Sports and the Law: Don’t Cry Over Spilled Coffee; Schultz’s Sonics Sale Will Not Be Rescinded
For 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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Comments
Good read. Can you think of any way to get the Jets back to New York right now and stop the construction of the new training facility in Jersey? I hate having to go to Jersey to watch games and if the practices are there too, the Jets won't have any connection with New York or Hempstead.
"Sports and the Law" is about as useful on a series entitled "Transvestites and Careers in Supermodeling." Sure, some readers will be hyper interested (trannies, perverts, aspiring agents), but the vast majority of people either don't care or think less of the blog because of it.
replace "on a" with "as a" plz.
these posts are interesting, thank you marc
8:33- why the hate? Nobody put a gun to your head to force you to read beyond the jump, let alone to take the time to comment.
I have a hard time working up sympathy for cities and states that are stupid enough to give millions of taxpayer dollars to team owners, or owners who are stupid enough to leave a sustainable market like Seattle for the boonies of Oklahoma. Boo hoo.
8:33 -
You are either female or that really awkward kid from gym class who threw like a girl. 90% of men and at least some percentage of women will be interested in sports topics.
Now, please go back to sewing that sweater for your boyfriend.
And thanks Marc, the hetero (apparently minority) group here enjoys these articles.
Lat - How about the finishing the thread on bar expenses, etc.?
9:12 yes, it's true homophobe. gay men never like things having to do with balls.
Schultz at least has the right idea here. Seattle needs to lawyer up and try to throw a wrench in this thing. At least make it painful (read: expensive) for Clay Bennett, et. al., to run away w/your NBA franchise.
'Good faith' implies an effort to succeed. In this case there was clearly none. Interpretation of e-mails aside, Bennett's position was essentially: "Taxpayers, build me a $500,000,000 single-use arena, I'll keep all the profits from the games, parking, etc." The conditions under which Bennett and his group would agree to keep the Sonics in Seattle were clearly unreasonable -- no fiscally sane city could agree to them. I agree this suit is probably a loser, and almost certainly a cynical PR ploy by locally loathed Schultz, but I do wonder if any definition of 'good faith' could encompass Bennett's performance.
CHANGE YOUR FREAKIN CLIPART
90% of people may indeed be interested in sports topics... but unless it is an athelete of the day segment ( something along the lines of judge of the day) I'll get my news from ESPN. Also, this isn't a legal analysis blog. I don't care about the merits of anyones claim (unless it is an associate suing his firm for more money or better hours) I'll get that from any number of legal journals and things I read at work. If you want to write legal analysis write a law review article PROFESSOR!!!
Cities are stupid (or at least those members of their management that pay the ransom of pro franchises). The economics are always bad for the city. If a few man up and tell the teams to bite it, the numbers will come back in line.
What did you think was going to happen when you sell the team to a group from Oklahoma City? This is a lame PR move; Schultz doesn't care about the team, he cares about his coffee
What about the side letter that stipulated a 'best efforts' for one year to keep the team in Seattle? I think that document plays a part in this and I dont see any mention of it here in this analysis.
"This case seems like a clear loser for Schultz, unless, of course, he is able to benefit from a home court advantage (pun intended)."
Unless I'm totally missing something, that's not a pun. It's just a...sports reference.
Oh, or it's totally a pun and I'm stupid. In my defense, it's an awful pun.
The entire body of antitrust law is a joke. Everything depends on how you define the market. Yes, the Sonics have a monopoly on "National Basketball Association franchises that play in the Seattle metropolitan area." But if you expand the market to all professional sports, or even as far as "family entertainment", or anywhere in between, there is no monopoly at all. The only element of antitrust law that makes any sense is actual collusion.
And if people in Seattle really want an NBA franchise that badly, they should do what everyone has to do for what they want in a free market: pay up. But the citizens of Seattle want the best of all worlds - they want the product they want at the price they want, even though the people in Oklahoma City are willing to pay more, and are willing to go to court to go around the free market.
Sure it's unlikely Schultz succeeds - my deceased grandmother could've told you that without recounting the 9 elements of fraud under Washington law (and she was not a lawyer). Wouldn't comment on anything without having seen the contract, supposedly existing side letters and everything else. Absent that, digging up case law from 1910 is a waste.
