The Herrick Win Column

July 2012

We are pleased to introduce our new sports newsletter, the Herrick Win Column. We launch this newsletter with the goal of keeping you, our clients and friends, informed of the many interesting legal developments that arise in our sports industry. In this issue partners Irwin Kishner and Dan Etna along with associate Rick Torres have written four pieces covering the use of Twitter in sports, the evolving controversy surrounding certain school mascots, the NHL Collective Bargaining Agreement, and the recent debt limit increase by the NFL. We welcome your comments and look forward to advising you in all of your sports related legal needs.

Say What? Twitter: Don't Leave Home Without It

The social media revolution has been underway for years now and its potential is unquestioned, but sports fans continue finding new ways to utilize social media platforms to consume information faster and more efficiently than ever before. Twitter, known for its ease of use and no-frills text-based posts, has become a particularly useful tool for sports fans, teams, players, and sponsors.

The "microblogging" service just celebrated its sixth anniversary, and continues to demonstrate strong growth. Twitter currently handles 1.6 billion searches a day, and has over 140 million active users who generate 340 million "tweets" daily, up 40% from nearly a year ago. So far is Twitter's reach, last year The Wall Street Journal estimated the San Francisco-based company's value to be as high as $10 billion.

The service provides information quickly and clearly, allowing users to connect with teams, players, and sponsors and share information in pithy texts of 140-characters or less. This means fans can keep updated with real-time information during games and continue to follow developments with teams and players even after a game has ended.

Statistics indicate that up to 26% of American fans use some form of social media to follow sports. The Associated Press recently reported that sporting events are most likely to account for major spikes in Twitter activity. This year's Champions League match between Chelsea and Barcelona broke Twitter records for a sporting event, topping out at 13,684 tweets per second.

Although the dizzying mass of activity threatens to make it difficult for fans to see the information they really want, developers have taken note, and developed ways to ensure that the constant stream of information makes sense and comes from reliable sources. A new app was recently developed and approved by Apple for use on its devices which promises to help fans follow games in more meaningful ways. The free app, called SportStream, sifts through Twitter feeds and delivers feeds to the user focusing on posts from the most active and trusted Twitter users. SportStream's founder, Will Hunsinger, hopes the app will enhance fans' experiences by "allowing people to connect on whatever and socialize and consume the game conversation at whatever level that they're comfortable with."

Platforms like Twitter afford sponsors unrivaled opportunities to reach audiences beyond the traditional touch points. Major American sports leagues have millions of Twitter "followers" who opt to receive information posted by a league. Individual players have also amassed large followings. LeBron James of the NBA's Miami Heat, for example, has over 4 million Twitter followers. The potential for sponsors cannot be understated: when LeBron James tweets, "Love my AirMax 2012 #swag," along with a picture of the sneakers, targeted consumers are listening.

Other rights holders, however, are less than thrilled about the instantaneous and "free for all" nature of social media platforms like Twitter. In 2009, the NHL, NFL, and NBA announced broad social media restrictions, charging that major platforms like Twitter and Facebook, by enabling users to post information in real time from stadiums and arenas around the country, infringe upon broadcast copyrights. Leagues have an interest in protecting the rights of television partners who pay billions of dollars for exclusive broadcast rights. While leagues and franchises can enforce restrictions on players, coaches, and other employees, one thing remains clear: millions of users have technology at their fingertips providing more real-time information than ever before, and social media's mark on the sports world is here to stay.

Will the Stanley Cup Run Dry Again? – NHL Collective Bargaining Agreement

Hockey fans recall with dismay the 2004-2005 season, which saw the words "Season Not Played" engraved on the Stanley Cup after a labor dispute resulted in a 310-day lockout. The National Hockey League's current collective bargaining agreement is set to expire on September 15, 2012, and it came as little surprise when a notice of intent to terminate or modify the agreement with the National Hockey League Players Association was filed. If the NHL and the Players Association fail to reach a new collective bargaining agreement this summer, the threat of another lockout looms and the start of the season is likely to be delayed.

Hockey's impending labor troubles come at a time of record interest in the sport. Viewership statistics and ratings for the latest season blew past previous milestones according to national data, and April's playoff opening night presentation was the most watched NHL opening night in NBC Sports Network history. This year also marked the seventh consecutive year of record revenue for the NHL. With earnings and viewership on the rise, the NHL and players are eager to avoid a repeat of the nixed 2004-2005 season, which angered fans and halted the sport's meteoric upswing in popularity for at least two years. Nonetheless, a host of issues are on the table, and it is unclear which side will be the first to budge. As the lockout from eight years ago taught us, a failure to reach a new collective bargaining agreement will present unique challenges to stakeholders, who should begin planning now to protect their interests.

The NHL's payroll expenses are expected to take center stage in the labor negotiations, as individual franchises remain eager to eliminate, or at least lower, the salary floor. The players are currently guaranteed, in aggregate, a salary level calculated on the NHL's revenue. The players, who viewed the imposition of salary caps as a major concession in the 2005 negotiations, are unlikely to support lowering the salary floor, particularly as the NHL's revenues continue to break records. This point of contention between the NHL and its players could lead to a work stoppage if an agreement is not reached before the start of the season, which would mean canceled games and unfilled seats in arenas around the country.

The battle over the new collective bargaining agreement will not be entirely between players and the NHL, as individual franchises will almost certainly quarrel amongst themselves over the current agreement's revenue sharing scheme. The 2005 agreement requires franchises in larger, more profitable markets to pay fees into a pool that are then distributed to teams in smaller markets. Revenue sharing acts as a subsidy to prop up financially weak teams, and players support revenue sharing because maintaining financially stable and competitive franchises across markets is good for the sport. Wealthier teams, however, are likely to balk at any expansion of revenue sharing, citing cost concerns.

