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Chaos and Fallout: The Legal Impact of the AAF's Potential Collapse

The AAF got off to a start filled with optimism, but the lives of players and coaches will be directly impacted following the sudden news of a suspension, which could cause a wide and intense legal fallout.

After a promising start, the Alliance of American Football is on the verge of collapsing. The legal ramifications could extend far and wide, and complicate the lives of many businesses and individuals.

As reported by The MMQB’s Albert Breer and Conor Orr, the AAF suspended operations on Tuesday. The move is likely a precursor to the eight-team league permanently shutting down before the end of its inaugural 12-week season. Approximately 450 AAF players, along with more than 100 coaches and dozens of league employees, will soon be out of jobs unless a court intervenes or a financial backer saves the league.

The apparent decider of the AAF’s fate is league chairman Tom Dundon, a Dallas-based billionaire who also owns the Carolina Hurricanes. After the first week of AAF games had been played in February, Dundon joined the AAF. He did so by pledging a $250 million investment.

At the time, Dundon assured the public that he was in it for the long-haul. “There’s a difference between commitments and funding,” Dundon was quoted as saying. “They had the commitments to last a long time, but maybe not the money in the bank. My money is in my bank. I’m sure of it … That’s enough money to run this league for a long time. We’re good for many years to come with what I just did.”

As later reported, Dundon’s pledge to the AAF did not quite involve “money in the bank” or at least not all of it immediately. He agreed to pay the pledge incrementally, over a period of time. It’s unclear whether Dundon legally became majority owner of the AAF at the time of his agreement in the February transaction, or whether that status was contingent upon him paying a certain amount of the $250 million. As explored below, such a question could take on legal significance.

The AAF’s smart design . . .

Charlie Ebersol and Bill Polian headline a group of investors who created and financed the AAF. Like the forthcoming XFL, the AAF is structured as a “single entity” sports league. This means that the AAF owns all eight AAF teams and employs all of the teams’ players, coaches and staff. As one business, the AAF can more easily trade—or, more accurately put, transfer—players in order to ensure that no one team is too dominant. Likewise, it can take steps to guarantee that each team is perceived by fans as having a legitimate chance to succeed.

The AAF model is radically different from that of the NFL. Each NFL team has a separate ownership group and each team employs its players, coaches and staff. While NFL teams collaborate in a variety of ways, they are fundamentally competing businesses who want to defeat each other both on and off the field.

The AAF’s single entity structure has a number of advantages. They include centralization of marketing, promotion and broadcast activities. This streamlined approach has likely aided the AAF in negotiating impressive broadcast contracts with CBS and the NFL Network.

There are legal advantages to the single entity structure, as well. For one, the AAF controls all of the intellectual property connected to league operations. No AAF team can attempt to control its image without the AAF’s approval. This makes sense since no AAF team acts on its own. Each AAF team is part of the AAF.

Single entity structure also ensures that the AAF avoids scrutiny under Section 1 of the Sherman Antitrust Act and the accompanying risk of treble damages. Section 1 prohibits competing businesses—such as rival and separately-owned NFL teams—from restraining competition in ways that cause more economic harm than good. The presence of Section 1 is a main reason why major pro leagues collectively bargain salary caps, maximum player salaries and other blatant constraints on player earning power with players’ associations. Rules that restrain players’ wages, hours and other working conditions can run afoul of Section 1 unless they receive the assent of players’ associations.

The AAF, in contrast, doesn’t need to worry about Section 1 of the Sherman Act and thus doesn’t need to engage in labor negotiations with players. That is because the AAF is one business. The eight AAF teams are akin to departments or wholly-owned subsidiaries within that business. Think of Microsoft and its Xbox and PC divisions that in some ways compete but for the benefit of the same parent. The same is true of PepsiCo with its Pepsi and Mountain Dew soft drinks that “compete” in the same vending machines but to the benefit of PepsiCo. To that point, a player on the Arizona Hotshots and one on the Memphis Express may be on different teams (departments) but they are both employees in the same company: the AAF.

A single-entity league is also much easier to sell in its entirety than a league with individually-owned franchises. When Dundon became the AAF’s chairman and its primary financial backer, he presumably gained final say on all league operations. Such an outcome is almost unimaginable with the NFL, where no one person would likely be able to buy all 32 individually-owned teams at the same time. All it would take is one NFL owner to refuse to sell.

. . . but troubled execution

Like many new sports leagues, the AAF has experienced turmoil in its early stages. As an early sign of trouble, the AAF struggled to meet payroll after the first week. In addition, venture capitalist Robert Vanech sued Ebersol in February, claiming that he and Ebersol had co-conceived of the AAF and thus he owns 50% of the league. Vanech also insists that he never consented to the AAF’s transaction with Dundon. The case is ongoing. If the AAF collapses, it’s not clear how much value Vanech would gain if a court awarded him 50% of a defunct league.

