No Fat Lady Yet: Tidbits from the Balsillie/NHL Ruling

Not Yet Needed in a Phoenix Courtroom

I spent some time this morning (on my coffee break, relax everybody) looking at what Judge Redfield T. Baum had to say about the Phoenix Coyotes bankruptcy proceedings (Odin Mercer at Five for Howling has posted a link to a copy of Judge Baum’s ruling.)

Much will be made of this ruling – and properly so – as a huge victory for those intent on keeping the Coyotes in Phoenix (including the Coyotes’ fans, the NHL and one Gary Bettman).  Any result that has the effect of delaying an auction and preserving – however temporarily – the status quo concerning relocation rights, transfer fees and the NHL’s procedures in respect of these matters has to be seen as a loss for Balsillie’s side.  This is so for many reasons, not the least of which is that Balsillie has lost the advantage of surprise at this point;  with the status quo preserved and the relocation train stuck in the station, the NHL has gained an opportunity to organize a competing ownership proposal, one that addresses the league’s concerns and (you can bet your sweet ass) does precious little boat rocking in terms of territorial rights, franchise relocation, etc.

My initial sense, though, upon going through this ruling, is that the victory is far from complete for the NHL forces.  In particular, it seems likely to me that:

1. The drama is far from played out in Phoenix as a result of this ruling; and
2. Lawyers for MLSE will be sitting Brian Burke and the Directors down and giving them some unwelcome news:  specifically, they’ll be telling the Leafs’ brass that it probably won’t be long before they have neighbours of one variety or another.

The NHL can’t reject Jim Balsillie as an owner.

As to the first point, regarding the change of ownership issue alone (i.e. transfer of the team to Balsillie’s company PSE, absent any consideration of the league’s geographic restrictions essentially requiring the Coyotes to stay in Phoenix), Judge Baum has ruled as follows (at p.8 of the ruling):

Significant to the court here regarding the objection to the transfer of ownership of the Phoenix Coyotes is the fact that in 2006 the NHL approved PSE [a holding company controlled by Balsillie] to become a member of the NHL.  The court has the firm sense that if the only issue here was PSE purchasing the Phoenix Coyotes [no relocation term] there would be no objection from the NHL.  The law implies in every contract a covenant of good faith and fair dealing.  Even when one party retains, by virtue of the contract, a right of approval or disapproval or a discretionary power over the right of the other, such powers must be exercised within the parameters of the duty of good faith (citation omitted)…Absent some showing by the NHL that there have been material changes in PSE’s circumstances since 2006, it appears to the court that the NHL can not object or withhold its consent to PSE becoming the controlling owner of the Phoenix Coyotes.  Therefore and based upon this record, the court concludes that the NHL can not declare a default solely due to the change in ownership terms of the APA.

This would seem to be a very powerful signal from the court that Balsillie can’t be rejected in good faith by the NHL as an owner, provided that he comes up with an offer for the team that otherwise would conform with the bankruptcy code.  As I see it, in this portion of his ruling, the judge has signalled that the race is on – he’s telling the NHL to get its alleged competing bidders together and get them to the table with their best offers, because Mr. Balsillie – if he wants to – can buy this team.  The judge is telling the NHL, “You can’t say Mr. Balsillie is an unacceptable owner.  You’ve already accepted him in principle into your club.”

What’s the big deal about that, you might ask; Balsillie wants a team in Hamilton, not a team in Phoenix. If he can’t move the team, he won’t want to buy it, right?  Well, maybe – but maybe not.

It’s far from certain that Balsillie (or any other owner) can’t unilaterally move the team.

To understand the significance of this part of the ruling fully requires a more in-depth examination of the judge’s reasons.

According to Judge Baum, PSE/Balsillie’s motion sought to have the court approve the sale of the Coyotes assets “free and clear” of certain geographic limitations in the NHL’s membership agreements.  The idea advanced by the Balsillie group was that section 363 of the Bankruptcy Code permitted the court to essentially release the Coyotes from compliance with league membership terms that would restrict the movement of the franchise because provisions in the membership agreements violate antitrust law.  Judge Baum discusses the results in previous relocation/antitrust pro sports cases, including a couple of cases involving the Oakland/L.A. Raiders and one case involving the L.A./San Diego Clippers.  Judge Baum points to certain propositions of law emanating from these cases that he says are “important” in the context of the Coyotes case.  In relation to the Raiders matters, he says (at p. 12) that:

(1) it is a difficult task to analyze the negative and positive effects of a business practice in an industry [i.e. professional sports] which does not readily fit into the antitrust context; (2) collective action in areas such as league divisions, scheduling and rules must be allowed, as should other activity that aids in producing the most marketable product attainable; (3) the unique structure of the NFL product precludes the application of the per se antitrust rule; and (4) to withstand antitrust scrutiny, restrictions on team movement must be closely tailored to serve the needs inherent in producing the NFL product.

