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September2012Volume85Number9
Sep 2012ArchiveIssueArticles
TopicsView All TopicsBusiness/CorporateSports/Entertainment
Sports and the Law: A National Niche and a Baseball Deal to RememberBeneath America's favorite pastime lives a complex legal and business world. With insight from sports industry lawyers Mary K. Braza and Kevin Schulz, follow the purchase of the Los Angeles Dodgers for a record $2.15 billion – a deal they helped bring about – and the rise to prominence of Foley & Lardner in sports law.Joe ForwardEmailPrintSaveComments (0)FacebookTweetlinkedInGoogle+
In late April 2012, Milwaukee attorney Kevin Schulz had a week of frenzied days and sleepless nights in Los Angeles, working with a team of lawyers to meet a short deadline: purchase of the Los Angeles Dodgers for a record $2.15 billion. The work completed, the mergers and acquisitions attorney made his way to L.A. International Airport, heading home to Milwaukee as the client, Guggenheim Baseball Management L.P. – led by Mark Walter, Stan Kasten, and Earvin (Magic) Johnson – became the biggest spender in sports history.
Back in the Milwaukee office of Foley & Lardner LLP, Schulz discussed the historic deal with Milwaukee lawyer Mary K. Braza, cochair of Foley's sports industry team. The two had worked on big sports deals before – including the purchase of the Chicago Cubs in 2009 ($845 million) and the Texas Rangers in 2010 ($593 million) – but this deal had been more complicated in a number of ways. For starters, then-Dodgers owners Jamie and Frank McCourt were submerged in lengthy and bitter divorce proceedings, which had implications for the deal. Second, battles in bankruptcy court, largely relating to local telecast rights, had to unfold before the Dodgers could be sold at auction. Finally, unlike some deals that can take upwards of a year to transpire, this one closed within only a few months of announcement of the Dodgers' sale.
"I remember walking away thinking I was just part of something pretty significant," said Schulz, a Foley partner who worked on the commercial transactions. "It's pretty cool to be a sports fan and then have an opportunity to help develop the inner workings of a sports deal like this."
Underneath America's favorite pastime lies a complex legal and business world. With insight from local sports industry lawyers, this article tracks the Dodgers transaction, as well as Foley's rise to national prominence in sports law. It also highlights underlying rules of baseball, including the Major League Baseball Commissioner's authority under the Major League Constitution.
Baseball's Best Interest Includes Dodgers Sale
Major League Baseball (MLB) is an unincorporated association of 30 professional baseball teams, divided into two leagues with three divisions in each league. The Major League Constitution, originally adopted in 1921, constitutes an agreement between the league and its teams.1 It establishes a commissioner, who governs MLB as its chief executive officer.2 Milwaukee's own Allan "Bud" Selig, who formerly owned the Milwaukee Brewers and served as the club's president, has served as the MLB commissioner for the past 20 years.3
The commissioner has the power to act "in the best interests of baseball."4 Thus, the commissioner has authority to investigate acts, transactions, or practices considered "not in the best interests of baseball."5 Like a judge, the commissioner can summon individuals, order document production, and impose preventive, remedial, or punitive sanctions deemed appropriate.6 The commissioner may also adopt regulations in the best interests of baseball.7
Kenesaw Mountain Landis, a federal judge, was baseball's first commissioner and permanently banned "Shoeless" Joe Jackson and seven other Chicago White Sox players from baseball for fixing the 1919 World Series.8 Another commissioner, A. Bartlett Giamatti, banned 17-time all-star Pete Rose from baseball on Aug. 23, 1989, for gambling. Rose was accused of betting on MLB games, including ones involving the Cincinnati Reds, while he was the Reds' manager. Coincidentally, Giamatti died of a massive heart attack one week later.9
In April 2011, Selig invoked the best interests power to seize control of the Dodgers' daily operations, an unprecedented measure.10 Frank McCourt, who acquired wealth by investing in Boston real estate, was entrenched in an expensive divorce from Jamie McCourt.11 Frank McCourt had purchased the Dodgers, Dodger Stadium, and surrounding real estate for $420 million in 2004, and Jamie (a lawyer, and the Dodgers' former chief executive officer) claimed half ownership of the team.12 Selig questioned the club's financial viability. In a press release, Selig said the action was necessary to address "deep concerns regarding the finances and operations of the Dodgers and to protect the best interests of the Club, its great fans and all of Major League Baseball."13
A commissioner's decisions are difficult to challenge. For one, they are final and unappealable.14 The clubs agree to refrain from litigation between or among themselves, or with MLB entities, including the commissioner.15 Clubs "severally agree to be finally and unappealably bound" by the commissioner's decisions and "waive a right of recourse to the courts."16 Historically, challenges to the commissioner's best interests authority have failed.17
In June 2011, Selig again invoked his best interests power to nix a potential 17-year telecast deal between Frank McCourt and television broadcaster Fox Sports West 2 – which is under contract with the Dodgers until 2013 – worth a reported $3 billion.18 Under the proposed renewal, McCourt would receive an up-front payment of $385 million, which he desperately needed to keep the Dodgers solvent and pay expensive players like Manny Ramirez.19 However, nearly half the $385 million would be diverted to pay McCourt's personal debts, including legal fees to attorneys.20
Pro Baseball Players and Managers Who Graduated from Law School
Tony La Russa (Florida State University Law School)
Led the St. Louis Cardinals to the 2006 and 2011 World Series titles
Was once quoted as saying: "Law school didn't teach me how to hit the ball or how to run or how to pitch. But, because of law school, I see the game playing out in front of me on the field in a very different way. My legal training taught me to put myself in our opponents' dugout. Law school taught me how to analyze and how to best deal with a specific situation. ... The best degree a baseball manager can get is a J.D. The law degree taught me how to study, how to think, and how to implement and develop a strategy."