2:30, in a free market, Bennett would build his Palace of Basketball and no one would grudge him 100% of the profits from it. But he wants tax money spent to build it -- he'll still take the profits though thnxkbai. Nothing remotely 'free market' about it. I'm sure he figured it was a no-lose -- either he gets the fans/suckers to go for it, or he gets to move the team to Oklahoma. (As an aside, I grew up in Seattle and I've been to Oklahoma -- I really do not understand the man.) He just happened to construct his trap in a city which had the same thing happen twice in the last decade-plus-a-little, three times if you count the last renovation of Key Arena (and people in Seattle emphatically DO)...and ran into taxpayers/voters with memories, and still steaming about it.
2:30--True, but the NBA also wants the best of all worlds--they want taxpayers to pay for their arenas because sports are more than just a business, but when it suits them to act like a business and pull up stakes, they'll do that too.
There is the issue of the side letter, Mr. Edelman, it would be interesting to see you address that--or does it not really matter whether it's a side letter or not, it's all part of the contract?
Actually, Oklahoma isn't paying more for the team. Last I checked, Bennett did not demand a 500 million dollar arena from them, as he did of Seattle.
Legally, its hard to define "good faith" but if anyone truly believes that current ownership has tried to keep the team in Seattle is wrong. One co-owner was fined last year for saying that the plan was to move the Sonics, the arena demands have been outrageous, and any attempt at compromise has been ignored or dismissed by ownership. How anyone could call their efforts "good faith" is beyond me, but I'm sure our legal system will find a way.
I wrote about this on my blog (East Coast Bias) today. I really wish we could get a copy of the contract.
http://www.east-coast-bias.com/2008/04/sonics-old-owner-tries-to-put-horse.html
Several posters (most recently 8:37) asked the question about how, if at all, my analysis would change given the presence of a side letter signed by the Oklahoma group promising to "honor the four-year lease in terms of the 2010 terms, and use ... best efforts over the next 12 months... to get something done." The most honest response that I can give is that I would need to see the side letter, as well as how, if at all, the side letter is referenced in the main contract. Does the original contract have an integration clause? Does the original letter reference the side letter? What exactly does the side letter say? Does the side letter make any statement about rescission? (As to the last point, I strongly presume the answer is "no" because if it were otherwise, Schultz surely would have mentioned this already).
Nevertheless, the main problem for Schultz, even if he can show breach based upon language in the side letter, remains whether the drastic remedy of rescission is appropriate. According to all media reports, Schultz is not asking for monetary damages, and is leaving the court with no choice other than to award full rescission (and unravel a consummated deal) or grant no reward at all.
If Schultz asked for monetary damages, this case would present the kind of situation where it would make little sense to make any predictions until all of the facts emerge. However, because he is asking for full rescission two years after consummating the deal, I am far less concerned with the factual subtleties, presuming the public quotes from the parties accurately present the big picture.
In short: rescinding a $350 million deal based on peripheral promises by a buyer, almost two full years after a buyer pays in full, is not a traditional remedy. And, this is true even before considering whether Schultz had clean hands in bringing this suit (a potential defense for discussion at another time).
We all know that Schulz is doing this solely to try and absolve himself from the blame he shares by selling the team to a group of out-of-town owners who were obviously going to move the team.
He's doing this solely to make people in Seattle not hate/blame him; and/or blame him less.
Despite your assertion to the contract, it appears to me that the legal tack that holds the most promise is the argument that fraud/misrepresentation by Bennett et al during the negotation of the agreement with Schultz to sell the team renders the contract invalid.
Given the demonstrated propensity by Bennett and his cronies for communicating openly with each other via email, there is a good chance that there exist smoking-gun emails exchanged between them prior to and during negotiations with Schultz to buy the Sonics, wherein they privately express their enthusiasm for moving the team to OKC, while simultaneously representing to Schultz that they have no intention to move the team (or something along those lines). Given actual and reasonable reliance, such misrepresentation would render the agreement to sell the team invalid.
