When Baseball, Television and Arbitration Collide
Last month, in Matter of TCR Sports Broadcast Holding v. WN Partner et. al. (2023 Slip Op. 02090 [April 25, 2023]), the New York State Court of Appeals ended a nine-year battle in the New York State Courts between the Washington Nationals and the Baltimore Orioles concerning their respective rights to profits and fees earned from telecasting games.
The dispute caught the public’s attention because it is a story about our nation’s beloved sport of baseball and our ability to watch games, even when we cannot be in the ballpark. Interest in baseball is probably one of the reasons you are reading this article. Interest in baseball is certainly one of the reasons why I am writing it. Full disclosure, I am married to a lifelong Baltimore Orioles fan.
Beyond baseball, however, this recent Court of Appeals decision is legally important because it concerns many principals underlying arbitration. The overwhelming takeaway from the case is that, with narrow exceptions, what you agree to is what you get from your arbitration agreement.
Briefly, the underlying dispute arose from MLB’s decision to acquire and relocate the Montreal Expos to Washington DC and rename the team the Washington Nationals. The Orioles objected because the two teams would occupy the same geographic market and the presence of another team would financially hurt the Orioles. This dispute was settled by a 2005 agreement signed by the Orioles, its broadcaster TCR Sports (TCR), the Nationals and Major League Baseball (MLB).
The agreement contains an arbitration provision which would be invoked if the teams were unable to agree on the value of certain future telecast rights.
Under the agreement, TCR became a two-team regional sports network known as Mid-Atlantic Sports Network (MASN). Both teams would have an ownership interest in MASN. The respective percentage ownership interests were expressly set forth in the agreement and while the percentages changed over time, the Orioles always retained the majority interest.
This difference in ownership and its consequent unequal sharing in profits was intended to compensate the Orioles for any monetary loss suffered due to the National’s relocation. MASN was obligated to pay each team annual fees for the right to telecast their games.
Profits were then distributed in accordance with each team’s respective percentage ownership interest in MASN. The annual fees paid during the initial years of the agreement were expressly set. The agreement then contemplated that, at certain designated times in the future, the teams would recalculate the value of the telecast fees for an ensuing five-year period.
The recalculated value would become the annual fee paid during that five-year period. If the parties could not mutually set the new annual fee, the agreement set forth an alternative dispute resolution procedure, with arbitration as the final step.
The agreement designated the Revenue Sharing Definitions Committee (RSDC) as the arbitrator charged with determining the value of the telecast rights. The RSDC is a part of MLB. It is a standing committee of MLB, charged, in part, with analyzing telecast agreements to find MLB’s compliance with revenue sharing. The RSDC is composed, at any one time and on a rotating basis, of representatives from three different MLB teams.
In 2011, when the first five-year reevaluation was to be made, the parties could not reach agreement on value. It is not difficult to understand why, given that the agreement incentivized the Orioles to claim increased profits and decreased value of telecast rights, while at the same time it incentivized the Nationals to claim increased value of telecast rights and decreased profits. The differing positions on value eventually triggered arbitration under the agreement.
What seemed like a straightforward, single-issue arbitration regarding valuation turned into multiyear battle, involving two arbitrations, two dispositive decisions from the New York State Supreme Court concerning the validity of arbitration awards, two decisions by the Appellate Division, First Department and a recent decision from the New York Court of Appeals, which reviewed the decisions of all the other courts.
The key issues in court were: [1] whether there was evident partiality by the arbitrators sufficient to vacate the awards, and [2] whether the court has the power to order that a new arbitration take place before independent arbitrators, in contravention of the designated arbitrators in the parties’ agreement.
The first arbitration panel preliminarily determined that the value of the telecast rights was $53 million in 2012, increasing to $67 million in 2016. The value of the Nationals’ telecast rights under the preliminary award exceeded what MASN actually paid the Nationals by about $25 million dollars.
While the parties were still negotiating a settlement, MLB advanced the Nationals $25 million dollars to encourage those settlement negotiations. If the parties were unable to settle, then MLB would be repaid with the proceeds of the arbitration award or as part of any future sale of MASN. Settlement failed and the final arbitration award issued by the panel was the same as the preliminary award.
In the ensuing Article 75 proceeding, the trial court, applying the Federal Arbitration Act (FAA), vacated the award based on evident partiality of the Arbitrators (9 USC §10[a][2]). Evident partiality was found because counsel representing the Nationals in the arbitration was also representing, at various times and in unrelated proceedings, virtually every participant in the arbitration (including all three teams comprising the RSDC) except for MASN and the Orioles. MLB and the RSDC had failed to fully disclose or to remedy the conflict before the arbitration hearing was held.
