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Sports and the Law: Don’t Cry Over Spilled Coffee; Schultz’s Sonics Sale Will Not Be Rescinded

Wednesday, April 16, 2008 7:50 AM - By Marc Edelman

Sports and the Law 3 Above the Law blog.jpgFor several years, Starbucks chairman and CEO Howard Schultz threatened to move or sell the Seattle SuperSonics, unless the city of Seattle increased his share of arena revenues. Then, on July 18, 2006, Schultz lived up to his word, selling the Sonics to an ownership group based in Oklahoma City, OK. Yesterday, however, Schultz — mired in bad PR from selling the Sonics — announced plans to sue the Oklahoma-based purchasers to get the team back, arguing that even though the ownership group fully paid Schultz his requested $350 million sale price, the new owners breached the purchase agreement by failing to make a “good-faith effort” to keep the team in Seattle as they promised to do in the sale agreement. This case seems like a clear loser for Schultz, unless, of course, he is able to benefit from a home court advantage (pun intended).

Setting Schultz’s claims aside for a moment, it is easy to feel bad for Seattle basketball fans. The NBA, as well as other premier American sports leagues, enjoys a monopoly over the supply of teams in their given sport. By limiting the number of teams, these leagues are able to drive up the price a city must pay to host a franchise. Not only does this strategy reduce the number of available teams below the amount that would otherwise be sustainable in a competitive market, but it also gives team owners the power to switch host cities whenever their facility demands are denied. As a result of this monopoly power, in 1995, the city of Seattle had to shell out $672 million in new stadium expenses just to keep the Mariners and Seahawks from moving. Unwilling to go in that route again, the city refused to give into demands of both Schultz and the new ownership group, and as a result, Seattle likely just lost the Sonics to another city. Indeed, these problems are endemic to American sports, given Congress’s failure to address the excessive bargaining power of American sports leagues (pdf).

Discussion continues, after the jump.

Nevertheless, even if keeping the Sonics in Seattle would benefit public welfare, Schultz’s proposed lawsuit to rescind a contract on which he was paid two years ago falls severely short in its legal merit. Although certain emails seem to indicate that the Sonics’ new ownership group may have been privately planning to move the team to Oklahoma City from the very beginning of negotiations, this behavior alone does not likely provide grounds for complete rescission of a sale-of-franchise contract for lack of a “good faith effort.” Not only is the issue of what constitutes “good faith” under this sort of clause vague, but, even more importantly, the doctrine of “substantial performance” states that performance is considered complete once the essential and material obligation is accomplished, and any shortfall from full performance thereafter is compensable only by monetary damages. The essential obligation of the new Sonics ownership group was simply to pay Schultz the full purchase price for the team, and the new ownership did that, paying a premium to boot. Under Washington state law, “if more than one promise is made [in a contract], each promise does not have to be substantially performed. Overall, substantial performance is sufficient.” Mortimer v. Dirks, 57 Wash. 402, 107 P. 184 (1910). In other words, breach of a secondary promise not vital to the core of the contract itself is insufficient to rescind the contract in full.

Although one way potentially around the doctrine of substantial performance may involve bringing a separate claim based on fraudulent inducement, a fraud claim under Washington law similarly is a nonstarter. Under Washington law, Schultz would have to show convincing evidence of “(1) a representation of existing fact, (2) that is material, (3) and false, (4) the speaker knows of its falsity, (5) intent to induce another to act, (6) ignorance of its falsity by the listener, (7) the latter’s reliance on the truth of the representation, (8) his right to rely on it, and (9) consequent damage.” Pedersen v. Bibioff, 64 Wash. App. 710, 723 n. 10 (1992). Even without knowing all of the facts, proving element nos. 2, 3, 4, 6, and 7 each would likely present some difficulty for Schultz.

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Marc Edelman is an attorney, business consultant, published author and professor, whose focus is on the fields of sports business and law. You can read his full bio by clicking here, and you can reach him by email by clicking here.

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