Misrepresentation is ground for rescission, and since the contract is invalid, there is no need to touch the more difficult to prove issues of integration of the side letter, substantial performance, good-faith performance, whether rescission is an appropriate remedy, etc.
Of course it's hard to really say much more without knowing exactly what was said between parties during negotiations and what the contract says, but that appears to be the best legal avenue for Schultz's lawyers, provided such emails exist and can be propounded.
"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."
Re: the above, what of Schultz's substantially damaged reputation in his home town and place of business (where the Sonics value is dwarfed by Starbucks). Sure, his suit is based in part as explained by 1:12am. However, his reputation damage is substantial, arguably more than the proceeds received. Perhaps the primary promise relates to the best efforts aspect to protect Schultz's reputation. Granted, it's in a side letter, but that letter is indicative of the state of mind of importance at the time, as well as the contemporaneous recorded comments of Schultz upon announcing the sale where this point was greatly emphasized. It's an argument.
Folks are quite dismissive of Schultz's suit. I wouldn't be so quick. This will tie up Bennett for some time, and it has viability. Further, Schultz can amend it to inflict pain at strategic points in the case. Finally, the REAL value lies not in what the judge will rule than the uncertainty to Bennett (and the NBA) that he could lose. Let's remember that very few cases reach a verdict. Bennett and the NBA can't afford the trial for their own reputations, the total cost (time hurts Bennett as he's losing $35M/yr in Seattle), and lack of upside. This one will get the parties to the table for real now. My prediction...look for a settlement...
P.S. Yes this blog is legally fairly geeky (welcome to the law); however, props to you, Marc :)
My question is that does anything change now since it has been disclosed this morning that the "Good faith and best effort for 12 months while honoring the 4 year lease" clause was actually written into the terms of sale contract that PCB(Bennett's group) signed? The side letter was just an additional thing but the actual clause was written into the contract.
"This will tie up Bennett for some time..."
That's not for certain. A judge must first issue injunctive relief to Schultz requiring the Sonics to remain in OKC while the suit is pending. Based upon the fact that the case is unlikely to succeed, I doubt such an injunction will issue.
Well, when I say some time, i certainly don't mean years. It will be painful to Bennett and the NBA in that discovery will be drawn out. Bennett may be able to move the team prior to conclusion of Schultz's claim, but the NBA requires the lease issue to be settled before he can move. The City's case is strong to hold him to the 2 remaining years. No injunction necessary for Schultz on his side. And the City and Schultz will play off each other's discovery to their mutual benefit, I'm sure. For instance, why wouldn't the City file a separate suit against Bennett under the same claim as Schultz as a 3rd party beneficiary? If I were scorching somebody's earth, I'd think about it...
The above the law. com is suspiciously close to the NBA headquarters. 3.5 miles away... Did Stern come over personally and ask you to post this joke of an analysis? Or is he a contributor to your propaganda arm?
If Schultz wins will you quit your day jobs? I hope so. Clown Shoes....
Although the lawsuit by Schultz seems to indicate that the sales contract includes a promise to make a "good faith best effort" attempt to get a new arena constructed, I do not see how it could also include a requirement that the Sonics "honor the four-year lease in terms of the 2010 terms" based on the following interview. Schultz clearly talks about a lease buyout, which would imply that he accepts the fact that it could occur. Secondly, he also states that ,"If they leave, and I don't think they will, the burden of that is not on Clay Bennett, the burden of that is on local and state officials." Rather cavalier discussion of the possibility of the team leaving, considering the interview occurred within days of the sale of the team.
http://a1135.g.akamai.net/f/1135/18227/1h/cchannel.download.akamai.com/18227/podcast/SEATTLE-WA/KJR-AM/Howard%20Schultz%20in%202006.mp3?CPROG=PCAST&MARKET=SEATTLE-WA&NG_FORMAT=sports&SITE_ID=645&STATION_ID=KJR-AM&PCAST_AUTHOR=Mitch_In_The_Morning&PCAST_CAT=Entertainment&PCAST_TITLE=Mitch_In_The_Morning_OnDemand
http://www.king5.com/sharedcontent/northwest/pdf/4-Lawrence-exhibits3.pdf
Here's the link to the sales contract. It's the last document