Opinion ID: 480588
Heading Depth: 2
Heading Rank: 1

Heading: The District Court's Calculation of Damages

Text: The district court found: 97 By their unlawful conduct, defendants precluded plaintiff IBI from acquiring the Chicago NBA franchise in the summer of 1972 and from enjoying the anticipated economic benefits of owning and operating that business. Rather, certain of the defendants have had the opportunity to enjoy and exploit the very same business over the past ten years. 98 Fishman v. Estate of Wirtz, 594 F.Supp. 853, 858 (N.D.Ill.1984) (Damages Opinion). 22 Since CPSC had acquired and operated the very same business sought by IBI, the district court found it just and reasonable to calculate plaintiff IBI's damages according to the yardstick of CPSC's actual financial experience from 1972 until 1982. It supported that decision with two findings: (1) IBI and CPSC had similar investment objectives for the Bulls; and (2) the financial success of the Bulls during the relevant ten years was not attributable to any skill or resources contributed to the business by CPSC. Id. at 859. We will outline the steps that the district court took in calculating IBI's damages and then will discuss the objections raised to both its methodology and results, both by defendants and by IBI in its cross-appeal. 99 The district court started with the proposition: 100 The financial benefits specifically realized by CPSC flowed (i) from the increasing going concern value of the business and (ii) from the cash generated from operation. These are the same sources that NBA owners generally attempt to exploit and are the sources IBI specifically intended to exploit. 101 Id. at 861. 23 Thus, the court determined that IBI should receive as damages its lost financial gain, which could be computed by determining the net value of CPSC's assets on May 31, 1982 (i.e., the fair market or going-concern value of the assets minus all liabilities) and then subtracting the net contributions made to CPSC by its shareholders. This yardstick figure would then be adjusted by a series of predictable differences in value attributable to IBI rather than CPSC ownership to determine a hypothetical total financial gain for IBI. 102 The first and most difficult step was to determine the fair market value of the Chicago Bulls franchise in 1982. This was accomplished by looking at recent sales prices of comparable NBA franchises. 24 The plaintiffs and defendants disagreed as to how the sales price of a professional sports franchise should be computed. A common way to pay for a professional sports team is to tender cash and notes and also assume the liabilities of the franchise. The district court agreed with the plaintiffs that assumed liabilities properly comprise part of the price of a franchise. 25 But it did not adopt the plaintiffs' proposed valuation method in its entirety because one class of assumed liability--liability for deferred compensation--would create problems in valuing the comparable teams: 103 The problem with plaintiffs' approach is not in their inclusion of deferred compensation in assessing the sale price of the assets of the comparable teams. Rather, it is an assumption that those asset values can be used directly to compute the value of the assets of the Bulls. The Bulls have their own unique structure of player contracts. Those player contracts undoubtedly will be of shorter duration and for lower dollar amounts than those of some NBA teams and will be of longer duration and for higher dollar amounts than other teams. The player contract assets of the teams, therefore, are not comparable. 104 The problem arising out of the incomparability of player contracts of otherwise reasonably comparable teams can be solved by simply eliminating deferred compensation entirely from all computations of the sales price of the comparables. In addition, the Bulls' actual deferred compensation will not be deducted from our valuation of the Bulls' assets to determine the Bulls' net market value. 105 Id. at 863-64 (emphasis in original). Central to this hybrid method of valuation was the district court's assumption that the relative length or brevity of a team's player contracts does not influence the fair market value of a team: 106 Team ownership does not become more attractive the more player contracts a team has and the more it is obligated to pay for them. The accounting worth of a team is not enhanced by simply adding equal amounts of assets and liabilities to its balance sheet. Teams with longer term, higher dollar player contracts will have a higher value on their balance sheets for their basketball assets, but not a higher net worth. 107 A team can, of course, either increase or decrease its market worth by entering into player contracts. It increases its net worth by making good deals, i.e., negotiating contracts which set player compensation low relative to their incremental contribution to the team[']s revenue so that the contracts add to the team's profitability. Conversely, a franchise can decrease its market worth by making bad deals. 