Now what? Maryland, the ACC, and the $52,226,342 fight

Editor's note: Maryland and the ACC are now-famously embroiled in a legal battle over the conference's $50mil (roughly) exit fee, with a suit being filed Monday by the conference to make sure Maryland pays in full within 30 days of joining the Big Ten in 2014. But unless you're a lawyer -and we've had several discussing it in the comments already - this type of stuff can get pretty tricky and tough to understand. So we turned to friend of the blog, attorney Matt Royack, who is a good friend of mine and TT's new legal expert, to help explain what's going on. What follows is his analysis detailing what is at stake and whether Maryland stands a chance at paying less then the current $50 exit sum:

It's officially on.

The ACC filed suit yesterday against the University of Maryland in Guilford County, (wait for it) North Carolina. What's more, the suit requests a jury trial. Jurisdiction may rightfully exist in Guilford County per the ACC bylaws, but a fair trial in such jurisdiction seems unlikely. Full text of the Complaint, for those who'd like to read it, can be found at the Washington Post.

This is the opening shot in what promises to be a drawn out battle in the Guilford County court room, as well as in the court of public opinion. Publicly, both sides had already thrown down the gauntlet. At Maryland's Big Ten introduction press conference, President Loh reiterated his position that the exit fee would not hold up in court, and that Maryland would work out an arrangement. Recently, SI reported that the ACC had "no intention to negotiate" and is satisfied that the exit fee is "legally binding." Such quotes have been attributed to ACC legal counsel, and the ACC has now taken the first step toward determining whether it's assertion is correct. Within, we'll examine the legal positions of each side, discuss the potential impact of the Open Meetings Act, and attempt to predict a likely outcome.

To begin with, the official text of the ACC's official bylaw, Section IV-5, titled "Withdrawal of Members" is as follows:

"To withdraw from the conference a member must file an official notice of withdrawal with each of the conference members and the commissioner on or before August 15 for the withdrawal to be effective June 30 of the following year. Upon official notice of withdrawal, the member will be subject to a withdrawal payment, as liquidated damages, in an amount equal to three times the total operating budget of the Conference (including any contingency included therein), approved in accordance with Section V-1 of the Conference Bylaws, which is in effect as of the date of the official notice of withdrawal. The Conference may offset the amount of such payment against any distributions otherwise due such member for any Conference year. Any remaining amount due shall be paid by the withdrawing member within 30 days after the effective date of withdrawal. The withdrawing member shall have no claim on the assets, accounts or income of the Conference. (Revised: September 2012)"

Clearly, the ACC has the more straight-forward argument in this case. As the Complaint points out, Maryland is a member of the ACC, and has agreed to bound by the constitution and bylaws of the ACC. Even though Maryland did not vote for increasing the exit fee, such exit fee passed by a 10-2 vote, and is therefore binding upon Maryland. It is interesting to note that the bylaw does not state that the exit fee is $52,226,342, but rather three times the operating budget of the entire league. We'll get back to that point in a minute.

The Complaint filed by ACC asks the Court to determine whether the aforementioned bylaw is valid and binding on Maryland. That's surprisingly it. The Complaint asks for Declaratory Relief, in which a judge determines the legality of an issue actually in question between the parties. The request for jury trial is limited to only those issues triable by a jury; ie, not whether the bylaw is binding, but any other triable issue briefed or argued along the way.

One particularly troublesome part for Maryland is the potential for the ACC to withhold distributions due to Maryland in 2013 in order to fund the exit fee, pursuant to the third to last sentence of the above quoted bylaw. This would impact Maryland's cash flow and put Maryland in a severe position of weakness. Withholding 2013 distributions would be allowed because the bylaw says for any Conference year.

President Loh, sounding every bit like the former law professor that he is, succinctly summarized Maryland's positions back in September, 2012 when he said:

The law says that when you have liquidated damages, and in advance you anticipate a breaching of the contract, we will decide what the damages will be. You talk about damages, not penalties, and it has to be a reasonable estimate. That's the law. We live in a free economy. We want people to move freely in and out of relationships. That's the philosophical principle. What constitutes reasonable? That's for a court to decide. But if the damages are so huge that it prevents the mobility, the free movement of people, then I think it's not good for society. Others may not be looking at it from this principle, and that's their prerogative.

Regrettably, the allegations in the Complaint center on the public statements made by President Loh, as well as the fact the he participated in the discussions to raise the exit fee. Let's examine this quote point by point.

1. Liquidated Damages

The concept of liquidated damages is that, in a scenario where actual damages are difficult to predict, the parties to a contract can agree on an amount to be paid in damages in the event of a breach. Such amount must be reasonable, and liquidated damages are meant to be just compensation, not a penalty. Loh correctly cuts to the heart of the exit fee issue, namely that it is a penalty, and not a reasonable estimate of damages. Clearly a reasonable legal mind could easily conclude that one school paying three times the operating budget of the entire conference is not a reasonable estimate of damages for such schools absence from the conference.

