The Washington Nationals had a turbulent 2015: vastly underperforming expectations by missing the playoffs, enduring clubhouse strife, firing their manager, losing several key contributors to free agency, and getting spurned by high-profile free agents. But the Nationals suffered another important defeat this offseason, one that might have a more lasting impact.
As you may know, the Nationals and Baltimore Orioles have been engaged in a long-standing dispute over television rights fees through Mid-Atlantic Sports Network (MASN), the exclusive local broadcast network of both teams. The Orioles own a 90 percent interest in MASN, whose broadcast rights were conferred as part of the relocation of the Montreal Expos to Washington. The agreement set the value of the Nationals’ television rights for 2006-2011 and provided that the Orioles, Nationals and MASN must negotiate in good faith to determine the amount of the Nationals’ rights fee after the 2011 season for the next five seasons. Not surprisingly, in 2012 the parties could not reach an agreement and the dispute went to arbitration in front of MLB’s three-member Revenue Sharing Definitions Committee (RSDC).
Though the hearing took place in April 2012, the RSDC Panel did not render a decision until June 30, 2014, in an apparent attempt to encourage the parties to settle. In the interim the Nationals were forced to play multiple seasons while receiving local television revenue well below fair market value as determined by the panel (not to mention the value the Nationals might receive on the open market with its own network). When the RSDC Panel finally disclosed its award, it set the rights fee for the 2012 season at approximately $53 million with built-in annual increases, a figure in between the parties’ submissions.
The Orioles, unsatisfied with the result of the arbitration, filed a lawsuit in New York state court requesting the court stay enforcement of the arbitration and overturn the panel’s decision. After initially granting the stay of enforcement, a New York state court vacated the arbitration on November 4, 2015, finding that the arbitration was not sufficiently neutral. Specifically, the court determined that the Nationals’ retention of the Proskauer Rose law firm as counsel constituted “evident partiality” because the firm had often served as counsel to MLB and several franchises. In fact, Proskauer acted as counsel in other matters for the Pirates, Rays and Mets, whose owners made up the three members of the RSDC Panel. But as is generally the case in hotly contested legal disputes, this decision is far from the end of the matter.
There are a number of interesting aspects of this decision, the first being that the court was willing to vacate the arbitration. A federal or state court overturning an arbitration award is quite rare (some studies peg the rate at which arbitrations are upheld at around 90 percent). The Supreme Court has consistently demonstrated a strong preference for arbitration, so much so that generally arbitrations can only be nullified by the courts for fraud or severe structural and procedural unfairness. A decision that is “wrong” or “incorrect” is almost always upheld in court provided that the process was fair.
But the court made a series of other findings likely to be relevant in further proceedings: 1) that there was no fraud or conspiracy by MLB in favor of the Nationals, 2) that the RSDC applied a reasonable methodology that was sufficiently supported in determining the size of the award, 3) that there was no misconduct by MLB in providing support to the arbitration, including the involvement of now Commissioner Rob Manfred; and 4) that a $25 million loan from MLB to the Nationals to advance the difference in televisions rights fees did not defeat the panel’s impartiality.
While the court’s decision was at times scathing for the “utter lack of concern for fairness of the proceeding,” the most important takeaway from the decision is that the dispute is likely to continue for the foreseeable future. Because federal and state courts prefer arbitration to lawsuits that proceed in court, the court itself will not step in to adjudicate the issue even when it finds fault with an arbitration proceeding. In fact, the court here found that it lacked the authority to even determine where the next arbitration should take place. So after years of delay, a full arbitration, and more than a year of court filings, the parties are back to where they started: in need of arbitration to settle the issue.
Both sides have been active since the decision. The Orioles and MASN both filed notice of appeals despite the fact that, at least on the surface, their motion to nullify the arbitration was granted. The appeal challenges several of the trial court’s findings, most significantly arguing that the trial court should have ordered a new arbitration in front of an independent panel. Not to be outdone, both MLB and the Nationals have filed a cross-appeal, arguing that the trial court was clearly erroneous in vacating the arbitration for partiality. The cross-appeals are likely to drag out at least another year, if not longer.
The Nationals, recognizing this reality, petitioned the court on January 21st to force the Orioles and MASN back to the RSDC for a new arbitration. In their papers, the Nationals explain that they have remedied the “evident partiality” by hiring different arbitration counsel. As the court did not find that the RSDC was disqualified or that the ruling was contrary to settled law, the Nationals (and MLB) believe that the arbitration should begin anew in front of the same panel. The submission also lays out, in a detailed footnote that may be of interest to fans of both teams, the many benefits the Orioles received in the original agreement—although the fact that the Nationals may have made a “bad deal” does nothing to strengthen their position here. The Orioles and MASN are due to respond to this motion on February 16th.
That the process is likely to continue to drag out is certainly a hit to the Nationals in the short term, but the decision could end up positive in the long run. Should the court grant the Nationals’ motion to send the arbitration back to MLB, one would expect a favorable ruling for the Nationals, given that the arbitration panel’s calculations were effectively sanctioned by the court. It is also helpful that MLB’s recent settlement in the Garber case maintains the status quo for local television agreements. In fact, a new arbitration may even grant higher annual rights fees to the Nationals, given that the Nationals argued their rights were worth approximately $120 million per year (and the cable bubble, to the extent one exists, has yet to burst). The Orioles and MASN are sure to oppose the motion to compel a new arbitration, and may request the appellate court to stay any arbitration through MLB. One would also expect the Orioles and MASN to challenge any new arbitration award in court as they did for the first arbitration. This will quite possibly take multiple years to settle still, and in the meantime the Nationals lose access to tens of millions of dollars that they would probably otherwise be receiving.
The Nationals first important contest of 2016 will not be on Opening Day but instead play out in New York state court. After 2015, they could use a big win.
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This was designed to be a long term revenue source to Angelos that declined over time. The O's get about 1.7x the worth of a TV contract here, benefitting from the Nationals' success over the last few years and a massive uptick in MASN ratings, while the Nationals fail to benefit from their hard work and success in player development.
Essentially, the Nats' success enabled the Orioles to overpay for Chris Davis!
The Orioles' offer for the Nationals TV rights is embarrassingly low; they are simply working the process to take full advantage. The courts are the only way to fix these problems. And Angelos seizes on every technicality to delay and reduce the value of the Nationals franchise.