The Confidential

Exit Fees and Liquidated Damages

Many people are confident that the ACC will be able to enforce its exit fee against Maryland.  Many people are confident that the ACC will not be able to enforce its exit fee against Maryland.  Regardless of which side is correct, it is important to understand the issue.

Most helpful to a non-lawyer is this recent article from the businessofcollegesports.com.  The article provides a great layman’s understanding of something called liquidated damages:

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.

The ACC’s current exit fee is not $50,000,000.  Instead, as the article notes, the ACC’s exit fee is “three times the conference’s total operating budget at the time of withdrawal.”  As for Maryland, this means the amount is roughly $52M.

Where the Confidential differs is the analysis of whether the exit fees satisfy (1) and (2).  The author does not seem to question (1).  Indeed, how exactly does one quantify the damages where a founding member of a conference leaves?  With all the conference realignment discussion, people talk about TV revenue.  But what about the unquantifiable damage to a conference when it is perceived to be unstable?  When there are daily rumors regarding this or that member leaving?  When there are discussions about whether the conference will cease to exist.  When schools like Wake Forest have, really, no other option at all in the conference realignment scenario.  Where it is questionable whether Pitt, BC, Syracuse, and other schools are certain to have a landing spot.  Does ESPN want to renegotiate now, when it might have to renegotiate in two weeks if two schools leave?  Do kids want to play for a school that may go from “ACC,” as it is currently thought of,” to its current weakened position in comparison to other conferences?  If UVA and Georgia Tech leave the ACC, what does that do for Florida State’s academic reputation?  How can you quantify these things?

You cannot.  Which is where exit fees come from.  Instead of trying to figure that all out, you agree on a number ahead of time.

As for (2), the article states “that [t]he 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.”  Liquidated damages clauses often just state a sum certain.  The ACC provision is actually tethered to something that relates to the size and wealth of the ACC at the time a member departs.  If the ACC grows and becomes even more successful, it has more to lose.  If the ACC contracts, it has less to lose and the liquidated damages (exit fees) decrease.  Moreover, the schools have a say in the conference’s operating budget.  If the schools want the conference to scale back operations, they can do so.

Perhaps the ACC could have tied its exit fees to TV revenue.  But this excludes the damage to the ACC’s name.  Is there any question that swapping Louisville for Maryland is a loss with respect to academics, cohesion, and the appearance of the ACC?  The ACC has been damaged beyond anything that can be measured in TV revenue.  The ACC is perceived to be on life support, forcing Presidents to make statements regarding rumors, etc.  Maybe a more reasonable number would be 1 or 2 or 1.5 times the operating budget, but the operating budget is a conservative measure to calculate damages.

Moreover, people analyzing this situation speak in terms of “black and white.”  Lawyers, at least good ones, know that life (and the law) are not black and white.  As the litigation moves forward, the parties will likely have a sense as to where the judge is leaning on legal issues.  Will the judge allow the jury to resolve the question of whether the exit fee is reasonable?  Will the judge decide it as a matter of law? On an issue like this, the judge is likely to defer a definitive ruling and give the parties a chance to settle based on an expectation of what these rulings would be.  In the meantime, nobody should presume that a certain result is inevitable.  It is doubtful that there will even be a result.  Someone will blink.