Jay Ramesh
Background
On Saturday, August 31, fans across North Carolina rejoiced as the University of North Carolina (UNC) took down the University of Minnesota in the inaugural week of college football. The Tar Heel faithfully looks to this season with optimism as the gates to the Atlantic Coast Conference (ACC) championship have been thrown wide open following slow starts from Clemson and Florida State (FSU).
Since 2010, only one season has featured an ACC champion not named Clemson or FSU.[1] But times are changing. Texas and Oklahoma shocked the college football world when they announced that they were leaving their conference, the Big 12, to join the Southeastern Conference (SEC): one of the most prestigious conferences in college football.[2] Seeking money, television deals,[3] and a better shot at making the college football playoffs, Clemson and FSU also announced their intentions to leave the ACC.[4]
However, unlike Texas and Oklahoma, Clemson and FSU’s paths to leaving the conference have been paved with headaches, legal battles, and massive exit fees. To disincentivize its members from leaving, the ACC’s contracts include exit fees and forfeitures of media rights: revenues from television deals that the conference distributes to its members.[5] For FSU in particular, its attempt to leave the ACC (FLexit) would include forfeiture of $429 million in media rights, the ACC withholding of $13 million in broadcast fee reimbursement, and a $130 million exit fee; combined, the fees and lost opportunity costs totals a mind-boggling $572 million.[6] The ACC filed complaints against FSU in Mecklenburg County, North Carolina, to preempt FSU suing the ACC, and FSU sought to invalidate the exit fees as unconscionable.[7]
Are FSU’s Exit Fees Unconscionable?
Although there are few instances of Division I conference realignment in the 21st century, there have been similar legal battles in the Division II world. In Mountain East Conference v. Franklin University, the Mountain East Conference (MEC) sued Franklin University (Franklin), the successor to Franklin-Urbana University (Urbana): a school that played in Division II of the National Collegiate Athletic Association (NCAA).[8] Urbana shut down in 2020 and unilaterally withdrew from MEC.[9] The MEC subsequently demanded that Franklin pay Urbana’s $150,000 exit fee, which Franklin refused.
The court found that the exit fee, amounting to six years of Urbana’s conference dues ($25,000 annually), was a “reasonable approximation of loss to MEC”.[10] In its analysis of “reasonableness,” the Court considered that the MEC’s profit margin was narrow (about $60,000-$70,000 annually).[11] It also weighed intangible and incalculable damages, such as “injury to [the MEC’s] reputation.”[12] Crucially, the court also found that the exit fee was a liquidated damages provision,[13] not a penalty, which would be unenforceable.[14]
If college conference exit fees are shown to be liquidated damage provisions and not penalties, then their reasonableness, and thus enforceability, will likely turn on the amount and specific structure of the exit fee.[15] Because it is difficult to approximate loss, the Franklin court compared the exit fee to Urbana’s annual conference dues and the MEC’s profit margin, finding that the fee was about twice the conference’s profit margin.[16] According to its constitution, the ACC’s exit fee for all schools is structured to equal three times its operating budget,[17] which comes out to roughly $130 million.[18]
In assessing the reasonability of this fee, the court will likely compare the ACC to the Big 10 and the Big 12. The Big 12’s constitution includes an exit fee equivalent to two years of gross revenue the Big 12 would have distributed to the departing school, including revenues from media rights.[19] The Big 10 does not have an exit fee,[20] and the SEC recently added a $30 million to $45 million exit fee to its constitution.[21] Even after adding the Big 12’s media rights forfeiture, these exit fees fall far short of FLexit’s massive $572 million cost.
In Vanderbilt University v. DiNardo, the 6th Circuit considered the question of how much money Vanderbilt University (Vanderbilt) owed former football coach Gerry DiNardo (DiNardo) after he breached his contract with the university by resigning and becoming the head football coach for Louisiana State University.[22] The Court held that DiNardo was required to pay Vanderbilt “. . . as liquidated damages, an amount equal to his Base Salary . . . remaining on the [original] Contract.”[23] Adam Kahn summarized the Court’s holdings:
“ First, because college sports contracts are “unique and specialized,” the damages from a breach are not easily ascertained. Second, and relatedly, damages in college sports contracts are broadly defined and can include abstract categories like loss of stability. Third, the “salary remaining under a contract” approach is a “reasonable” LDC valuation method as long as there is difficulty ascertaining the actual damages.”[24]
The court in FSU’s case may turn to sports contract cases such as DiNardo in determining if the ACC’s exit fee is reasonable. FSU is a major brand in college football, and its departure could severely hurt the ACC’s prestige. This rings especially true considering that a motivating factor for FSU’s departure was the school being left out of the 2023 CFB playoffs despite going undefeated—many believed that their strength of schedule, mainly consisting of other ACC opponents, was not as difficult as other schools such as Alabama and Ohio State.[25] The court could find that the “reputation damage” to the ACC accompanying FSU’s departure is difficult to ascertain, strengthening the legitimacy of the exit fee.
