terms of the initial deal. In that situation, the ACC�s actions might give rise to a cause of action.

There may also be other subsidiary Big East contracts dealing with radio rights, certain arena and/or vender contracts, or other similar deals that could be terminated after the departure of UM, SU and BC. If I were a member of the Big East legal team, I would be reviewing all of the revenue producing contracts very carefully.

Also worth noting is the fact that under this claim there could be two different claims: the Big East could seek a equitable relief in the form of a preliminary injunction/temporary restraining order seeking to prohibit UM, SU and BC from leaving the Big East and competing in the ACC. There also could be a cause of action against the ACC for monetary damages.

There are several potential defenses to these claims. First, the escape provision obviously is in the Charter, and it might have been incorporated by reference into all subsequently executed contractual deals. If that is the case, then arguably the escape provision permits the three schools to leave without a technical "breach" occurring in any of the Big East contracts.

Also, although this is a factual issue, the role of the ACC versus the role of the departing Big East schools could be relevant. In particular, the topics of discussion at the 1998 meeting between Mike Tranghese and certain ACC officials regarding a merger could severely damage the viability of any claims.

Finally, claims brought based on subsidiary contracts � for example, with souvenir sellers � may not be actionable because the ACC did not "intentionally" harm the business relationship, although it admittedly was an inevitable consequence of ACC expansion.

II.  Promissory Estoppel/Detrimental Reliance

Many fans are particularly outraged at statements attributed to Miami�s President, Donna Shalala. Several times, most recently at the 2001 meetings, President Shalala allegedly gave verbal assurances to the other Big East presidents that the University of Miami was committed to being a Big East member for the long term. Several Big East schools including VT, WVU and particularly UConn, made significant capital expenditures to improve facilities after the 2001 meetings.

Normally, in order to enforce a promise, there needs to be consideration from both parties; stated differently, a contract must be a bargained-for exchange where both parties get something of value. President Shalala�s promise was in a vacuum and, apparently, UM received no benefit from her verbal assurances. Nonetheless, in certain circumstances a promise made without consideration will be enforced under the theory of promissory estoppel if the promise could have been reasonably expected to induce action or forbearance, and the action or forbearance was in fact induced.

In this case, arguably, President Shalala�s promise induced certain Big East schools to make additional expenditures in anticipation of the Big East continuing to remain a top notch football conference. Moreover, that promise suggested on ongoing revenue stream that could be used to subsidize those expenditures, or other athletic department costs.

There are many defenses that could be proffered to a detrimental reliance argument. There may very well be a clause in the Charter, called an integration clause, that basically says all the terms of Big East membership are written down in the Charter and no additional terms may be added except by virtue of a writing signed by all the member institutions. This isn�t a lock solid defense, though. Some states permit parole (oral) evidence to show subsequent modifications of a written contract, and the exclusion of parole evidence only applies to prior or contemporaneous negotiations. So, an argument can be made that the integration clause in the Charter may be modified by any oral agreements made by UM after it signed the Charter in roughly 1991.

There are certain other defenses that would be asserted if the case went to trial, and they would center around whether the reliance by the Big East member institutions was reasonable, whether the statement was sufficient to be a "promise," and whether the promise had to be in writing under the Statute of Frauds as it could not be performed within one year.

III.  Breach of Fiduciary Duty

To my knowledge, the Big East is a nonprofit organization. If a nonprofit is incorporated, a board of directors exercises its corporate powers and directs the management of its activities. My understanding is that President Shalala is a member of the Big East Board of Directors, in addition to her position with the University of Miami. A director has a duty of care to exercise his or her responsibilities in good faith and with a requisite level of diligence and skill.

Under a legal concept called the business judgment rule, if a director acts in good faith and with the requisite degree of care, a court will not review the action even if it proves disastrous to the organization. Thus, the duty of care focuses on the way a director conducts his or her activities, rather than reviewing the results of a given decision.

Directors also owe a duty of loyalty that requires them to act in a manner that does not harm the corporation. The duty of loyalty requires directors to place the interest of the corporation ahead of their own personal gain. Breaches of loyalty are much easier to identify than breaches of care and give rise to much more litigation.

In analyzing potential conflicts of interest, there is a procedural component � how a transaction occurred - and a substantive component � what actually occurred - that resolves the issue of whether a transaction was fair to the corporation.

The gravamen of the Big East claim is that President Shalala, under the duty of loyalty and perhaps the duty of care, had an obligation to tell the Big East of her plans for leaving the conference. If she failed to do so, then a strong argument can be made that she was neglecting her fiduciary responsibilities. What President Shalala should have done, from a legal perspective, is to resign from the Board when the best interests of Miami (arguably, going to the ACC) diverged from the best interests of the Big East (which clearly was to keep all three schools). Then, after resigning from the Big East Board, President Shalala could begin negotiations with the ACC. The allegations that President Shalala was, in essence, "negotiating" with the ACC while still a member of the Big East Board is problematic for her.