Branch Rickey (University of Michigan Law School)
Founder of baseball's farm system
As an executive, signed Jackie Robinson in 1945
Inducted to Hall of Fame in 1967
Miller Huggins (University of Cincinnati Law School)
Led New York Yankees to six pennants and three World Series titles
Inducted to Hall of Fame in 1964
Hughie Jennings (Cornell University Law School)
Star shortstop for Baltimore Orioles
Managed 16 seasons
Inducted to Hall of Fame in 1945
John Montgomery "Monte" Ward (Columbia University Law School)
Organized baseball's first players union
Pitched an 18-inning, complete game shutout in 1882
Sources: Baseball Almanac, http://www.baseball-almanac.com/; National Baseball Hall of Fame, http://baseballhall.org/hall-famers.
In a statement, Selig concluded that the "proposed transaction with Fox would not be in the best interests of the Los Angeles Dodgers franchise, the game of baseball and the millions of loyal fans of this historic club."21 That same month, the Dodgers filed for bankruptcy protection.
"When the team went into bankruptcy, there was early speculation that the Dodgers would be sold by McCourt, or forced to be sold by MLB," Braza said. "We started to talk with people who were interested in buying the team. They came to us because we had experience in purchasing sports franchises, and we eventually took on a relationship with the Guggenheim group."
In November 2011, Frank McCourt agreed to sell the Dodgers through a court-supervised auction. He reached an agreement with Jamie McCourt to pay her $131 million upon the sale. With a concentration of sports industry lawyers in place, Foley's due diligence would soon begin.
The Rise of a Sports Industry Practice
When the Milwaukee Brewers took center stage in the 1982 World Series, Braza, originally from Ithaca, New York, had just started working for Foley's litigation group in Milwaukee. Her mentor was Robert DuPuy, a Foley partner and the Brewers' outside legal counsel. In 1989, MLB asked DuPuy to serve as outside legal counsel. After four years, Bud Selig hired DuPuy as MLB's chief legal officer, a position he held until October 2010, when he left MLB and returned to Foley as a partner in the firm's New York office.
"I came in because Bob was a mentor," said Braza, a litigator who helped MLB defend its exemption from state antitrust laws in Major League Baseball v. Crist.22 "I got into MLB matters that Bob was working on, and when MLB hired him, he involved us in these new commercial ventures. I went through a lot of growth professionally as I expanded my litigation practice into new aspects of the sports industry that I didn't even know existed."
As DuPuy passed the torch to Braza and Jim McKeown, an antitrust specialist, MLB was developing MLB Advanced Media (MLBAM), which launched in 2000. The company houses digital assets and run MLB.com, delivering live audio and video Internet streaming and real-time baseball information. MLB clubs grant Internet rights to MLBAM, now a lucrative arm of baseball's business.23 Braza provides legal representation to MLB and MLBAM, with the assistance of sports industry lawyers from different Foley practice areas.
"Shortly after MLB put the two leagues into one entity in 1998, it allowed the teams to combine their Internet rights and to start their own technology company to run Internet activities," Braza said. "It has really exploded. MLB has become a frontrunner in delivering online content."
In ensuing years, Braza and her Foley partners continued to recognize increasing opportunities in the sports industry. Foley's Milwaukee office represents the Brewers and the Green Bay Packers but wanted to expand its sports industry work beyond the borders of Wisconsin and MLB. Professional sports leagues and teams were expanding beyond mere presentation of games with ticketing, merchandise, and concession revenues. The "game" was changing. The firm saw a national sports industry need for different kinds of sophisticated legal services.