Despite these challenges, the AAF seemed like it had a chance to succeed. By playing games between February and April, the AAF—unlike the USFL in the 1980s—made no ill-advised attempt to compete with the NFL. Also, AAF teams featured many players who had played in NFL training camps and in some cases played in NFL preseason and regular-season games. The AAF’s quality of play, though obviously not as high as the NFL, was also superior to college football and produced some exciting games.

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Further, the league seemed aware of the need to control costs while still offering to pay players a solid wage. AAF players are paid, on average, about $83,000 a season. This is a lower amount than in the NFL—where the minimum salary is $480,000 and where practice squad players are paid at least $8,000 a week. However, for four months of play, it is still well above the median American income of approximately $47,000 a year.

Perhaps most impressively, AAF games have been broadcast on major networks. CBS and the NFL Network have aired AAF games. By partnering with well-established TV partners, the AAF could be watched by larger audiences. Just as important, these partnerships helped to legitimize the AAF as a “real league” that seemed sort of like the NFL and would presumably stick around.

Unfortunately for the AAF, those promising signs apparently didn’t translate into viability.

The potential legal fallout of the AAF’s demise is wide and intense

There are a number of potential lawsuits that could arise from the demise of the AAF.

Have internal AAF governing documents been followed?

In the coming days, expect attorneys for Ebersol, Polian and other investors to comb over AAF governing documents. They might ask themselves this question: if Dundon is calling all the shots on his own, is he legally authorized to take such consequential measures in the absence of approval or at least consultation with other AAF officials?

As reported by a number of journalists close to AAF officials, coaches and players, today’s developments came as a complete shock. Although the league has experienced financial woes (discussed above), there was confidence that the AAF would survive at least through the end of the season. Just as telling, both Ebersol and Polian—the two persons who by all accounts ran the league until Dundon joined—reportedly opposed shutting down the AAF and their opposition apparently had no power.

The decision to suspend AAF operations could require an internal administrative process and, if so, it’s not clear whether such a process occurred. Pro leagues normally operate through a constitution and bylaws, and those terms outline a procedure for stopping play. In the NBA, for example, Article 16 of the league’s constitution details the necessary and orderly procedure for dissolution of the NBA and the legal ramifications of that dissolution (for example, a stipulation that New York law would apply to any resulting controversies).

Since the AAF is a single-entity, perhaps it does not operate with such procedures and perhaps Dundon can essentially do whatever he wants. Still, as a business worth at least hundreds of millions of dollars, it’s reasonable to expect that governing documents are instructive on what appears to be the pending dissolution of the AAF. If those documents were not followed, Ebersol, Polian, other investors and even coaches and players could seek a temporary restraining order from a court to stop a closure of the league and rewind the decision to stop play until a court could review the situation.

What exactly did Dundon “buy”

The terms of the financial agreement signed by Dundon and the AAF are extremely important.

While the agreement is a private document, it presumably specifies how and when Dundon would obtain equity in the AAF. 

Published reports indicate that Dundon agreed to pay $250 million. That was the headline, but the details are far more significant.

It’s not certain, for instance, how the payment would be made, and under what terms it would be paid. The Action Network’s Darren Rovell reports that Dundon has paid on a week-to-week basis, and has thus far paid about $70 million. The pledge may have also been tied to banks and lending institutions’ willingness to loan money. Whether there has been full compliance with applicable procedures remains to be seen.

Could Dundon legally buy the AAF to strip it of its intellectual property and dump the rest?

As Breer first reported, there is a belief among AAF executives that Dundon purchased a majority stake in the AAF not for the underlying asset of a professional football league but rather for its accompanying intellectual property. Specifically, Dundon allegedly eyed ownership rights in an innovative gambling app technology and its data.

The business of legal sports betting has grown considerably since last year's ruling by the U.S. Supreme Court in Murphy v. NCAA. In that case, the Court ruled that the federal ban on sports betting is unconstitutional and, as a result, permitted each state to legalize sports betting. Thus far, eight states have legalized sports betting and as many as two dozen others could soon follow. If the AAF is pioneering an innovative app for sports betting and if that technology could be licensed to other pro leagues—such as the NFL or the NHL—it could prove quite lucrative to Dundon.

