The true nature of the dispute between the Orioles and the Nationals over MASN rights fees took shape as the two sides filed court papers in advance of a Monday hearing that will represent the next stage in the process. Monday's hearing is to determine whether the judge will allow a temporary restraining order, in favor of the Orioles, against an MLB arbitration panel ruling that the Orioles must pay the Nationals an increased rights fee starting for this season.
According to the Washington Post, which obtained the court filings, the Nationals have threatened to terminate MASN's license to broadcast Nationals games unless they are paid $15 million now and another $5 million by September 1.
That sum of $20 million comes from the result of the panel's ruling, which had not previously been made public. My prior analysis, based on the last batch of reporting about the dispute, that the Nationals were winners in total in the panel's ruling, needs to be revisited based on what we now know.
The Nationals had been reportedly seeking between $100-110 million per year, whereas MASN was offering something like $35-40 million per year. This recent round of papers indicates the panel awarded the Nationals only about $20 million more per year than what MASN had proposed. So what they're trying to force the Orioles to pay is the $20 million they feel they're owed extra for this year, with extra rights fees piled on in subsequent years as well.
This means that MASN, rather than suddenly having to go from paying $35 million in rights fees to each of the two teams to $100 million, would instead only have to increase them to $55 million initially. That's still a significant increase in that expense line, over 50% more than what's currently paid out in rights fees to the two teams. The contract requires that the Nationals and Orioles be paid the same rights fee.
Given that the Orioles reap the lion's share of MASN profits due to their 85% ownership stake, this extra $40 million comes largely out of the Orioles' current revenue stream. Their percentage of that $40 million would be $34 million. If the money is paid out in rights fees instead, they lose out on their percentage of what would be paid to the Nationals - 85% of $20 million, which is $17 million. Additionally, about 1/3 of the extra $20 million in rights fees going to the Orioles would be taken to put into MLB's revenue sharing program.
This is back of the napkin math, but it puts at least an approximate number on what the Orioles could stand to lose for the first time, in the realm of $24 million per year that would vanish from their current revenue stream. That's almost exactly a quarter of the Orioles' Opening Day payroll this season.
Taking the money out of the MASN bottom line that the Nationals initially demanded could end up bankrupting the network. This may well have been an aim of the Nats all along. One affidavit obtained by the Post is from MASN Executive Vice President Michael Haley, who stated that, all the way back in April 2012, the Nationals' counsel said at the RSDC hearing the Nationals "have been waiting seven years to get their rights back." Haley further stated that if the Nationals received the money they were asking for - that is, the $100-110 million rights fees - the network would be "rendered immediately insolvent, a fact that the Nationals counsel acknowledged."
That does fit with what we can reasonably guess about MASN's finances. The idea that it could absorb an extra $120 million in rights fee payments per year and still exist in its current form always seemed unlikely. If they pay out $40 million more to the two teams, that probably won't kill the network, although it would cause tangible harm to the Orioles.
It seems that the key contention between the Orioles and the Revenue Sharing Definitions Committee is whether they applied the proper methodology in awarding the extra money to the Nationals. The dispute boils down to whether the RSDC used its "established methodology" in making the award.
MASN (which is doing the Orioles' bidding, to be sure) contends that the only established methodology is that employed by the Bortz Media & Sports Group, which the RSDC determined did not apply in this case. If the Bortz methodology IS the "established methodology", then the panel is acting against the terms of the Settlement Agreement by which the Nationals were allowed to settle within Orioles territory to begin with.
There can be nothing but what Bortz says, and MASN, in the initial court filing that resulted in the temporary restraining order, laid out the case for why that is, with the Bortz methodology being used in all other situations. Unless the RSDC's "established methodology" is to use Bortz when convenient and disregard it when not. That was tongue in cheek, there.
One claim made in MASN's initial filing that resulted in the temporary restraining order is that the RSDC used as a baseline the MASN profit margin from 2007, when it was first starting (5%) rather than what it achieved every year since, and what the RSDC has held as reasonable for every other team (20%). If that is the case, that's a significant point to support the MASN claim that the arbitration panel was seeking out a predetermined outcome. Significant in the eyes of this Orioles fan layman, anyway - legally significant is another matter.
In their own filing, the Nationals, among other things, offer this statement: "As the U.S. Supreme Court has instructed in applying the Federal Arbitration Act ... 'It is not enough for petitioners to show that the panel committed an error - or even a serious error.'"