108 Id. at 863 n. 9. Since the district court would later in the damages calculation subtract CPSC's actual liabilities (since IBI, in fact, assumed no liabilities at all), it elected to omit liabilities for deferred compensation assumed by the buyers in the comparable NBA transactions from the comparable fair market value and then not subtract those actual liabilities for deferred compensation. The district court thus found an approximate fair market value (not including liabilities assumed for deferred compensation) for five NBA franchise transactions that it deemed comparable to a 1982 sale of the Bulls. 109 Armed with this indicator of a comparable fair market value, the district court then examined a number of other factors [b]ecause of the limited number of transactions, the less than perfect comparability of [other] clubs to the Bulls, and the advent of developments subsequent to some of the comparable transactions, id. at 873, and ultimately adjusted the Bulls' value upward to account for developments in pay television and the construction of the Rosemont Horizon (which gave the Bulls greater choice in arena sites than many other teams). It adjusted the Bulls' value downward to account for changes in the tax laws applicable to professional sports franchises and for changes in the NBA free agency rules. At this point, the district court had an approximate fair market value of $11.5 million for CPSC's basketball assets (i.e., the Bulls franchise) as of May 31, 1982. To this it added the undisputed value of CPSC's non-basketball assets for a total CPSC asset value of $12,667,602. 110 The court then subtracted all of CPSC's liabilities (with, for the reasons stated above, the exception of its liabilities for deferred compensation) in order to account for the fact that IBI never in fact assumed any liabilities. This left it with a net value of $10,812,090 for CPSC's assets. To determine the total gain realized by CPSC as a result of its ownership of the Bulls, the court next deducted the $4,310,000 that CPSC's shareholders had invested in the franchise; thus, the total gain realized by CPSC was $6,502,090. Finally, this figure was adjusted to reflect predictable differences between IBI's hypothetical costs in owning and operating the Bulls and those of CPSC. This included the $1,190,281 that CPSC had incurred in defending this and related lawsuits and the $50,000 difference between CPSC's and IBI's offers for the franchise. It declined to adjust the total gain to reflect the purportedly higher interest rate that defendants argued IBI would have had to pay on funds borrowed to purchase the Bulls and operate the team from 1972 to 1982. The district court did, however, deduct $3.6 million from the total gain to reflect the opportunity cost associated with IBI's hypothetical equity contributions, that is, that part of the purchase price and initial working capital that IBI would have funded by equity instead of debt. The rationale behind this opportunity cost deduction was that[h]ad IBI acquired the Bulls, it would have incurred operating losses which it would have funded through equity obtained from its shareholders. Because IBI was prevented from acquiring the Bulls, it did not have to fund these losses with equity contributions. IBI, therefore, would have had the use of the funds contributed by the shareholders. If the court did not deduct for opportunity cost, IBI's damages would be inflated by the court's prior conclusion that IBI would have funded operating losses through equity rather than debt, even though IBI had realized the benefits of use of that same equity for other purposes. This would put IBI in a better position than it would have been in had it acquired the team. 111 Id. at 879. This opportunity cost was computed by multiplying the amount of equity invested annually by IBI or its shareholders by the period of time invested, and applying an applicable opportunity cost compound interest rate. Here, the district court used the rate of return on the most nearly riskfree security on the market, id., the three-month treasury bill. 112 Following these adjustments, the court concluded that IBI's hypothetical gain from ten years of Bulls ownership--thus, also IBI's actual damages from having been deprived of the Bulls--was $4,142,371. Upon a motion to amend, 26 it revised this finding of actual damages to $4,692,238. 113 Pursuant to section 4 of the Clayton Act, 15 U.S.C. Sec. 15 (1982), these actual damages were trebled and the $750,000 that IBI had received in settlement from the NBA defendants, see supra note 6, was deducted after trebling. Judgment on the antitrust counts was entered in the amount of $13,326,734, with all defendants jointly and severally liable. IBI was also awarded costs and attorneys' fees, under section 4, and post-judgment interest. 114 The district court also found that defendants' violation of Illinois law injured IBI in the amount of $4,692,238. It entered judgment against all defendants, jointly and severally, in the amount of $3,942,238 ($4,692,238 less the $750,000 NBA settlement). It also entered judgment for punitive damages, $2 million against the estate of Arthur Wirtz (who had died during the litigation), $2 million against Lester Crown and $500,000 against William Wirtz. 115 The antitrust and tort judgments were expressly entered in the alternative. IBI could only execute on one award of damages or the other, but not both. Further, the district court declined to exercise its discretion under Illinois law to award the Bulls franchise to IBI as restitution in lieu of money damages. 116