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Orioles-Nationals MASN Dispute: The case that Major League Baseball has cheated the Orioles

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The Orioles, through the proxy of MASN, have taken baseball to court over a dispute about MASN rights fees. How did things get to this point? Probably because MLB decided it was going to screw the Orioles. Here's how.

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Rob Grabowski-USA TODAY Sports

When MLB and the Orioles hammered out the settlement that would allow the then-Expos, owned by MLB, to move into what was previously the sole territory of the Orioles, the Orioles were explicitly given certain sweet financial perks in order to compensate for the lost revenue anticipated. One of those perks was the ability to take in the lion's share of the region's television revenues. Both parties agreed to this.

Yet MLB never planned for this deal to last for long. They communicated to prospective buyers of the Nationals franchise that the television revenue would be redistributed in spite of the prior agreement with the Orioles. Major League Baseball has been planning for years to go back on this sweetheart deal now that it's no longer convenient for them.

At least, that's what MASN has to say about it, charging in a petition to a New York Supreme Court that baseball engaged in a scheme that "knowingly and intentionally deprives MASN and the Orioles of their promised compensation, assets, and rights." This petition was filed despite the threats of baseball commissioner Bud Selig to levy the "strongest sanctions available" should a franchise take this dispute to court.

The intent of the petition is for the court to vacate a recent arbitration decision that decreed that MASN should pay between $60-90 million in additional rights fees to the Nationals per year. In essence, Selig is playing the part of Darth Vader in saying to the Orioles, "I am altering the deal. Pray I don't alter it any further."

Note that, despite what it seems like, this court case is not Orioles owner Peter Angelos suing Selig in open court. The petitioner in the case is TCR Sports Broadcasting Holding, LLP, which does business as the Mid-Atlantic Sports Network. It was news to me that MASN isn't really MASN, too.

Of course, the Orioles - that is, the Baltimore Orioles Limited Partnership - own 85% of the network, so it's safe to say that MASN would not be suing the Office of the Commissioner of Baseball nor the Commissioner of Major League Baseball if O's majority partner Angelos did not wish it so. Still, Angelos himself isn't filing suit or going to court, funny as it would be to picture it.

MASN is represented in the case by the New York law firm of Chadbourne & Parke LLP. They are based in the famous 30 Rockefeller Plaza building. The lead attorney on the petition is Mr. Thomas J. Hall, co-head of the firm's commercial litigation practice, whose biography boasts of 40 trials to verdict and arbitrations to award. Well, that sounds impressive enough.

How did things get to where MASN was filing suit against Baseball? In the original agreement between the Orioles and Baseball, the television rights fees for the nascent Nationals franchise would be set by MASN until 2012, at which time the Nationals fees would be adjusted to "fair market value." The Orioles would further receive the same amount of fees as whatever the Nationals would receive in any agreement.

When the time came to determine that market value, MASN secured the services of the Bortz Media & Sports Group, which, according to the petition, has set the value of any disputed television contract for the last decade and a half. By their agreement, baseball's committee - the Revenue Sharing Definitions Committee (RSDC) - is required to use this methodology to render any rulings.

In 2012, MASN proposed a $34 million rights fee, set to increase by 7.7 percent annually, according to the Washington Post. If that has continued to be the case, they would be getting about $40 million this year.

The Nationals objected to this plan, believing they were entitled to $100-120 million in rights fees. This dispute went to the RSDC, which was made up of one representative of ownership each from the Rays, Pirates, and Mets. Despite being required to use the Bortz methodology, which MASN had already consulted, the committee ruled in June, as we only found out a week ago, in favor of the Nationals.

MASN's petition charges that the arbitration panel acted outside the scope of its authority granted in the Settlement Agreement. This is how refer to the deal that let the Nationals set up shop in Orioles territory in the first place. The Orioles agreed that the Expos could settle in their territory.

Further, the petition charges that the RSDC panel was impossibly tainted by a conflict of interest. An increase in the rights fees for the Orioles and Nationals means that more money goes into the revenue sharing pool. Baseball collects 34% of local television revenues as a tax to put in the revenue sharing pool. Profits from an ownership stake in a network - which the Orioles have enjoyed explicitly as a compensation for losing sole access to their territory - are not taxed in this way.

Both the Rays and Pirates are franchises who receive revenue sharing money. The petition also charges that the Chairman of the panel made statements during the hearing confirming an interest in receiving more revenue sharing money.

Even beyond this, there is the argument made in the petition that Baseball had a financial stake in the outcome of the arbitration, as it had privately given the Nationals money, secured from a third party loan, in both 2012 and 2013 in advance of an expected windfall when the arbitration case was handed down. Therefore, Baseball, which convened the committee, as well as two of the three committee members, stood to benefit financially from a ruling in favor of the Nationals. The panel in essence began with an outcome pre-determined - which was disadvantageous to the Orioles - and did everything to live up to that outcome.