Turning to the Clippers case, he adds (at p. 13) that:

…for the purposes of antitrust claims, professional sports league franchise movement restrictions are not invalid as a matter of law.  Second, the question of what restraints are reasonable is one of fact (citation omitted).  Third, the mere existence of terms and conditions for franchise relocations cannot violate antitrust law.

The judge then (at p.13) applies these lessons from the case law as follows (and here is where the rubber really starts to meet the road):

With this brief but important overview of applicable antitrust law regarding the effect of restrictions on team’s relocations, the court turns to the assertions by the Debtors [ed. note: that’s the Coyotes] and PSE [Balsillie].  They argue that there is either applicable nonbankruptcy law (antitrust case law) which permits this sale under Section 363(f)(1) or there exists a bona fide dispute under Section 363(f)(4) either or both of which allows the sale and relocation of the hockey franchise to Ontario, Canada free and clear of the claims of the NHL.

The judge first considers whether the 363(f)(4) exception is operative in this case, i.e. whether there is a “bona fide dispute” about the antitrust provisions.  He points out that merely filing a lawsuit isn’t sufficient to establish the existence of such a dispute and says that previous case law requires the court to determine “whether there is an objective basis for either a factual or a legal dispute as to the validity of the claim.”  He refers to precedents in which a bona fide dispute has been found to have existed and says (at p.14) that he doesn’t yet have enough information to determine the issue because there isn’t enough of a history between Balsillie and the league on the issue of relocating the Coyotes:

By comparison with the situation here, there is no factual or legal history for the court to analyze…  Until the antitrust action was filed on May 7th [ed. note: 2 days after the team was petitioned into bankruptcy and purportedly sold to Balsillie], the record is barren of any assertion by the Debtors, PSE or anyone else that there were any antitrust issues or claims…It is also significant to this court that a relocation application was first filed with the NHL by the Debtors/PSE only after this court’s comments during the May 19th hearing relating to the fact that the parties had not asked the NHL for approval and the importance of actually making such request based upon the decisions [in the Raiders case and one other matter]…A significant portion of the briefs, declarations and arguments by the Debtors and PSE is the claim that under the “as applied” standard in the antitrust cases the actions of the NHL violate antitrust law.  The fundamental problem with those assertions is that the NHL has never made any decision about the relocation of the Phoenix Coyotes to any site, be it Ontario, Canada or anywhere else, i.e. the NHL has not yet applied its relocation requirements to this request.

In other words, the Court says that there isn’t (yet?) a historical record upon which the court can adjudicate the issue before it;  specifically, in the absence of a request for relocation from PSE and in the absence of an answer to that request generated by the NHL’s own internal mechanisms, the court has no basis upon which to find that the league is applying its requirements in such a way as to violate antitrust law.   The court doesn’t say that the NHL is entitled to reject that request at its sole discretion.

In the same paragraph, the court points out (p. 14) that “it is uncertain that applicable nonbankruptcy law, here antitrust law, permits this sale.”  The victory for the NHL here is that the judge has found that franchise relocation restrictions are not, per se, a violation of antitrust law entitling Balsillie and the Coyotes to escape their effect;  importantly, however, the court has left open the question of whether the league’s relocation rules are being fairly, properly and legally applied to any request by the Coyotes (or any other team, for that matter) to move.

A Veto Ain’t What it Used to Be in the NHL

Encouragement for Balsillie’s camp (and southern Ontario hockey fans starving for more local teams) may not be immediately evident to everyone in this latter ruling, but there is some reason to believe that Judge Baum’s ruling suggests that the league can’t indefinitely protect the Maple Leafs’ monopoly position in what is believed to be an excellent hockey market.   Why is this so?  Stick with me, the explanation gets a wee bit involved.

As noted above, it appears that in making his ruling, Judge Baum is adhering to the rationale of the Raiders case, as modified by the Clippers case.  In Raiders, the NFL’s franchise relocation restrictions were found to be anti-competitive (hence, unenforceable).  Here’s what the authors of International Sports Law and Business (Aaron N. Wise and Bruce S. Meyer) have to say (at p. 31) about the Raiders case:

[The Raiders was] a case arising out of the NFL’s Oakland Raiders’ attempt to move to Los Angeles.  The Raiders filed an antitrust suit after the NFL blocked its move.  The NFL’s rule required that the NFL teams unanimously approve any such move (later amended to require a three-quarters vote).  A trial was held on the legality of the NFL’s franchise movement restrictions, which resulted in a jury verdict in favor of the Raiders.