While the current arrangement guarantees a certain level of financial security for all hockey franchises, changing or eliminating the subsidy will inevitably make some teams riskier than others. This means sponsors and licensees in particular will need to engage in a more thoughtful analysis of each individual team with which they contract, recognizing that their bargaining positions may change over time as certain franchises thrive and others struggle to keep up with their deep-pocketed peers.

The possibility of another wiped out season creates enormous risk for television partners, sponsors, and licensees, who must monitor the situation closely and evaluate that risk. Stakeholders should familiarize themselves with the progress of the negotiations, keeping in mind that their agreements with the NHL, its franchises, and the players may be impacted by changes in the collective bargaining agreement or by an agreement not being reached in time. Equally important, however, is choosing legal counsel that appreciates the unique business issues encountered in the sports industry every day. Attorneys must not only navigate the complex laws surrounding business arrangements; rather, they must also possess a firm handle on the business models of their clients.

What's in a Name? – North Dakota Fighting Sioux

North Dakota voters recently opted to let the University of North Dakota retire its storied "Fighting Sioux" nickname, after a nearly ten year struggle over the issue. Whether the battle over the controversial moniker has concluded remains to be seen; however North Dakota fans feel that the end of the "Fighting Sioux" is inevitable.

The issue has been surprisingly complicated, with courts, the state legislature, and–most recently–the electorate all taking part in the debate. It all began in 2005, when the NCAA adopted a policy prohibiting its member institutions from using "hostile and abusive" monikers or imagery at all NCAA championship events and selling any related merchandise at championship venues.

The University of North Dakota and the North Dakota State Board of Higher Education, the governing body of the state's public colleges and universities, promptly challenged the NCAA after the NCAA identified the "Fighting Sioux" nickname as potentially offensive to Native Americans. The NCAA threatened sanctions against University teams if they continued to use the name. The Board and the University of North Dakota sued the NCAA, challenging its policy and application of that policy to the state's collegiate teams. Both sides eventually reached a settlement that seemed, at the time, sensible: the University agreed to dismiss its claims against the NCAA, and the NCAA agreed to drop the issue if the University obtained "clear and affirmative support" from the Spirit Lake and Standing Rock Sioux tribes.

The settlement, however, highlighted debate even among the state's Native American tribes. The Spirit Lake Tribe overwhelmingly voted to grant the University perpetual use of the "Sioux" name. The Standing Rock Tribe, however, failed to vote one way or the other. When it appeared that the cause was lost, the State Board of Education moved to terminate the "Fighting Sioux" nickname. This angered the Spirit Lake Tribe, which promptly filed suit against the Board, charging that the Board violated the settlement agreement by moving to terminate the name prior to the deadline imposed by the NCAA.

The North Dakota Supreme Court held that the Board had properly interpreted the NCAA settlement agreement, and that nothing in the agreement prohibited the Board from voluntarily retiring the "Fighting Sioux" nickname. While the court ruling appeared to clear the way for the Board to put the issue to rest, the North Dakota state legislature passed a law requiring the University to continue using the controversial name. The NCAA, however, indicated that it would not budge on sanctions, and eventually the state legislature backed down, voting to repeal the statute less than a year later.

Following the vote, it appears that the Fighting Sioux's days are numbered. However, as the last eight years have demonstrated, stakeholders on both sides have fought hard to keep the issue alive. Supporters of the Fighting Sioux, including the Spirit Lake Tribe, are already maneuvering for a second referendum that would ensconce the "Fighting Sioux" nickname in the state's constitution.

Brother Can You Spare a Dime? – NFL Debt Limit Increased

The National Football League recently raised the debt limit for individual franchises from $150 to $200 million. Many expected the NFL to raise the limit by approximately $25 million. The greater than expected increase reflects the overall financial health of the NFL and the NFL's confidence in its own business model.

The debt limit does not refer to how much individual franchises may borrow. Rather, it restricts how much teams may pledge as collateral, and any borrowing above the debt limit cannot be collateralized by the value of the franchise. The move to raise the limit follows on the heels of a new 10-year collective bargaining agreement that promises to reduce the risk of labor disputes or work stoppages for at least the near term. The NFL has also seen franchise values rise to an average of over $700 million.

Raising the debt limit will make it easier and less expensive for teams to make valuable, long-term investments, particularly for things like stadium improvements, which can now be financed using more of the team's value as collateral. Several years ago, the NFL tried to lower the debt limit, but faced opposition from the players, who viewed the move as an excuse to rein in player compensation. Today, however, it is not clear that an increase in the debt limit will have any impact on player compensation, particularly with the new collective bargaining agreement in place which continues to tie the amount players receive to NFL revenues.

Team owners would be wise to reassess the value of their franchises and their borrowing goals. The ability to collateralize more of the franchise increases the value of the team since teams can borrow more at a reduced cost. As team revenues and the debt limit increase in tandem, franchise owners should consider whether now, while the NFL's financial outlook appears strong, may be an ideal time to make capital improvements.

For more information on these and other sports law issues, please contact Irwin A. Kishner, Esq. at (212) 592-1435 or [email protected] or Daniel Etna at (212) 592-1557 or [email protected].

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Copyright © 2012 Herrick, Feinstein LLP. Herrick Quarterly Sports Update is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.