Television agreements are a significant source of funding for NCAA athletics programs. To secure long-term television agreements, the ACC entered into a long-term “Grant of Rights” deal with ESPN.[26] The Grant of Rights agreement mandates that the ACC’s members hand over the right to produce and distribute football games to the ACC for the entire term of the agreement, even if the members leave the conference during the term.[27]
The Grant of Rights acts as a stabilizing force, ensuring that the ACC and its members have access to a steady stream of revenue from its television deals, and it also disincentivizes members from leaving the conference due to forfeiting their media rights. The ACC’s Grant of Rights runs through 2036, so if FSU leaves the conference and the Court finds the ACC’s provisions to be enforceable, the school will forfeit all the revenue from its media rights, amounting to $429 over the next thirteen years.
Applying the reasoning of DiNardo to FLexit, the ACC could make the argument that the Grant of Rights functions like DiNardo’s liquidated damages. In the same way that DiNardo was required to pay Vanderbilt an amount equal to his remaining Base Salary under the contract, the ACC could argue that its Grant of Rights payouts are like a salary, thus requiring FSU to forfeit the remaining media revenue it was entitled to under the contract. The court may find that this exit fee structure is reasonable in principle, but unconscionable compared to other conferences’ exit costs.
What Will the Outcome Mean for the ACC Going Forward?
The ACC hosts four North Carolina schools, all of which could be significantly financially impacted if FSU and Clemson successfully leave the ACC. If FSU fails to convince the court that its exit fees are unconscionable, its forfeited revenue may be distributed among the remaining ACC schools, giving a significant financial boost to ACC athletics departments in North Carolina. If FSU succeeds and nullifies the exit fees, its departure could significantly damage the ACC’s prestige and encourage other schools like N.C. State and Miami to flee the conference. Simply put, a ruling in favor of FSU and Clemson could lead to the ACC suffering the same fate as the Pac-12.[28]
Broadcasting companies like Fox and ESPN want to sign media rights deals with programs that have large fanbases, a prestigious history, and can bring in lots of viewers. As such, large money-making conferences like the SEC and the Big 10 are incentivized only to admit prestigious, well-performing schools into their conferences. A collapse of the ACC will likely lead to the stratification of college football into “premier” conferences filled with the best programs and lower-tier conferences with all other schools. The ACC provides financial incentives for schools to make the CFB playoffs to avoid stratification.[29] If powerhouse programs join weaker conferences, they are likelier to go undefeated and have a shot at the CFB playoffs. To avoid a 2023 FSU situation, “weaker” conferences could schedule more non-conference games to allow their teams to play strong, competitive programs, and increase their playoff resumes.
As the legal battle between FSU and Clemson continues, the future of the ACC hangs in the balance. In determining whether the provisions are unconscionable, the court will need to weigh the disparity between the ACC and other conferences’ exit fees along with the fact that the lawyers and parties that signed these contracts were highly sophisticated, were aware of the fees, and even praised them in the past.[30] All eyes in North Carolina are on the courts as FSU and Clemson play their dangerous gambit.
[1] Atlantic Coast Conference Index, Sports Reference (Sep. 8, 2024, 7:40 AM), https://www.sports-reference.com/cfb/conferences/acc/.
[2] Heather Dinich & Mark Schlabach, Texas Longhorns, Oklahoma Sooners Unanimously Accept Invitation to SEC, ESPN (Jul. 30, 2021, 11:08 AM), https://www.espn.com/college-football/story/_/id/31920686/texas-longhorns-oklahoma-sooners-unanimously-accept-invitation-sec.
[3] The Big 10, another college conference, recently signed a $7 billion media rights agreement that would distribute far more money to its member schools than the ACC. Adam Rittenberg, Big Ten Completes 7-Year, $7 Billion Media Rights Agreement with Fox, CBS, NBC, ESPN (Aug. 18, 2022, 09:30 AM), https://www.espn.com/college-football/story/_/id/34417911/big-ten-completes-7-year-7-billion-media-rights-agreement-fox-cbs-nbc.
[4] Mark Giannotto, FSU vs. ACC Lawsuit Explained: What it Means for College Football, Conference Realignment, USA Today (Aug. 31, 2024, 6:00 PM), https://www.usatoday.com/story/sports/college/2024/08/31/fsu-acc-lawsuit-conference-realignment-2024-college-football-season-florida-state/74909159007/.
[5] Atlantic Coast Conference, ACC Manual § 1.4.5 (2020-2021 ed. 2020).
[6] William Huff, FSU Sues ACC, First Steps in Leaving Conference, Thomasville Times-Enterprise (Sep. 8, 2024), https://www.timesenterprise.com/sports/fsu-sues-acc-first-steps-in-leaving-.conference/article_a5ee0b92-a4e8-11ee-b1e3-dbf5e0a43b2d.html#:~:text=According%20to%20a%20breakdown%20of,three%20times%20their%20operating%20budget.