On appeal, the Ninth Circuit upheld the verdict…

…the court found that the ban on franchise movement was anticompetitive in that it perpetuated local monopolies, that is, in the present case, by protecting the NFL’s Los Angeles Reams from competition from another team in Los Angeles (citation omitted).   The Raiders’ move to Los Angeles would create, not eliminate, competition.  The court found no procompetitive benefits to the NFL’s ban, noting that “ruinous competition” was not a defense (citation omitted).

The NFL argued that territorial restrictions were “ancillary restraints” inherent in an agreement among joint venturers and necessary to promote stability and fan loyalty.  The court agreed that some territorial restrictions were necessary but felt that the same goals could be achieved in less anticompetitive ways.  In particular, and of great importance, the court noted that the NFL’s rule provided no objective standards or durational limits and no procedures.  The court noted that the market itself would deter unwise moves (citation omitted).  There was no showing as to how the Raiders’ move to Los Angeles would harm the NFL.

The requirement for “durational limits” on territorial restrictions in particular ought to interest any franchise owner curious about sampling the fruits of the southern Ontario professional hockey market.  It also ought to send chills down the spine of every MLSE director;  the monopoly is being threatened.

The subsequent Clippers case modified the result in Raiders in a significant way by essentially requiring a trial of the issues where anticompetitive behaviour is alleged in the context of professional sports franchise relocation restrictions.  According to the authors of  the same book, the Clippers wanted to move from San Diego to Los Angeles and filed a motion for something called “summary judgment” in an action where they alleged the NBA’s relocation restrictions were anticompetitive;  in essence, the Clippers tried to get the court to dismiss the NBA’s defence of its rules without hearing evidence, arguing that as a matter of law they were entitled to the result sought.  Referring again to International Sports Law and Business (at p. 32), the court found that:

Raiders had just held that a reasonable jury could have found that the NFL’s rule violated the antitrust laws.  The court did not interpret Raiders to be laying down an absolute ban on rules limiting franchise movement.  Nor did Raiders set forth a requirement that a franchise movement rule take into account objective factors.  Any such rule presented issues of fact relating to purpose, effect and relevant markets.  Thus, the NBA’s rule could not be summarily dismissed without a trial (citation omitted).

It would seem, therefore, that Judge Baum has indicated that he finds persuasive reasoning on these issues that contemplates (from Raiders):

1. “durational limits” on territorial restrictions;
2. limits that can be demonstrated to be necessary for the protection of certain markets; and
3. limits that are subject to exemption via certain defined procedures.

The league and the Maple Leafs ought to be concerned about whether the existing league rules would measure up to examination by Judge Baum – a system in which the Leafs enjoyed or exercised a perpetual veto over the relocation of a franchise within their territory for example – rather than a system that attempted to measure the economic impact upon the team of such a relocation, then compensate them accordingly – seems unlikely to pass muster with the court.  Moreover, the reasoning in the Clippers case, as well as the judge’s repeated insistence that allegations of anti-competitive behaviour are inherently fact-driven, suggest very strongly that a trial – rather than a quick and easy ruling based on argument from counsel – of any such allegations would be required to resolve a dispute between the Coyotes and the league.  Since trials are expensive, very public and typically drawn-out procedures, it is unlikely that the cost-conscious, intensely private NHL would have any appetite to wage a protracted and destabilizing (in Phoenix and elsewhere) war.  The only way to avoid such a trial would be to settle the inevitable antitrust action (by offering Balsillie or the aggrieved owner what he wants for a fee), or else prevent the issue from arising in the first place by exploiting the southern Ontario market opportunity by expansion – essentially a pre-emptive effort by the league to capture the market (and the associated expansion revenues) before a destabilized team (such as Phoenix) could build the necessary record required to legitimize relocation.

The bottom line here is that Judge Baum’s ruling suggests very strongly that neither the NHL nor the Maple Leafs can restrict access to a market opportunity in southern Ontario in perpetuity.  If the league chooses not to sell an expansion opportunity in that market, it may be just a matter of time before Jim Balsillie (or some other owner of a a financially troubled franchise) can legitimately press the case to the court that they have been inappropriately (and illegally) prevented from exploiting that opportunity.

I would suggest that Judge Baum’s ruling creates at least as much uncertainty in relation to the Coyotes’ situation as it resolves:  we know now that there won’t be an auction for the team on the 22nd of June, and we know that Jim Balsillie’s offer to purchase the Coyotes as presently constituted won’t be accepted by the court.