The idea of Maryland's value to the ACC is tough to approximate, but three times the ACC's operating budget is disproportionate with the harm suffered by the ACC and the remaining members. The entire point of contract damages is to make the non-breaching party whole, not to punish the breaching party. Simply put, the ACC and the remaining members will decidedly not be out $52,226,342 come 2014, and will never have to write a check for such amount. Given the state of college athletics it seems clear that the increased fee was meant to discourage ACC schools from leaving and harm them if they left.

2. Illegal restraint of trade

Loh makes this point a little more subtly, but essentially such a high exit fee will restrict the ability of ACC member schools to decide for themselves which conference they should align with. In an open market capitalist economy, people have the ability to change relationships and move as they see fit. As such, restrictions on that free movement are illegal. Clearly, society is no better off thanks to the ACC's higher exit fee, and is in fact worse off due to the restrained ability of ACC schools to look out for their best interests. The high exit fee is completely self serving to the ACC and does not benefit the general population at all.

3. Arbitrary and Capricious

This point is an off shoot of the liquidated damages argument, and essentially alleges that the ACC pulled the $52,226,342 number out of the air. The previous penalty was 1 ¼ times the operating budget, and the ACC will need to show some reason for increasing to 3 times the budget as opposed to 1 ½ or 2 times the budget.

4. Timing

The $52,226,342 is calculated on the budget from July 1, 2012 to June 30, 2013, dates which, as of now, Maryland will be in the ACC. It stands to reason that the exit fee shouldn't be due until 7/1/2014 at the earliest, the date Maryland actually exits the ACC, since the ACC will profit off Maryland in 2013. Asking for a declaratory judgment now takes the position that Maryland's announced departure is an anticipatory breach of the ACC constitution and bylaws. The ACC's request for declaratory judgment, however, because if the exit fee is meant to compensate the conference and the remaining league members for the absence of the departing member going forward, it should not be due until after Maryland leaves and for several years thereafter.

The Open Meetings Act

Recently, the Washington Post published a story regarding the legality of the Board of Regents' actions pursuant to the Open Meetings Act. Just this week in fact, a private citizen filed a complaint with the Maryland Attorney General claiming that the Board of Regents violated the Open Meetings Act. The general rule of the Open Meetings Act is that meetings by public bodies, of which the Board of Regents is one, must provide notice of their meetings and keep them open to the public, ie, the media. However, there are fourteen exceptions to this general rule, which are codified at section 10-508 of the State Government Article of the Maryland Code.

The decision to leave the ACC for the Big Ten was made by the Board of Regents in a closed meeting. In public interviews, Board of Regents members have most commonly cited the exception for consulting with counsel to obtain legal advice, and consulting with staff regarding pending or potential litigation. In addition to these two commonly cited exceptions, I believe the exception for considering a matter that concerns the proposal for a business or industrial organization to locate, expand, or remain in the State, since the Big Ten is a business expanding into Maryland. Given the exceptions cited above, it seems unlikely that a Court would rule against the Board of Regents. However, should that occur, the Board of Regents could easily re-do the action in an open meeting.

Impact on Other Schools

The Big East exit fee facing Rutgers is $10 million, not nearly as burdensome as the fee facing Maryland. This also means, however, that such fee is likely to withstand any legal challenge. Rutgers faces the additional hurdle of leaving without providing 27 months notice. However, each Big East school that left (WVU) or is set to leave in the next year (Pitt, Syracuse) has successfully negotiated to reduce the notice period. West Virginia paid $20 million to leave basically at a moment's notice, whereas Syracuse and Pitt each owe $7.5 million for leaving before the 27 month period lapses. Expect Rutgers to pay the same $7.5 million that Syracuse and Pitt paid for leaving early.

The impact on the remaining ACC schools is entirely based on their intentions. It has been suggested that some schools are waiting to see what Maryland ends up paying before deciding whether to seek greener pastures. Those ACC schools in it for the long haul will want the ACC to fight hard for every dollar, as that will increase their cut.

How it'll shake out

A week or so ago, I was convinced, as were many others, that this matter would settle somewhere in the $25-30 million range paid out over time with some contribution from the Big Ten. I've seen enough to know that this is generally how litigation goes. It is expensive, time-consuming, and risky, whereas a fixed result allows everyone to move forward with certainty.

Yesterday, it was reported that Jim Delany was quoted as saying that the Big Ten would stay out of it, and that it was between Maryland and the ACC. Fair enough, but concerning for Maryland. Ultimately, it seems as if neither side is willing to budge and that this will go the distance. The concept of the exit fee is binding pursuant to the ACC constitution and bylaws. However, I would expect Maryland to prevail on the theory that the amount of the exit fee is an arbitrary and capricious penalty, meant to harm Maryland, rather than to reasonably compensate the ACC for the loss of a league member.

Matthew D. Royack, Esq. is an associate attorney with the law firm of Adelberg, Rudow, Dorf & Hendler, LLC. Mr. Royack maintains offices in Baltimore City and Howard County and concentrates in the areas of business and real estate transactions, general corporate matter, commercial litigation, and estate planning. He can be reached at matt.royack@gmail.com or (410) 539-5195.