Wednesday, November 28, 2012

The ACC Sues Maryland over Exit Fee

The Atlantic Coast Conference filed a lawsuit in North Carolina state court on Tuesday seeking to enforce a $52,266,342 exit fee against the University of Maryland, following the recent news that the school was leaving the league to join the Big 10.  The exit fee represents a sum three times the conference's annual operating budget for the 2012-13 school year, and was approved by the ACC membership in September, with both Maryland and Florida State University voting against the measure.

The Washington Post has obtained a copy of the ACC's complaint, available here.  In the lawsuit, the conference alleges that Maryland president Wallace Loh -- a former dean of the University of Washington Law School -- has "refused to provide assurance" that the school would honor the exit fee.  The complaint also points to statements made by Loh back in September, in which he contended that the ACC's exit fee could be legally unenforceable

Indeed, Maryland can argue that the ACC's fee is an unlawful penalty under traditional contract law principles.  Specifically, courts will generally refuse to enforce liquidated damages provisions (like the ACC's exit fee) when the clause goes beyond simply compensating the non-breaching party for its anticipated financial injury and instead unfair penalizes the breaching party (I have summarized the law regarding the enforceability of liquidated damages provisions in the related context of college football scheduling agreements and coaching contracts in a law review article available here on pages 21-23).

Maryland can thus plausibly argue that the ACC's exit fee -- set to three times the entire conference's annual operating budget -- goes beyond mere compensation and rises to the level of an unlawful penalty.  The school can also point to the fact that the ACC's fee appears to be significantly larger than that imposed by any other conference in the country (the SEC notably has no exit fee).  Meanwhile, expect the ACC to argue that the total damage inflicted on the conference by a defecting university is so significant, and yet hard to precisely calculate, that a $52 million fee is within the realm of being reasonable.

I anticipate that Maryland and the ACC will ultimately settle the case out of court, likely for less than the full amount owed (as Missouri, Texas A&M, Syracuse, and Pitt each did following their recent defections to new conferences).  In fact, I suspect the ACC likely opted to file its suit on Tuesday in a favorable forum in hopes of obtaining some leverage in the ensuing negotiations, thereby preempting a potential suit by Maryland in a local state court.  You may recall that West Virginia University and the Big East conference both filed dueling lawsuits against one another in 2011 after the school announced it was departing for the Big XII, lawsuits that were ultimately settled earlier this year.  On the other hand, it is also possible that the ACC may refuse to settle for anything less than the entire $52 million in order to try to prevent other schools from leaving the league.