"We had lawyers all over the country working for sports clients, but no official practice group. In 2002, we developed a national, cross-disciplinary team of lawyers, people from various substantive areas in both transactions and litigation," Braza said. "It made a whole lot of sense to connect local lawyers with the resources to offer full-service legal work in the sports industry."
As Braza and the sports industry group sought new frontiers, it was perfect timing for Schulz. He was a Foley summer associate in 1998 and worked on some corporate legal matters for the Brewers. After joining the firm in 1999, he helped the Brewers and Green Bay Packers with sponsorship agreements and local television and radio agreements, among other matters.
"Then a few years later, the Brewers went up for sale," Schulz said.
In 2005, Mark Attanasio, who went to Columbia Law School, purchased the Brewers for an estimated $223 million. Foley represented the sellers, led by the Selig family, which had owned the Brewers since 1970.24 "I had been doing mostly commercial transactions and M&A work, so I was a natural fit for this deal," Schulz said. "This was a turning point for me and the firm."
More Online ...
Looking at the sports pages differently
Foley & Lardner attorneys Mary K. Braza and Kevin Schulz talk about their involvement in the sports law industry, the roles of lawyers in big sports transactions, how their firm built a nationwide sports practice, and their favorite teams. View the video with this article online only at www.wisbar.org/sportslaw.
After the Brewers transaction, big sports team spenders sought Foley's representation, including the Ricketts family, which purchased the Chicago Cubs in 2009 for $845 million. "The Ricketts family approached a lawyer in our Chicago office and said they were interested in the Cubs," Braza said. "I got a call, and from there, we put together a team to work on it."
At the time, the Cubs transaction closed as the biggest deal in baseball to date, and the third biggest deal in sports, surpassed only by the National Football League's Miami Dolphins ($1.1 billion purchase in 2009) and English soccer's Manchester United ($1.47 billion purchase in 2005). After the Cubs deal closed, Nolan Ryan's investment group approached Foley's team to help with purchase of the Texas Rangers in 2010 for $593 million. The Rangers made consecutive World Series appearances in 2010 and 2011 and signed a long-term telecast deal worth a reported $1.6 billion.25 Foley's Milwaukee lawyers also worked on the sale of a significant minority interest in the NFL's Cincinnati Bengals in 2011. Other Foley offices helped secure deals such as a purchase of the NFL's Jacksonville Jaguars this year for $770 million.
With these large transactions under its belt, Foley's sports industry team (nearly 60 lawyers in 11 offices across the country) was ready to tackle another mega-deal.
Led by Braza's counterpart in Washington, D.C., Irwin Raij (the other cochair of the sports industry team), Foley's lawyers began discussions with Guggenheim's ownership group to make a winning bid for the Dodgers. The biggest tasks: due diligence to facilitate Guggenheim's valuation analysis and strategic counsel.
"Most people who get into ownership of a sports team do not have a history in the business of sports. They've made their wealth in other industries," Braza said. "So they don't know what these transactions will look like, how the team is valued. In addition, many prospective buyers want this as a unique, long-term investment, a legacy to be continued by their children. After these initial discussions, we'll start bringing in lawyers to deliver expertise on the details."
In January 2012, Foley's lawyers began reviewing tax implications, player and stadium contracts, sponsorship agreements, employee benefits, public financing, and real estate issues, among others. Whereas litigation zones are often called "war rooms," lawyers filled virtual "data rooms," reviewing details about the Dodgers' assets, liabilities, and potential opportunities.
Because the costs of yearly operation can be unpredictable, potential owners seek new revenue opportunities. Right now, baseball broadcasting and media rights are particularly valuable. Under the MLB Constitution, clubs have a right to authorize radio and, by means of over-the-air, cable, and satellite technology, the telecasting of games in "home television territories."26
For instance, the Brewers contracted with Fox Sports Wisconsin to telecast a minimum of 150 games per season, and those broadcasts are restricted to the Brewers' defined market.27 In contrast, the National Football League reserves broadcasting rights to the league, and redistributes profits evenly among its 32 teams, including the Packers. MLB also has contracts with national broadcasters, such as Fox, which hold broadcasting rights to certain games, including the All-Star Game, the playoffs, and the World Series.
Teams such as the New York Yankees and the Boston Red Sox have started their own networks, retaining the broadcasting rights while reaping the big revenue rewards. In turn, these teams can sign the big money players.28 After 2013, the new Dodgers owner could do the same, or let broadcasters compete for broadcasting rights.29 Indeed, Frank McCourt's telecast renewal attempt with Fox Sports West 2 was estimated to be worth $3 billion. Braza said Los Angeles is a hot spot for broadcasting, sharing a large telecast territory of southern California with the Los Angeles Angels of Anaheim, which in January acquired former St. Louis Cardinals slugger and Brewer nemesis Albert Pujols in a monster deal worth $240 million.30
"This was a unique opportunity," said Braza. "It was driven in part by the potential to enter a broadcasting deal in the next year or two. Already, Los Angeles is a great baseball city geographically, but then you add a potentially lucrative broadcasting transaction to the mix."