This brings to mind the old saying about the law, "If you have the facts on your side, pound the facts. If you have the law on your side, pound the law. If you have neither on your side, pound the table." Who is pounding what in this MASN dispute probably depends on what lens you're viewing it through. It sounds to me like the Nats know they benefited from an erroneous arbitration, so they're trying to pound the law.
If an arbitration panel committing a serious error isn't enough to move on to a court case, that's an unfortunate law in this situation. Fairness and the law do not always go hand in hand.
The fact that an error is not enough is probably why MASN laid out a case that the panel's decision was based on "pervasive conflicts of interest, intolerable self-dealing and fraud that thoroughly infected and completely undermined any semblance of the fair and objective arbitral process." These allegations of conflict of interest include the fact that two of the members of the panel - the Rays and the Pirates - both stand to gain from increased money going into the revenue sharing pot, as does Major League Baseball, which privately loaned the Nationals a reported $25 million in anticipation of winning in the arbitration hearing.
Additionally, MASN charges that the Nationals use of the same law firm, Proskauer Rose, that has represented MLB in the past, as well as both the Rays and Pirates, and did not disclose that conflict. Whether that fact matters is also up to the judge. The Nationals own filing characterized that the claim of conflict "verges on the disingenuous."
If MASN has offered sufficient proof to show that the arbitration panel was biased against them, that would certainly count as showing more than just a serious error. Whether what they've offered does this is as up in the air as anything else.
While the RSDC ruling that the Nationals are owed an approximate $55-60 million rights fee has the appearance of a compromise in the sense that it's somewhere between what the Orioles and Nationals demanded, it's not much of a surprise that the Orioles still don't accept it even though it's closer to their proposal than the Nationals one.
O's owner Peter Angelos probably feels he compromised to begin with by allowing the Nationals to set up shop and that MASN existing as a benefit to the Orioles is the result of that compromise, which was not, in his eyes, a temporary one. He may not feel he should be required to give up anything more. Having $24 million a year subtracted from revenue isn't exactly a matter of chump change. Painting him as the obstinate, unreasonable party in this scenario is bringing outside biases into play. We would all fight for $24 million a year, too.
With the Monday hearing, it's hard to say when the New York Supreme Court judge who hears the case would issue a ruling on whether to keep an injunction in place or not until the matter can go to trial. It could take a week or more to get that ruling.
It seems that if the Orioles lose that injunction hearing, they would be expected to pay the Nationals $15 million immediately and $5 million more by Sept. 1 or else the next action would be the Nationals attempting to terminate MASN's license to broadcast Nationals games. That's its own can of worms, as the Orioles would likely contend that the Nationals have no right to broadcast games anywhere in Orioles television territory unless it's through MASN.
Of course, it's possible also that the Orioles losing the injunction hearing would be their sign that it's time to fold up the tents and accept the inevitable. If they can't prove they deserve the injunction in the interim, how could they expect to win in a trial? Their revenue stream from MASN would be significantly throttled compared to what they enjoy at present.
To what extent a loss in either the injunction hearing or trial would impact the team payroll is unclear. Perhaps the Orioles would be relatively unaffected compared to their current payroll. It's quite possible that the reason that the O's haven't been spending money that some outside observers feel they "should" be spending is that they couldn't plan on MASN revenue until this situation is resolved.
The situation has dragged on since 2012 and has been hanging over the Orioles' heads all the while. Not committing money for the future that you might not have is generally a good idea. So it may not be doom and gloom with immediate slashing of the payroll, but it could be a significant constraint on growth of the payroll going forward.
If the Orioles have been spending that $24 million annually - or whatever the real number is - assuming it would be there forever, then, well, the result of a loss in this MASN dispute would probably not be pretty.
On the other hand, if the Orioles were to win and have the preliminary injunction extended until the trial, they would wield significant leverage in the internal negotiations about this dispute within baseball, as baseball does not want its financial information aired in open court. The pendulum might swing back from acting to pacify the Nationals, which has clearly occurred, to acting to pacify the Orioles instead.
In the meantime, here's hoping the Orioles have $20 million laying around, just in case. It could still turn out that all along the MASN dispute has been nothing more than the Orioles pounding the table, with neither the facts nor the law on their side.