Once President Shalala accepted and retained a seat on the Board, she had an obligation to take steps that were in the Big East�s best interests. Moreover, if it can be proven that the ACC negotiated with ABC/ESPN using UM as monetary leverage to "negotiate" a new television deal while President Shalala was on the Big East Board, then a more specific claim can be made that President Shalala breached her duty by usurping a corporate opportunity from the Big East.

Again, the facts will determine how viable this cause of action is, but the breach of fiduciary duty claims are, in my estimation, the strongest claims of those discussed thus far.

IV.  Antitrust

Discussing antitrust law is the intellectual equivalent of going to the dentist, but I will try to break things down by using a frequently asked question format. I will start by generally discussing the primary antitrust provisions.

Section 1 of the Sherman Antitrust Act declares illegal any "contract, combination . . . or conspiracy in restraint of trade or commerce among the several States." This provision is the primary statutory provision applied to agreements of joint action by the universities participating in college conferences.

Section 1 is a very broad prohibition against agreements between two or more separate economic actors. There are two limitations on Section 1: (1) it does not apply to unilateral conduct by a single entity; (2) while by its terms it appears to prohibit all contracts that restrain trade, in fact it only prohibits agreements that unreasonably restrain trade.

At a most basic level, Section 2 of the Sherman Act restricts roughly the same type of conduct declared illegal in Section 1. The primary distinction between Section 1 and Section 2 is that Section 2 restricts conduct by even a single entity when that entity seeks to achieve a monopolistic position in the relevant market and has a dangerous probability of succeeding.

Section 5 of the Federal Trade Commission Act prohibits "unfair methods of competition in or affecting commerce." However, Section 5 does not give rise to a private cause of action; the only party that may proceed under this section is the Federal Trade Commission. So, neither the Big East nor the individual member institutions can sue under this provision. However, if the FTC would decide to pursue a claim against the ACC because of the effect the expansion would have on college football "consumers," it would have very broad authority. The FTC has the power to define unfair competitive practices, even if the practice itself does not infringe the letter or the spirit of the antitrust law.

Stated differently, the FTC gets to define what is unfair and then litigate based on it. That is an advantage private parties do not have under the Sherman Act.

Many states have their own antitrust laws that mirror Sections 1 and 2 of the Sherman Act, but those likely would not apply here. There are also state FTC Acts and they are fairly divergent: some limit "unfair methods of competition" while others limit "deceptive practices." Likewise, states differ as to whom can enforce the provisions. Some states require that a designated office, like the Attorney General, prosecute the action, while other states provide a private cause of action for a person injured as a result of a violation of the statute.

Because the FTC allegations typically require governmental action, I will limit my antitrust focus to the Sherman Act. Here are some of the basic questions that need to be asked under Section 1:

Did the challenged conduct involve an agreement between parties?

In evaluating a Sherman Act Section 1 claim, there must be an agreement that restrains competition. Arguably, if UM, SU and BC elect to leave the Big East, there is evidence of collusion among the principle parties to limit competition in college football. The marketplace, in terms of television dollars among other things, is finite. Reduction of the number of schools sharing the television revenue increases the amount each remaining school will take home.

The reason the ACC hopes to strike gold in their next college football negotiation is not merely because their product will be improved with the addition of Miami. The ACC is also acutely aware that taking UM, SU and BC will eliminate its largest competitor on the East Coast for television revenues.

Was the agreement horizontal or vertical?

Vertical agreements are agreements between entities at different levels of the consumption chain, like manufacturers and sellers, or retailers and consumers. Horizontal agreements are agreements between entities at the same level of the chain; more generally, agreements between competitors. Vertical agreements are essential to the marketplace, but horizontal agreements rarely are and draw increased antitrust scrutiny from courts.

In this case, ACC expansion would, in my opinion, clearly constitute a horizontal agreement as it was an agreement among similarly situated college football programs seeking to increase their overall share of the college football economic market.

Is the complained of conduct per se illegal?

Certain activities, like price fixing or bid rigging, are per se illegal. Rarely in college sports are activities considered per se illegal, so my suspicion is any court hearing the case would evaluate the claim under the Rule of Reason, discussed below.

If the conduct is not per se illegal, it must be evaluated by analyzing the facts peculiar to the business, the history of the restraint and the reason why it was imposed (so-called "Rule of Reason" Analysis).