After an auction in New York, Frank McCourt announced Guggenheim Baseball Management as the winning bidder on March 27.31 The bankruptcy court approved the transaction, which would allow McCourt to exit bankruptcy and pay all creditors.32 He set a closing date of April 30, which coincided with the payment date for $131 million he owed his ex-wife under an agreement.33
Joe Forward, St. Louis Univ. 2010, is the legal writer for the State Bar of Wisconsin. He covers and reports court decisions, legislative actions, and other legal developments related to the practice of law. Forward was a sports reporter and editor for newspapers in Wisconsin and Oregon before attending law school. He can be reached at org jforward wisbar wisbar jforward org.
Schulz packed his bags for California, the final stage of a tumultuous and historic transaction in sports. On May 1, Frank McCourt transferred his ownership to Guggenheim Baseball Management in exchange for $2.15 billion.34 Braza and Schulz said the clients benefitted from Foley's ability to field a national, cross-disciplinary team with sports industry experience. Foley's prior experiences with the Brewers, the Cubs, and the Rangers, among others, allowed it to quickly assess the prospects for a new ownership group and provide the legal services to close the deal.
"League rules create additional twists in sports deals," Schulz said. "Transactions involving manufacturers are not the same as transactions in Major League Baseball. Our team was able to bring this unique experience to the table. This was a deal to remember."
1 Major League Constitution (MLC), art. I.
2 Id. at art. II.
3 Selig served as the "interim" commissioner from 1992 to 1998, the year he was elected permanent commissioner by a unanimous vote of the MLB club owners.
4 MLC, art. II, § 2(b).
6 Id. § 2(b)-(c).
7 Id. art. XI, § 3.
8 See Ted Curtis, In the Best Interests of the Game: The Authority of the Commissioner of Major League Baseball, 5 Seton Hall J. Sports L., 5-8 (1995).
9 Id. at 29.
10 ESPNLA.com, Bud Selig says MLB will run Dodgers, April 21, 2011.
11 Kim Masters, California's most expensive divorce?, thedailybeast.com, April 9, 2010.
12 Carla Hall, A baseball love story veers off the base paths, L.A. Times, Aug. 23, 2010.
13 MLB.com, Press Release, MLB statement regarding the Dodgers, April 20, 2011.
14 MLC art. VI, § 1.
15 Id. § 2.
17 See Curtis, supra note 8, at 5-33.
18 Ken Gurnick & Barry M. Bloom, Commish: TV deal not in Dodgers' best interests, MLB.com, June 20, 2011.
19 Even Brunell, McCourt must pay Ramirez $8.33 million by June 30, CBSsports.com, June 13, 2011.
20 Gurnick & Bloom, supra note 18.
21 L.A. Times, MLB statement on Dodgers-Fox TV deal, June 20, 2011.
22 331 F.3d 1177 (11th Cir. 2003)
23 Jorge L. Ortiz, MLB's advanced media arm pulls in profits, USA Today, Dec. 5, 2007.
24 Espn.com, Selig has run team since 1970, Jan. 19, 2004.
25 Bob Nightengale, TV deals for Angels, Rangers open door for other teams, USA Today, Feb. 10, 2010.
26 MLC, art. X, § 3(a)(b).
27 Bob Wolfley, Fox Sports Wisconsin to televise 150 Brewers regular-season games, Feb. 23, 2012; Don Walker, Brewers, FS Wisconsin have a new TV deal, April 30, 2009.
28 Tom Van Riper, TV money is a game changer for baseball and the Dodgers, Forbes Mag., April 2012.
29 LATimes.com, Dodgers settle with Fox, ending battle over TV rights sale, Jan. 10, 2012.
30 ESPNLA.com, Albert Pujols' contract completed, Jan. 5, 2012.
31 L.A. Dodgers, Press Release, Dodgers and Frank McCourt announce agreement with Guggenheim Baseball Management, March 27, 2012.
32 CNN.com, Bankruptcy court approves sale of Los Angeles Dodgers, April 14, 2012.
33 ESPNLA.com, Dodgers say case still on track, April 6, 2012.
34 ESPNLA.com, Sale of Dodgers finalized, May 2, 2012. Wisconsin LawyerEmailPrintSaveComments (0)FacebookTweetlinkedInGoogle+