Is Litigation the Right Strategy?
As the last group to successfully found a franchise in Canada, I have watched Mr. Balsillie’s attempts to acquire an NHL Member Club with great interest. Now with his third attempt to acquire and move an NHL franchise in ruin, one could question the effectiveness of his approach.
His determined efforts to acquire a franchise have provoked rage in some quarters and admiration elsewhere.
Litigation has been part of his overall strategy. However, when you are trying to join a private club, rarely do you want to litigate your way in. Whether it is a golf, country, gym or professional sports club you are trying to become a member of, a litigation approach is unlikely to win you many friends amongst the existing membership.
If Mr. Balsillie had been successful, I predict he would soon have found a sub-group of owners that would have allied themselves with him and NHL insiders would gradually have accommodated themselves to his presence. Money talks.
But still, if I had been asked by Mr. Balsillie’s group for any advice, litigation would not have been one of the tools I would have pulled out of my toolkit. The NHL is led by two clever and formidable lawyers and they are not afraid of litigation.
Who Actually Owns an NHL Franchise?
When we founded the Ottawa Senators, I had a sense that we did not really own the team—the fans did.
About half the value of a franchise is in player contracts and, while players are well-paid, the fact that they can be traded like pork bellies always made me uncomfortable. The relationship reminded me more of a medieval arrangement than a modern employer/employee relationship. So ‘owning’ a player (or the rights to a player) is an oddity here in the 21st Century.
The other half the value of a franchise comes from the revenue streams produced by the franchise.
Bill Wirtz (Chairman of the Chicago Blackhawks for many years, now deceased) once told me that the key to running a successful franchise was to fill the building with fans. This creates a sense of excitement; sponsors want to be associated with that feeling. Everything flows from the fans—suite leases, sponsorship, signage, parking, merchandise sales, F&B, all the revenue streams flow from one source—attendance.
And attendance flows from the close connection between fans and players; after all, the fans don’t come to see the owners, they want to see and touch and talk to the players.
So, one could argue that the team actually belongs to the fans, without whom a franchise is not viable.
Certainly, lawyers for the NHL would argue that NHL owners ‘own’ their teams subject to the conditions of their Franchise Agreements and subject to the By-Laws of the NHL (contained in the NHL’s Constitution known by
its Latin name, ‘Lex Scripta’.)
So, a franchise owner has certain rights and obligations. Bankrupt franchise owners have many fewer rights and, under certain circumstances, the NHL has the right to revoke a franchise and take control.
But whatever lawyers may argue, ultimate control over the destiny of any sports league comes from the source of all revenues—the fans. Money talks.
So, I would argue that:
New or Used?
When we were pursuing a NHL franchise, I was asked by one owner: “Do you want a new one or a used one?”
My preference, indeed the only option we looked at, was a new one—we wanted an expansion franchise rather than a relocated one. To me, renaming and re-locating an existing franchise seems to tarnish the brand right from the start—the only way to buy and relocate a ‘used’ franchise is by disenfranchising fans somewhere else, hardly an auspicious way to start.
How do you think Baltimore fans feel to this day about the NFL’s Colts? Just go to a Ravens game and sit in the end zone with a Colts jersey on to find out for yourself.
Mr. Balsillie wanted to purchase an existing franchise and move it to Hamilton.
If instead, he had sought an expansion franchise for Hamilton (the course of action more likely to succeed in my view), the fee he would have paid would have included an infringement payment to any club that is nearby (i.e., the Maple Leafs and the Sabres). There is plenty of precedent for this—when the Devils relocated to New Jersey, they paid infringement fees to the NYI, NYR and the Flyers.
Plus, the expansion fee he would have paid would have been shared by all Member Clubs. Thus, League Members would have had a financial incentive to bring somebody like Mr. Balsillie into the Club. And the Clubs being infringed upon, Toronto and Buffalo, would have been compensated for that and they too would have had some type of financial incentive to make the whole thing work.
Bill Daly argued that the relocation of any existing NHL Club requires a simple majority vote by League Members and that there is no veto by any individual Club. This argument is central to the NHL’s view that the NHL’s Constitution meets the test of US anti-trust law and that there is no undue restraint of trade created by Lex Scripta.
