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Mountain West Stable, For Now

The Mountain West appears to have won a large victory with the recent additions (or not losses if that’s how you choose to look at it) of Boise State and San Diego State.  That may in fact be the case.  However, there is also the possibility that in its quest for stabilization and increased stature, the Mountain West endangered itself by giving away crucial member equality in order to re-acquire Boise State.

Reports indicate the Mountain West has or will (among other things): 1) re-negotiate its television contract with CBS Sports Network which will allow teams on national television (i.e. Boise State) to make more money through bonuses, 2) sell Boise State’s home games in a separate package, and 3) allocate half of BCS (and future equivalent) bowl game revenue to the participating team (i.e. Boise State) before splitting it among the remaining conference members.

From the quotes of Big East commissioner Mike Aresco, it sounds as if Boise State wanted to stay in the Big East if it would match the Mountain West’s offer.  Smartly, Mr. Aresco and the remaining Big East schools’ (bonus points if you can name them) presidents said thanks, but no thanks.  In a time when it must feel like everything is crashing down around them, the Big East brass found a line they wouldn’t cross.  Good for them. Let’s face it, Boise State to the Big East wasn’t exactly the perfect mix of chocolate and peanut butter.  So for the Big East to grant unprecedented perks to a school 2,600 miles removed from the conference office didn’t make a whole lot of sense.  Navy Athletic Director Chet Gladchuck even went public with his disdain for the proposed deal, saying:

“What Boise State wanted was outrageous and unprecedented. It was not palatable to any of the other Big East institutions,” Gladchuk said. “In the final analysis, Boise wasn’t worth it. There is zero television interest in Boise along the Eastern seaboard. What it tells me is the Mountain West was desperate. Clearly, the Mountain West was willing to make whatever concessions necessary to keep Boise in the fold.”

But surely it made sense for the Mountain West to do whatever was necessary to bring Boise State back under its tent, right?  Maybe, maybe not.  The money grab that is conference realignment also has an undercurrent of trying to create and/or maintain stability and long-term viability.  As mentioned earlier, the Mountain West seems to have stabilized at 12 members.  But when gross member inequality is part of a league’s structure, there can be problems.

Example:  When the Big 12 was formed in the mid-90s, its structure was similar to how the Mountain West is currently proceeding.  Most notably, it did not share bowl and television revenue monies equally among the members.  Rather, the participating teams were first entitled to a larger share.  This obviously funneled most of the revenue toward the traditionally successful programs, and smaller amounts to everyone else. (Berry Tramel of The Oklahoman wrote about this structure in 2010.) As time passed the Big 12 and its membership experienced the difficulties of operating a conference successfully when there’s a sense that a few schools are driving the bus and collecting the checks, and the rest are just passengers along for the ride.  Ultimately, that and other issues led to the departure of 1/3rd of the Big 12’s schools (Nebraska, Colorado, Missouri, Texas A&M), and a near collapse of the conference entirely.

Whether the Big 12 leadership decided the original structure was a mistake, or that times had changed and therefore the structure needed to change with it, the powers that be agreed to a more (though not completely) equal distribution of revenue in the summer of 2011.  It also put a stake in the ground on stability by having each member grant its television rights to the conference for a long period of time (initially six years, but recently extended to 13), essentially removing the largest incentive to other conferences who may wish to come poaching in the future (the importance of this “grant of rights” was well articulated by Mat Winter in a BusinessofCollegeSports.com post last month).  I have not read or heard anything along the lines of Boise State or the other Mountain West schools making similar commitments.

So while the Big 12 (barely) escaped the inequality trap and the Big East has avoided it for now, the Mountain West may have fallen right in it.  Sure, Utah State and San Jose State are excited to be new members in a league which just got considerably stronger.  And the other Mountain West schools no doubt see the tremendous value Boise State brings to all of them.  But give those non-Boise State presidents and athletic directors a few years of conference meetings looking over financials, and watching the revenue flow into the conference and out to Boise State.  Give them a few years of conference meetings observing how decisions are made.

The camaraderie that exists today may not continue very long.  And without a grant-of-rights or similar level of commitment, Boise State is for all intents and purposes a perpetual free agent, available to accept the next best conference offer that comes along.  The Mountain West’s current and future members no doubt wanted to make decisions which ensured stability over the long-term.  And while the league certainly got immediately stronger with the addition of Boise State, it may be that the deal they made guarantees the long-term will be anything but stable.

Follow Daniel on Twitter: @DanielHare

Grants of Television Rights, Not Increased Exit Fees, Are The Solution To Realignment Frenzy

A number of Division I conferences have recently increased the fees a member school must pay when it withdraws from the conference.  These fees are commonly referred to as exit fees.  The ACC is one of the conferences that recently increased its exit fees.  And its exit fee provision has been receiving a lot of attention lately because of Maryland’s departure to the Big Ten.