The war is far from over,  though.  The team remains in bankruptcy.  Balsillie’s offer remains as the only expression of concrete interest in the Coyotes advanced to date.  Balsillie himself would seem to have received the approval of the court as an NHL owner, notwithstanding the league’s apparent wishes to exclude him.  Finally, there remains a significant amount of uncertainty as to whether the league’s franchise relocation rules would survive judicial examination in the context of antitrust litigation.   Far from clearly rejecting Mr. Balsillie, it seems to me that the judge has attempted to muddy the legal waters surrounding the ownership of the Coyotes to such an extent as to virtually require the parties to reach a negotiated (or mediated) resolution to their differences.  The court has essentially indicated that – at a certain point – the issue of control over exploitation of an excellent opportunity in a given market boils down to a matter of compensation, which is to say “money”.  Preventing the Coyotes or any other team from exploiting a lucrative opportunity might lead to a significant damages award in view of the high-dollar value of the market from which competition is being excluded (southern Ontario).  In those circumstances, Balsillie might be tempted to continue to pursue the team and begin an elaborate game of chicken with the league:  if the team continues to lose money in Phoenix and he makes a request to move it to southern Ontario, the league has to either approve that request or risk having its relocation rules subjected to a prolonged costly (and likely victorious) public attack in court.

The lease is the thing.

What about the arena lease, though?  Is Balsillie (or anyone else) likely to buy the team and try to move it in view of the arena deal?

In 2001, the City of Glendale entered into an agreement with the Coyotes by which the Team is required to play all of its home games at the new arena built by the City through 2035.  The City has the right to require “specific performance” of the lease (which means that the City can require that the Coyotes fulfill the precise obligations upon them under the contract (rather than settling for damages).  In the event that specific performance is impossible “liquidated damages” were set, by the contract, at almost $795 million, subject to adjustments based on the revenues recouped by the City from taxes and fees surrounding the development over the term of the agreement (i.e. essentially a set fee for breaking the contract, adjusted downwards by the amount of cash recovered by the city over time).

Balsillie and PSE sought to have the lease provisions essentially set aside by the bankruptcy court.  Glendale argued that the bankruptcy court could not do this, owing to the right of  “specific performance” subsisting in their deal with the Coyotes.  Glendale also argued that its interests would be damaged by acceptance of Balsillie’s offer so disproportionately as to outweigh any benefit provided by the proposal by way of repayment of the Coyotes’ creditors.

The Court declined to decide the point, but again sprinkled some uncertainty around in (I would suggest) an effort to encourage negotiated resolution of this issue.   Judge Baum points out (at p. 16 of the decision) that the case law on the “specific performance” issue is unclear.  He also casts considerable doubt on the viability of Glendale’s “disproportionate effect” argument by pointing out that Glendale’s claim against the Coyotes may well be capped (see p. 17), enhancing the recovery enjoyed by creditors.  He also points out that while Glendale did an excellent job adducing evidence about the damage the City would suffer if the team departed, they made a “minimal showing regarding the other side of the equation i.e. the benefit to the general creditors” (see p. 17) – essentially, he’s pointing out that Glendale has attempted to sweep under the carpet very real considerations that would weigh against ruling in the City’s favour.

Here again, the judge has cautioned all those involved not to assume the correctness of their position;  he is strongly encouraging the City of Glendale to re-evaluate its exposure to the risk of failure in litigation.  Again, he is (I would suggest) attempting to stimulate discussion among the parties about a negotiated result.  The Court has said to the City, “Your specific performance term may be worthless, leaving you with a claim for liquidated damages that might be capped at something less than the $795 million amount specified in the agreement.  Behave accordingly.”

In the end, the Court has declined to express an opinion about the status of the Glendale lease.  It may be a boat anchor securing the Coyotes to sail the seas of desert hockey for years to come, but it may also be unenforceable.  Leaving open all of the possibilities means that the Coyotes remain a potentially attractive asset for buyers such as Mr. Balsillie who are motivated to get the team out of Phoenix.

Let me ‘splain:  No, is too much.  I sum up instead.

1. The judge would likely not be persuaded by arguments that Balsillie is an acceptable owner;
2. It is far from clear that the team can’t (ever) move unilaterally;
3. The Glendale lease isn’t necessarily the type of boat anchor it was designed to be;
4. Balsillie’s offer remains the only concrete expression of interest in the team to date; and
5. The final ingredient of it all – Balsillie’s motion was dismissed “without prejudice”, meaning he is free to present another proposal to the court for approval.

At the end of the day, Judge Baum has decreed that the current proposal won’t work;  he has, however, set the table for further action on this asset.

As far as the Leafs are concerned, it seems more and more likely that  – whether by relocation of a financially troubled franchise or through a pre-emptive league expansion (to ensure that all owners reap a share of the proceeds from the entry fee into that market) – the day is coming when the Leafs will have to deal with a nosy neighbour popping in to borrow a cup of sugar.