After reading the ACC’s lawsuit, which was filed Monday in Greensboro, N.C., Charles E. Dorkey, a partner at McKenna Long & Aldridge LLP in New York, said the ACC should be compensated for revenue lost over Maryland’s defection to the Big Ten, but may have trouble collecting the total amount because the payment it is seeking could be seen as punitive.
The ACC is seeking an exit fee amounting to three times the conference’s annual operating budget, which amounts to $52,266,342, the lawsuit says.
The lawsuit states that, in a September vote, a majority of the ACC’s university presidents concluded that “the sum of three times the annual operating budget of the ACC was a fair and reasonable approximation of the potential financial and other harm resulting from withdrawal.” Such payments sought to “provide some relief for the prospective and substantial harm caused by withdrawal.”
Maryland, however, will need to demonstrate that such payments are punitive, far exceeding any harm caused by its move to the Big Ten.
“Even if you made it three times Maryland’s contribution [to the ACC's coffers]. I think that’s still a hard case, but at least that’s an easier case to defend,” Dorkey said. “But three times the budget of everybody? That’s a lot of money. The [ACC's] defense will be, ‘The bylaw says it’s liquidated damages.’ You can use liquidated damages as a way of compensating the party whose rights were breached for their loss. You cannot use it for punishing the rights who breached.
“Maryland will argue that any reference to the budget makes it a penalty and does not reflect the actual damages of the ACC. What damages do they suffer? When Maryland leaves, the ACC doesn’t have a $17 million hole in their budget. There are other teams that pay money, other teams that get support, other games for people to watch on television. Just thinking out loud, maybe the better solution would be three times Maryland’s contribution to the ACC budget, averaged over the past five years.”
The crux of the ACC’s argument, Dorkey said, rests in the ACC Council of Presidents’ 10 to 2 vote, which passed the new exit fee into effect. University of Maryland President Wallace D. Loh was among the two dissenters, but “voluntarily consented to and participated, without objection, in the discussion and vote,” by which the ACC’s members “are bound,” the lawsuit says.
“The other side says we have a valid contract, it should be enforced,” Dorkey said.
An interesting wrinkle was thrown into the equation Wednesday, when the ACC’s presidents – minus Loh – unanimously voted to admit Louisville, which will replace Maryland. The Cardinals boast an illustrious basketball program and is currently ranked fifth nationally. Louisville’s football program has also enjoyed more success than Maryland’s in recent seasons and on Thursday clinched a BCS bowl berth with a win over Rutgers.
In a news conference introducing Louisville as the newest ACC member, Commissioner John Swofford said that bringing in the Cardinals does not affect the value of the ACC’s television deal with ESPN, a curious admission given that his conference’s case rests on proving that Maryland’s exit will cause “substantial harm.” The ACC’s “hook,” Dorkey said, is proving liquidated damages. Maryland’s will be proving that paying more than $52 million is punitive.
“The idea is not to have a penalty,” Dorkey said. “Parties should be free to enter and leave contracts without paying penalties. You’re not supposed to punish somebody for breaching it. You’re supposed to compensate the injured party for their loss. What Maryland’s going to argue [is], ‘This is way out of proportion to any loss suffered by the ACC.’ You lose a strong team in the conference, therefore attendance will go down, sell less hot dogs, less whatever. The ACC should be compensated for what it’s lost. But this is not designed to penalize.”
Dorkey, who has handled a number of complex commercial breach-of-contract cases, has seen situations like this settled in five minutes, while others drag on for months. The overwhelming majority of such civil cases, however, get settled. Maryland can be expected to pay some form of liquidated damages, Dorkey said, but not to the level being sought in the lawsuit.
“It seems to me, you leave the ACC, you understand the people you’re leaving behind, it’ll cost them something on some level, so you owe them on some level,” Dorkey said. “But we have freedom of contract, and you’re supposed to go wherever you want to go.”