It’s not clear, however, whether Dundon’s investment in AAF contemplates AAF technologies. As reported by Ad Age last September, MGM Resorts International entered into a contract with AAF to develop sports betting technologies. The contract would indicate whether MGM Resorts owns the intellectual property and licenses it to AAF, or vice-versa. If MGM Resorts owns the related intellectual property, Dundon might not own the AAF app or its data.

Even if we assume that Dundon became the owner of the AAF gambling app, he may be barred from shutting down the league simply because he obtained the app and doesn’t want the league. For one, he owes fiduciary duties to other investors in AAF. Those duties include a duty to act in good faith, a duty of care and a duty of loyalty. Other investors could potentially sue him for breaching those duties. They would need to find evidence that Dundon looked out for his own interests at their—and the AAF’s—expense.

Similarly, if Dundon agreed to certain obligations and duties in his contract to purchase part of the AAF, other investors could contend that Dundon breached those obligations and duties. They could also argue that he unjustly enriched himself and willfully mispresented his intentions to the point of committing commercial fraud.

Of course, if Dundon’s contract with the AAF contained none of these provisions and if he satisfied his fiduciary duties, he would likely defeat any such lawsuits.

Could Dundon stop the AAF for any reason?

It’s also unknown under which conditions (if any) Dundon could back out a commitment to continue AAF operations.

Last week, Dundon expressed frustration to USA Today that, as he described it, the NFLPA would not permit the AAF to use players from NFL rosters. Dundon hoped that the NFLPA would see the value of inexperienced NFL players developing their games in the AAF. Under this logic, inexperienced NFL players would become more likely to succeed in the NFL.

However, the ability of players under NFL contracts to play for AAF teams is hardly a straightforward issue. It is one that requires substantive discussions and negotiations by the NFL and NFLPA. Keep in mind, if NFL teams required or “strongly urged” their players to develop in the AAF during the NFL offseason, those players would be denied of collectively-bargained protections for offseason free time and safety.

Could failed talks with the NFLPA have given Dundon the right to stop the AAF? Relevant business contracts and league governing documents would likely shed light on the answer.

The terms of Dundon’s agreement with the AAF also specify which league assets were transferred to Dundon and when. It was reported he bought a majority stake in the league. Did this stake transfer to Dundon upon completion of the contract to buy equity in the AAF, or was it contingent on Dundon paying all of the $250 million or a larger portion than $70 million (which is only 28% of the total investment)?

Could players, coaches, fans and media partners sue?

The answer to this question is “yes” but the viability of the claims is less certain.

Take players and coaches. In some ways they have the most to lose if the AAF shuts down. While wealthy AAF investors could lose more money, AAF players and coaches may be relying on their wages for family expenses and to pay mortgages. They may also be using their AAF employment for their family health care. Players are already feeling the effects, too. According to Rovell, AAF players’ contracts have been terminated and there is no severance play. The players, whose final AAF paycheck was received for last week’s game, have been told to return home. As The MMQB’s Robert Klemko reports, players are having to foot the bill for airfare. 

Players’ and coaches’ employment contracts obligate the AAF to pay them. It’s unknown, however, if those contracts contain clauses that would extinguish the AAF’s legal responsibility to pay in the event the AAF runs out of money. There could thus be debate as to whether the AAF has run out of money or whether Dundon is terminating the league for other reasons.

Even if no such clauses exist, the players and coaches might find the prospect of litigation (or, if the contract instructs, required arbitration) unappealing. Litigation is stressful and time-consuming. The players also do not have a union to represent them and thus would need to take their own initiative.

That hurdle could be overcome to some extent if the players and coaches pursued litigation in a class action (since the attorneys would run the litigation and each player/coach would not need to be actively involved). Even then, AAF investors may be insulated from any litigation if the AAF was created as a limited liability company or similar entity that limits personal exposure of business owners.

As to fans, those who purchased season tickets and/or tickets to forthcoming games have a right to a refund. Hopefully there is money available to pay them that refund. Given that the AAF is headquartered in San Francisco, fans might be able to avail themselves of California’s Unfair Competition Law. This law enables consumers who have been adversely affected by unfair business practices to sue the offending business. Fans might argue they were misled by false assurances and promises of the league’s continued operations.

Last but not least, various businesses entered into contracts with the AAF. Some of them are major entities, like CBS and the NFL Network. The terms of those contracts would indicate whether the AAF could be liable for failure to satisfy contractual obligations. The AAF’s insurance companies could also appear on the scene if they have not been paid.

In short, while the AAF might soon die, it could have a long afterlife in the courts.

Michael McCann is SI’s legal analyst. He is also Associate Dean of the University of New Hampshire School of Law and editor and co-author of The Oxford Handbook of American Sports Law and Court Justice: The Inside Story of My Battle Against the NCAA.