The ACC actually increased its exit fees twice in the span of a year.  The ACC first upped the fees from around $12-14 million to $20 million in September 2011 when it announced it would add Syracuse and Pittsburgh.  The fees were then upped again this September after the conference added Notre Dame (in all sports except football and hockeyl).

The ACC’s current exit fee calls for a withdrawing member to pay an amount equal to three times the conference’s total operating budget at the time of withdrawal.  Based on the ACC’s 2012-13 operating budget, this equates to an exit fee of more than $52 million.  It is this amount that the ACC is seeking in its lawsuit against Maryland for the school’s move to the Big Ten.

When the ACC and other conferences increase their exit fees, the general thinking is that it further discourages members from leaving the conference.  But, because of how courts analyze the legality of these exit fee provisions, increasing the amount of the fee can actually increase the chances of the exit fee provision being deemed unenforceable.  So, instead of discouraging schools from leaving, it can actually embolden them to do so.

In legal terms, conference exit fees are known as liquidated damages.  Liquidated damages provisions are commonly added to contracts.  They set the amount a party to the contract must pay in the event it breaches the contract.  Liquidated damages provisions are useful because they theoretically save the parties the time and expense of litigating the amount of damages caused by the breach.

But, the amount of liquidated damages specified in a contract cannot be randomly selected.  Courts will generally only enforce liquidated damages provisions if (1) the anticipated damages in the event of a breach are difficult to ascertain at the time of contracting, and (2) the amount of liquidated damages is a reasonable estimate of the actual damages that would likely be caused by a breach.  If a liquidated damages provision does not meet this test it is deemed a penalty and is unenforceable.

Assuming that the ACC’s liquidated damages provision fulfills the first element of the test, it is questionable whether it would meet the second element.  The requirement to pay three times the conference’s operating budget does not appear to be related in any way to the actual amount of damages the ACC would suffer if a member withdraws.  It just seems like an easy way to ensure that the exit fee continues to grow without having to continually vote on it.  This makes it look like a penalty.

And the actual number that results from this provision, $52 million, is not a reasonable estimate of the ACC’s actual damages.  For example, Maryland’s departure will not result in the ACC’s tv deal being reduced by $52 million.  A good argument can be made that the ACC actually suffered no damage when Maryland left.  Maryland’s departure allowed the conference to add Louisville.  And the general consensus is that the ACC is now stronger athletically as a result (at least in the two sports that matter for tv revenue purposes, football and men’s basketball).

This is consistent with recent realignment history.  Over the past two years the Big 12 lost Nebraska, Colorado, Texas A&M, and Missouri.  Yet, after adding TCU and West Virginina, the Big 12 signed the most lucrative tv deal in the conference’s history this year. (The one exception to the no damage upon withdrawal argument would be the Big East.  The defections in that conference have definitely hurt the value of its tv rights).

When a liquidated damages provision is determined to be invalid, the party attempting to enforce the provision is allowed to instead seek its actual damages from the breaching party.  But, as discussed above, conferences often suffer minimal damage when a member withdraws, either because the member added little value to the conference or because the conference quickly replaces it with a new member of equal value (at least in tv executives’ eyes).

As a result, exit fees often leave conferences in a tough position.  They have to be high enough to discourage a member from leaving the conference.  But, if they are too high they could be declared an invalid penalty.  And, if the exit fees are invalid, the conference would then have to prove its actual damages, which are usually much less than the amount of the exit fee.  As a result, exit fee disputes have always settled without a court deciding the validity of the liquidated damages provision.  Recent examples include the Big 12 settling with Nebraska, Colorado, Texas A&M, and Missouri for less than the mandated amount of exit fees.

So, what is the solution to the problems with exit fees?  Grants of television broadcast rights.  In these agreements, all of the conference members grant their television broadcast rights to their athletic contests to the conference for a certain period of time.  If a member leaves the conference during that time, the conference retains the member’s television rights.  Because the value of a school to a conference is the television revenue it can help generate, a grant of rights agreement makes the members essentially worthless to another conference that is looking for new members.

While grant of rights agreements do have potential issues (sovereign immunity issues being the biggest), they are not subject to a subjective test like liquidated damages provisions.  Thus, they are much more likely to hold up in court as valid contracts.

Currently, only the members of the Big Ten, the Pac-12, and the Big 12 have executed grant of rights agreements.  Other conferences that want to ensure stable membership would be wise to insist on their members signing similar agreements.  (Yes, even the mighty SEC should have its members sign grants of rights).  If the ACC had one in place, Maryland likely would not be joining the Big Ten.