The trial court rejected other arguments raised by the Orioles that the $25 million dollar advance gave MLB a stake in the outcome of the arbitration and that MLB controlled the arbitration process as additional reasons for finding evident partiality. It also concluded that despite finding evident partiality, it had no authority to rewrite the agreement and refer the matter to a different independent arbitration panel.
The Appellate Division decision agreed on some but split on other issues raised on appeal (153 AD3d 140 [1st Dept 2017]). All five Justices agreed that the conflicted representation by the Nationals’ counsel constituted evident partiality requiring a new arbitration.
Two judges in the plurality held that while in rare cases the court had the authority to disregard the parties’ agreed to arbitrators, this was not that rare circumstance.
A third justice joined in the plurality but held that the court had no authority under any circumstance to rewrite the arbitration agreement and disregard the arbitrators designated in the parties’ agreement.
Two dissenting judges agreed with vacating the award but would have directed that the new arbitration take place before a panel of neutral arbitrators, not otherwise agreed to by the parties. It disagreed with the plurality on the severity and significance of the evident partiality and believed that MLB’s monetary advance to the Nationals during the pendency of the arbitration was also a ground for vacating the award.
The second arbitration proceeded before the RSDC. Certain major changes had occurred. The same conflicted law firm no longer represented the Nationals. The three MLB teams comprising the RSDC had changed and none of the new teams had been represented by conflicted counsel. The Nationals had repaid in full the $25 million dollars advanced to them by MLB. The second arbitration hearing appeared more robust than the first hearing. The hearing was longer, the evidence presented greater, and the award decision was 48 pages long. The award was set the value of the telecast fees at $55 million in 2012 rising to $62.4 million in 2016.
The trial court confirmed the second arbitration and entered a money judgment for the amount of the award plus pre-judgment interest. The Appellate Division affirmed (187 AD623 [1st Dept. 2020]).
The Court of Appeals affirmed the confirmation of the second arbitration award. It modified the prior decisions only to the extent of vacating the money judgment entered by the trial court.
The Court of Appeals set out the legal standards for deciding the issue of evident partiality. It held that the party seeking such a determination must prove by clear and convincing evidence that a reasonable person would conclude that an arbitrator was partial to one party in the arbitration.
The court stated that arbitrators are not held to judicial standards on partiality and that vacatur of awards should not be based on “tenuous relationships between the arbitrator and the successful party.”
Not surprisingly, given the narrow interpretation of the standard, the Court of Appeals concluded that there was no evident partiality affecting the second arbitration award. On the issue of conflicted representation, the court concluded that the conflict was “cabined in the first proceeding and did not irredeemably infect the RSDC as a second forum.”
The court, however, did not rule on whether the conflicted representation constituted evident partiality because the Nationals had abandoned arguing to the contrary. The Nationals’ retention of new counsel and the three new MLB teams comprising the RSDC remedied any prior partiality.
The Court of Appeals also held that the $25 million dollar advance did not give MLB a financial stake in the outcome of the arbitration, and that, in any event, because the amount had been bonded and paid before the second arbitration, there was no evident partiality.
Finally, the Court of Appeals held that there was no evidence that MLB, or its then executive vice president, Robert D. Manfred, Jr, had any influence over the arbitrators beyond “what the parties had bargained for in the settlement agreement.” This last finding is significant in view of the court’s legal analysis on the parties’ right to select an industry insider, with ties to the parties, as an arbitrator.
Because the court held that that the second arbitration award did not suffer from evident partiality, it did not reach the issue regarding whether the court had the power to direct that a subsequent arbitration take place before an arbitral forum not designated by the parties in their arbitration agreement.
Notwithstanding that the issue was not reached, the court discussed basic concepts of contract law applicable to arbitration agreements, perhaps foreshadowing how the issue would be decided were it before the court again. It stressed that arbitration agreements between sophisticated and counseled clients will be interpreted and enforced by the courts in the same manner as any other commercial contract. It pointed out that it is not the court’s role to rewrite the agreement or impose new terms.
Importantly, the court observed the parties have the right to choose their own arbitrator and that they may select industry insiders who have a particular expertise in the subject matter with existing relationships with the parties. Given these considerations the court observed that the choice of an arbitrator is a valuable contractual right, not to be lightly disregarded.
You are probably thinking—it took nine years in the courts for this matter to be resolved and while it did not fulfill arbitration’s goal of expediency, at least the matter is over. Think again. The Court of Appeals may have confirmed the arbitration award, but it vacated the money judgment because the arbitrator’s authority under the agreement was only to determine the fair market value of the telecast fees. Remedies for non-payment of the fees, the court observed, are governed by other contractual provisions, which include a cure period. So the final inning of this dispute has yet to be played.
"When Baseball, Television and Arbitration Collide," by Judith J. Gische was published in the New York Law Journal on May 23, 2023.
Reprinted with permission from the May 23, 2023, edition of the New York Law Journal © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.