Some Member Clubs might feel that they do, in fact, have a veto. What they actually have is the right to compensation for infringement of their territory but not the right to unilaterally reject such an infringement. This is an important distinction, a type of fine print that lawyers love.
When I sat on the NHL’s Expansion Committee, we heard from two applicants: Wayne Huizenga for what would become the Florida Panthers and Michael Eisner and the Disney Company for the Mighty Ducks.
For the Anaheim team, the $50 million expansion franchise fee was paid as follows: $25 million to the NHL and $25 million (at $5 million per year for five years) to Bruce McNall and the L.A. Kings, whose territory was infringed by the Ducks.
The NHL defines the franchise area for a Member Club from the boundary of, for example, the Corporation of the City of Ottawa (the old City not the new City) plus 50 miles. So, if someone wanted to establish a franchise in Gatineau or Red Deer or Hamilton, they should first do a deal to determine the amount of compensation that the rights holders being infringed (the Sens, the Oilers and the Flames, the Leafs and Sabres) would receive.
Is that a tolerable restraint of trade? I don’t know but it seems reasonable to me. If you had just paid $50 million for a franchise in the 1990s (or $140 million or $212 million or whatever the going rate is today), you probably would expect to be able to generate revenues without undue interference within your defined territory and, if such interference happened, then you would expect to be compensated.
I know that when the modern-era Sens were re-established in the 1990-1992 period, we did a deal with the Canadiens to trade mid-week broadcast rights—Montréal could broadcast their games into Ottawa-Gatineau (where they had a lot of dedicated fans) and we could do the same in Montréal. Initially, this was a deal highly in favor of the Canadiens but the Sens have been seen in Montréal for 17 years and have a following there now. Plus, there is the fact that Montréal is a bigger market than Ottawa, so it probably balances out today—no money has ever changed hands.
The same deal was offered to TO but the offer was declined by the Leafs. In fact, the Maple Leafs threatened to broadcast their mid-week games into Ottawa without prior agreement with the Sens right up until the first day of their season in 1992-1993. I told them that this was going to be the greatest day in the modern history of the Ottawa Senators up to that point in time because, if they infringed on the Sens territory without our permission, all their broadcast revenues could be forfeit under Lex Scripta to the Sens. The Leafs wisely did the right thing and did not broadcast into Sens’ territory without a prior agreement on compensation.
And this comes to the crux of things, the Leafs are the wealthiest, most widely followed franchise in the NHL. There is no point in bellyaching about it if you are a fan of any other NHL team—Toronto fans are terrific—they LOVE their team even if it hasn’t won a thing since 1967.
Their local broadcast rights are probably worth more than $40 million per year today and they don’t want to share this revenue stream with anyone else. With a cap rate (capitalization rate) of, say, 7.5% p.a., this makes their local broadcast rights alone worth something like $533,000,000. So, for Mr. Balsillie or some future bidder to locate a franchise in Hamilton, he or she should, in my view, make a deal about compensation with both the Leafs and the Sabres, both of whom the prospective franchise would infringe upon.
And they need to make that deal before they deal with the NHL—that is what Mike Eisner and the Mighty Ducks did with Bruce McNall. Leagues are very reluctant to impose a second, third or fourth franchise in a metropolitan area without prior agreement on the amount of compensation those teams being infringed on would receive.
For the Maple Leafs, it just comes down to money but for teams like Ottawa, the Sens would be hard pressed to survive if they did not have some type of control over their own territory.
You can not have one rule for the L.A. Kings and the Ottawa Senators and another for the Leafs just because the Leafs have more money.
What is the Role of the Commish?
There is no doubt that the Sens would not have survived to this day without the intervention of Gary Bettman during the run up to and in the bankruptcy of the team here in Ottawa. He went to bat for the team many times during the era preceding the ownership of Eugene Melnyk.
Winnipeg fans and Nordiques fans may ask where was Mr. Bettman during their last days but Ottawa fans should recognize what Mr. Bettman did for this team.
When the Sens were admitted to the League, the team’s NHL payroll (including its minor league affiliate) was around $6.5 million CAD per
year. John Zeigler, then President of the NHL (and soon to be replaced by Commissioner Gary Bettman) told us to expect player salary increases of about 10% per annum. So, by the turn of the Century, we could have expected a total payroll of about $14 million CAD under the rosy scenario painted by Mr. Zeigler.