Or at least, that's what MASN argues. The New York judge who received the petition felt it had enough merit to issue a temporary restraining order against either Baseball or the Nationals doing anything to enforce the award from this arbitration panel. The Nationals had been arguing for Selig to declare the Orioles in default for payments they were supposed to make according to this biased arbitration panel.

MASN wants a new arbitration hearing with an unbiased panel that will act according to the terms of the Settlement Agreement. A full hearing on the matter of an injunction will be held later in August, and if things escalate beyond that, a trial will be set for an undetermined later time.

It's not just conjecture by MASN that the RSDC ignored the Bortz methodology. The Managing Director of Bortz stated in an affidavit that the RSDC "improperly ignored facts and intentionally ignored other applicable reports that applied the established methodology" - all in order to find in favor of the Nationals, which, as far as MASN/the Orioles are concerned, it had planned to do for years, going back to when MLB was selling the Nationals franchise.

One way that the RSDC juked numbers to rule in the Nationals' favor, MASN lays out in its petition, is that the RSDC considered as a baseline numbers from the 2007 season, which, as the first year of MASN's existence, are not representative of how it has performed in any year since and particularly not in the present.

In 2007, MASN had a 5% profit margin; since, it has run on a 20% profit margin, which is, according to Bortz, the industry norm. That 20% profit margin has been applied in every single other case except for this dispute and is considered a reasonable profit. The RSDC used these 2007 numbers to justify ruling that a 5% profit margin was reasonable for MASN going forward despite the fact that it had never done so before, and was expressly bound in the Settlement Agreement to use the Bortz methodology.

By shifting money from MASN profits to the rights fees, the Orioles suffer in two ways. One, they lose the 85% of money that they would have collected from what would be shifted to the Nationals rights fees. Two, they would lose 34% of money shifted to their own rights fees as part of the revenue sharing tax. If the result of the arbitration is that both the Orioles and Nationals make $60 million more in rights fees, that's potentially $71 million annually that now goes to the Orioles that would be lost if this arbitration award is forced upon them.

There is a further question of whether MASN could even continue to exist in its current form if it was forced to have another $120 million in expenses over what it now possesses. It seems unlikely that it could.

Baseball and the Orioles made a deal when the Expos came to town. Baseball no longer likes the deal and is trying to finagle out of it. One wonders if Selig arranged things so he could buy Angelos' cooperation for a few years, only to turn around and take him to the woodshed later. If so, he forgot who he was dealing with. Now, Angelos, through the MASN entity, has taken Baseball to court to protect the 2005 agreement. This is a man who won a multi-billion dollar settlement from tobacco companies. He's probably not afraid of whatever baseball can throw at him.

Whether this all will go to a trial is not even a sure thing. The trial will not be under seal, which means that any documents introduced about the finances of baseball or its individual teams, would be open record. Baseball has fought very hard to avoid ever doing this, probably because then the players will see how much money the teams are hiding with sleight of hand.

It could be that now that MASN is on the path to a trial, Baseball will suddenly be much more conciliatory in trying to broker a settlement, rather than trying to force them into a disadvantageous award from a biased arbitration panel. Baseball could beat MASN/the Orioles and still lose in the long run if the players are armed with more accurate information for the next round of labor negotiations.

What seems like fairness to a layperson does not always go hand in hand with what the law says. Hardball Talk's Craig Calcaterra, one of the many lawyer-bloggers floating around, notes how difficult it is to have a court set aside an arbitration decision, regardless of how screwed up that arbitration may have been. And the Nationals and Baseball will have their own high-powered lawyers to argue that the decision was fairly reached and, therefore, binding on MASN, who would then have to pay the Nationals a lot more money. In turn, the Orioles would in turn receive a lot less money.

Of course, the whole agreement was constructed to be unfair to the Nationals to begin with, offsetting the unfairness of the Orioles losing the sole access to its own territory. Without the initial agreement being advantageous for the Orioles, Angelos would have gone to court when the Expos came to town. This agreement was the price of his silence. Little surprise that now that baseball no longer wants to kick in that money that Angelos is no longer silent about it.

It's impossible to know what will happen next because nothing like this has ever happened before, with a team waging a court battle by proxy against another team and the league in general. Uncertainty over the outcome of this process could go a long way to explaining why the Orioles have been more cautious with payroll than outside observers think they should be. With tens of millions of dollars of annual revenue potentially going up in smoke, they simply don't know what they'll be working with in five or even two years.

Until then, we wait. On the field, outside of any of these legal concerns, the 2014 Orioles have played their way to a five game lead in the American League East. The future may hold any number of problems, but for today, things are looking pretty good. The rest is up to a New York judge.

This article has been edited to clarify legal terminology that was inexpertly used by this layman. Thanks to resident CCer kba26 for the explanation.