[7]See Atlantic Coast Conference v. Board of Trustees of Fla. State University, 2024 WL 1462914 at *3 (N.C.Super., 2024), Reply Supp. Def.’s Mot. Dismiss 9 (citing lack of consideration or lack of authority to enter into contract as examples).
[8] Mountain East Conference v. Franklin University, 2023 WL 2415277, at *3 (N.D.W.Va. Mar. 8, 2023)
[9] Id. at *2.
[10] Id. at *9.
[11] Id.
[12] Id. at *9.
[13] Id. at *9.
[14] Id. at *8 (citing Huntington Eye Assocs., Inc. v. LoCasio, 533 S.E.2d 773, 782 (W. Va. 2001)).
[15] Adam Kahn, Breaking Up is Hard to Do: Examining Whether College Conference Exit Fees are an Enforceable Form of Liquidated Damages Clause, 22 Sports Law. J. 115, 124 (2015).
[16] Franklin, 2023 WL 2415277 at *9.
[17] Atlantic Coast Conference, ACC Manual § 1.4.5 (2020-2021 ed. 2020).
[18] Andrea Adelson, Florida State to Sue ACC Over Grant of Rights, Withdrawal Fee, ABC News (Dec. 22, 2023, 11:09 AM), https://abcnews.go.com/Sports/florida-state-sue-acc-grant-rights-withdrawal-fee/story?id=105872897.
[19] Big Twelve Conference, 2021-2022 Conference Handbook § 3.1 (2021-2022 ed. 2021).
[20] Ben Portnoy, Clemson Suing ACC Over Exit Fees, Media Rights, Sports Business Journal (Mar. 19, 2024), https://www.sportsbusinessjournal.com/Articles/2024/03/19/clemson-acc-lawsuit#:~:text=The%20Big%20Ten%2C%20for%20example,45M%20depending%20on%20if%2Fwhen
[21] Southeastern Conference, Constitution and Bylaws § 3.2 (2020-2021 ed. 2020).
[22] 174 F.3d 751, 753 (6th Cir., 1999).
[23] Id. at 754. DiNardo signed an addendum extending his contract with Vanderbilt, but the court held that the addendum was unenforceable as a matter of law and thus the liquidated damages provision only applied to DiNardo’s original contract. Id. at 760.
[24] Kahn, supra note 14, at 122-123.
[25] William Huff, FSU Sues ACC, First Steps in Leaving Conference, THOMASVILLE TIMES-ENTERPRISE (Sep. 8, 2024), https://www.timesenterprise.com/sports/fsu-sues-acc-first-steps-in-leaving-.conference/article_a5ee0b92-a4e8-11ee-b1e3-dbf5e0a43b2d.html#:~:text=According%20to%20a%20breakdown%20of,three%20times%20their%20operating%20budget.
[26] Ashwini Jayaratnam, Florida State’s Way Out of ACC? Exit Penalties Could Be Ruled Unenforceable, JDSUPRA (Dec. 29, 2023), https://www.jdsupra.com/legalnews/florida-state-s-way-out-of-acc-exit-9854036/#_ednref3.
[27] Id.
[28] Ten schools left the Pac-12 at the conclusion of the 2023-2024 season, leaving only two remaining. The departing schools avoided forfeited media rights because their Grant of Rights contracts expired that season. Brad Adgate, With No New TV Deal Expected; Five More Schools Have Left the Pac-12, Forbes (Aug. 8, 2023, 11:23 AM), https://www.forbes.com/sites/bradadgate/2023/08/08/with-no-new-tv-deal-expected-five-more-schools-have-left-the-pac-12/. However, the departing schools settled with the Pac-12 to avoid future litigation. Associated Press, Washington State, Oregon State Settle with Schools Exiting Pac-12, ESPN (Mar. 25, 2024, 04:49 PM), https://www.espn.com/college-sports/story/_/id/39808513/washington-state-oregon-state-settle-schools-exiting-pac-12.
[29] Associated Press, ACC Schools Have a New Path to More Revenue: Just Win… in the Post-Season, Spectrum News 1 (Sep. 05, 2024, 7:15 AM), https://spectrumlocalnews.com/nc/charlotte/news/2024/09/05/acc-schools-have-a-new-path-to-more-revenue–just-win—-in-the-postseason#:~:text=The%20ACC’s%20model%20centers%20around,a%20total%20of%20%2420%20million.
[30] Several years ago, FSU trustee Mark Hillis commented on the exit fees, “I was in concert with President Barron that this was the best thing that could happen. It ensures that we don’t lose any members. Nobody can afford to leave now.” Karen Weaver, Florida State Once Again is Facing an Important Question. Should it Stay in the ACC?, Forbes (Mar. 1, 2023, 09:25 AM), https://www.forbes.com/sites/karenweaver/2023/02/28/florida-state-once-again-is-facing-an-important-question-should-it-stay-in-the-acc/.