Under the Rule of Reason analysis, a court views the anticompetitive effects of the agreement to see if they exceed the procompetitive benefits in light of other, potentially less restrictive alternatives. Although the precise test under the Rule of Reason may differ in certain jurisdictions, the underlying rationale is static: namely, is the challenged conduct an unreasonable restraint of trade?

While it may seem obvious to Hokie fans that the anticompetitive effects of the challenged conduct are enormous, defense counsel in a potential lawsuit would likely point to certain cases, particularly NCAA v. Board of Regents of the Univ. of Okla., 468 U.S. 85 (1983) which arguably broadened the scope of procompetitive benefits that will be recognized under the Rule of Reason in an athletic setting. I do not necessarily agree with that interpretation, but it has frequently been used as a defense.

What about Section 2 of the Sherman Act?

Plaintiffs almost always allege Section 2 violations along with a Section 1 violation in case a court concludes there was no agreement between parties. In my opinion, it is unlikely any claims would be resolved under Section 2, but the basic analysis would require defining the relevant market, both geographically and in terms of product, and then demonstrating an intent to monopolize.

Could individual lawsuits be brought?

Potentially, individual lawsuits could be brought in this action. In 1993, after learning of substantial penalties levied against the University of Washington, five players (among others) sued the Pac-10 on antitrust grounds, alleging the purpose of the penalties was not to punish rules infractions, but rather to cripple UW�s ability to compete against the rest of their Pac 10 competitors. The district court concluded that the players did have grounds to sue, called standing, and therefore permitted the antitrust violation claims to survive a motion to dismiss. Although admittedly factually distinct, some of the same types of arguments could be made in a case against the ACC.

What makes individual lawsuits even more daunting in this context is that Section 4 of the Clayton Act permits the recovery of treble (three times actual) damages by a person who is injured because of a violation of the antitrust laws. Thus, individual antitrust claims can have a punitive component that would discourage expansion.

What about the possibility of stopping the schools from leaving altogether?

A lot of Big East officials are throwing out the term "irreparable harm" and it has a very specific legal meaning. In order to obtain injunctive relief stopping the three Big East schools from leaving, a plaintiff must demonstrate irreparable harm; mere monetary damages do not suffice to obtain injunctive relief. In the UW case mentioned above, the trial court held that the players had standing to attempt to obtain injunctive relief under the Clayton Antitrust Act. In contrast, a season ticket holder did not have standing to obtain injunctive relief because his only interest in the outcome was pecuniary and a monetary damage award could "fix" his grievance.

V.  Other Factors

There are other potential legal claims here, but perhaps more important than any of the foregoing analysis is the pragmatic aspect of these claims. From the perspective of the Big East, do you want to sue a counterpart bearing in mind hopes you may have for rebuilding the Big East and obtaining a BCS bid? Would presidents of the Big East agree to sue their own peers for claims? Would a president want their own conduct subject to such scrutiny?

From a Virginia Tech perspective, if the Hokies truly believe they will land on their feet, do you want to jeopardize say, an SEC membership by going through a nasty lawsuit with former colleagues in the Big East? Would VT�s time and resources be better spent trying to find a new conference affiliation or making the "new" Big East the best possible football conference?

From a Miami perspective, this is very high stakes poker. Some of the claims I have described likely would not survive an initial motion to dismiss/preliminary objection/demurrer, so they would never see a jury. Likewise, after discovery a number of the claims might be ripe for disposition at the summary judgment stage. However, I do think some of these claims are viable enough to get to a jury. Is Miami prepared to take that chance? It is a big risk.

Bear in mind that these cases could be brought up and down the East Coast, which would require a significant financial commitment to fight claims in "foreign" jurisdictions, and as a private university, Miami would have to fund their own legal defense. While undoubtedly UM has insurance contracts that would pick up some of the tab, there also may be certain policy exclusions that do not require coverage for certain claims. A policy might exclude: intentional torts such as interference with contractual relations; a claim against President Shalala when she acted outside the scope of her authority as a member of the Big East Board of Directors; or perhaps the policy excludes any claims that seek punitive or treble damages, in which case some of the antitrust claims may not be covered.

Likewise, the blue blood ACC has to look in the mirror. If this case would be litigated, I would immediately copy the ACC�s governing documents. I would regularly cite to the court any euphemistic provisions that discuss how the purpose of the league was to promote fair competition, encourage educational pursuits and prevent commercial exploitation of athletes. Is the pecuniary gain worth the continuing, and likely increased, scrutiny for a league that fancies itself the last "big time" bastion of academic integrity in college athletics?

I have not seen the documents, nor do I know the "facts," so I cannot provide any answers. However, it is safe to say that there are some very significant legal issues that may arise if UM, SU and BC leave for the ACC, and at the very least it should cause President Shalala and her merry band a sleepless night or two.

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