Instead, salaries in Ottawa soared to more than $42 million (priced in USD) and the CAD $ shrank from 90 cents when the franchise was granted to just 64 cents. Ottawa’s payroll growth during this period was around 33.5% p.a.; the enterprise was not sustainable. Nor were the Jets and the Nordiques—a major adjustment was inevitable.
The Commish had nothing to do with this realignment of currencies and, whatever else Mr. Bettman may have done to madden Canadian NHL fans;
he can not be blamed for it.
Is the NHL a Monopoly?
The NHL is probably an effective monopoly. The old IHL is long gone, the WHA is no more. All the challengers to the NFL are extinct—major professional sports tend to be or become monopolies.
Is that bad? Well, experience shows that rival leagues tend to cause player salaries to grow even faster and that is not good for smaller-market teams like Ottawa.
And there are plenty of other ways people living in NHL cities can spend their entertainment budgets, so I am not sure it matters a great deal.
The arguments made in Judge Baum’s courtroom in Phoenix included raising the specter of pro sports being a monopoly and engaging in restraint of trade. In my view, Judge Baum wisely refused to allow Bankruptcy Court to write new anti-trust law which, in effect, would have freed pro sports teams from their local obligations (to their creditors, to their Landlords, to their fans and sponsors) and made franchises much more mobile—just starve them of capital, bankrupt them and, whoosh, off you go.
This is not the right direction for any League or their fans.
Can We Make it Nine?
Having said all of this, I am in favor of having more NHL teams in Canada—this would be good for hockey fans, for revenue-sharing with the players and for the League itself. What I am not in favor of is relocating existing teams.
If the Carolina Hurricanes can be successful in Raleigh (by, in part, winning the Stanley Cup and icing competitive teams), the NHL can probably be successful pretty much anywhere.
I believe the League should set out clear criteria for the return of the Winnipeg Jets and the Québec Nordiques including:
This will allow new ownership groups to coalesce in those places and to build definitive plans for the return to the National League of those teams.
In the matter of Hamilton, Ontario, the matter is more complex. The above criteria are still required but there is the matter of infringement payments to the Leafs and Sabres. Certainly, the Leafs are not going to accept a McNall-like payment plan over time and, in my view, they should not be forced to. In fact, maybe Mr. Balsillie or his successor would not need to offer any money or only part of the compensation might be money; there could be a more effective inducement, at least for the Leafs.
If television revenues are a primary concern for the Leafs, then maybe what a future bidder would offer would be, say, 50% of their local broadcast rights for the first ten years of the franchise operation followed by a schedule of diminishing percentages over the next ten years.
But whatever happens next, the future bidder should do it in concert with the League and his or her future partners.
FOR REAL ESTATE INVESTMENT AND BUSINESS COACHING THAT’LL HELP YOU PROVIDE FOR YOURSELF AND YOUR FAMILY FOR 3-GENERATIONS, PLEASE CONTACT:
Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD
Real Estate Investment and Business coach
ROYAL LePAGE Performance Realty broker
Ottawa Senators founder
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Copyright, Bruce M Firestone, Ottawa Canada 20179
Postscript: Hockey Historian, Paul Kitchen, now deceased, reminded me that the Hamilton Tigers played in the NHL from 1920 to 1925. In 1925, the Tigers made the playoffs but the players refused to play because they were concerned that the owner would not pay them. As a result, the franchise was relocated to NYC to play as the New York Americans. Maybe, Mr. Balsillie’s or his successor’s slogan should be ‘BRING BACK THE TIGERS’.
Image source: https://en.wikipedia.org/wiki/File:Hamilton_Tigers_Logo.svg
Postscript 2: How Hamilton could acquire an NHL expansion franchise for just $2,700 cash down!
By capitalizing parts of certain revenue streams!
$21,666,667 per NHL team [share of expansion franchise fee]
$120,000,000 [infringement fee shared by Buffalo 25% and Toronto 75%]
$51,666,667 gross proceeds to Buffalo
$111,666,667 gross proceeds to TO
Download spreadsheet from: https://www.dropbox.com/s/8te8woqmqbvrxr8/HAMILTON-Franchise-Cost-2019.xlsx?dl=0