Florida State’s Way Out of ACC? Exit Penalties Could Be Ruled Unenforceable

Last summer, we wrote about the Atlantic Coast Conference’s (“ACC”) “ironclad” Grant of Rights agreement being the only document keeping top schools from leaving for either the Big Ten or Southeastern Conference (SEC), conferences that distribute considerably higher revenues to their members. The Grant of Rights had been successful in preventing such exits because of its significant withdrawal penalties, making it economically unfeasible for schools to leave.

That may soon change.

On December 22, 2023, Florida State University (“FSU”) sued the ACC, in Florida state court, seeking a declaration that the conference’s provisions governing forfeiture of media rights and payments on withdrawals are unenforceable penalties and unreasonable restraints of trade, stifling competition. Specifically, a provision in the ACC’s Grant of Rights requires that, if a member leaves the conference prior to the Grant of Rights expiring in 2036, the member forfeits annual revenue from its media rights, for each year remaining on the Grant of Rights’ term.[i] For FSU, this forfeiture amounts to $429 million worth of media rights.[ii]  On top of that, the ACC’s Constitution requires that FSU pay a withdrawal fee equal to three times the ACC’s total operating budget, which comes to $130 million.[iii] And, were it to withdraw, FSU also loses $13 million in unreimbursed broadcast fees for the 13 years left on the Grant of Rights, making the total exit price $572 million.[iv] FSU claims that the sole purpose of such an exorbitant exit price is to trap schools in the conference for the foreseeable future.[v] Otherwise, the exit price is not designed to compensate the ACC for the potential damage, if any, from member withdrawal.[vi]

The ACC, of course, sees things differently. Ready for battle, it in fact struck first, launching its own action against FSU a day earlier, on December 21, in North Carolina state court, where the ACC is headquartered. Per the ACC, FSU knowingly and voluntarily entered into the Grant of Rights 10 years ago, aware that the advantages created by aggregating each member’s media rights in the conference, as opposed to each member marketing them separately, would yield more lucrative long-term contracts between the ACC and ESPN, in turn, providing greater revenue distributions to conference members.[vii] The ACC claims that as a result of these media rights agreements, which could not have been achieved without the Grant of Rights, FSU has received hundreds of millions in distributions since 2013, when it executed the Grant of Rights.[viii] The ACC thus seeks a declaration that having accepted the benefits of the Grant of Rights for a decade, FSU is estopped from now challenging its enforceability.[ix]

The Roots of FSU’s Disenchantment

The Grant of Rights was born from the need to counteract the instability to media rights negotiations caused by conference realignment.[x] With the frequent withdrawals and additions of schools, the ACC had to continually renegotiate its media rights agreements with ESPN. This created uncertainty for ESPN with respect to games it could broadcast, and for conference members with respect to annual revenues they could anticipate. Therefore, to enable the ACC to secure long-term agreements with ESPN, the ACC and its members executed a Grant of Rights.[xi] The Grant of Rights provided that members, “irrevocably and exclusively” grant the ACC their media rights, including the right to produce and distribute their football games, for the entire term of the Grant of Rights, “regardless of whether such Member Institution remains a member of the Conference during the entirety of the Term.”[xii] This meant that were a member to withdraw from the ACC, it would be forfeiting revenue associated with its media rights for the remainder of years before the Grant of Rights terminated in 2036. For FSU, this would be $429 million ($33 million per year x 13 years).[xiii]

FSU was not always dissatisfied with what may now seem a Faustian bargain. When it accepted the Grant of Rights in 2013, one member of its Board of Trustees extolled its virtues, saying “[i]t ensures that we don’t lose any members. Nobody can afford to leave now.”[xiv] However, 10 years later, FSU saw a change in its football fortunes, leading it to believe that its brand entitled it to more revenue from the ACC.[xv] As an ACC member, it will receive about $33 million in 2024, whereas SEC members will receive approximately $55 million, and Big Ten members will receive over $60 million.[xvi] While FSU secured a larger share of revenues from the ACC in May 2023,[xvii] this was financed by taking money that would otherwise have gone to new members Cal, Stanford, and SMU, whose entry into the ACC Florida State vehemently opposed, claiming it further undermined the ACC’s football media profile.[xviii] As apparent evidence of the new entrants’ inferior media football value, FSU points to the large share of media revenue they ceded to the ACC in exchange for membership.[xix]

Matters came to a head when FSU, despite its undefeated season record, was excluded from the College Football Playoff. The school alleges that its being passed over for two one-loss teams “crystalized the years of failures by the ACC to fulfill its most fundamental commitments to [FSU] and its members.”[xx] Having decided it wanted out, but not wanting to sacrifice $572 million in fees and revenues, FSU brought its declaratory judgment action seeking to invalidate the revenue forfeiture and withdrawal payment provisions.

The Legal Issues

Restraint of Trade: Florida antitrust law provides that “[e]very contract…in restraint of trade or commerce in this state is unlawful.”[xxi] FSU claims that the ACC’s hefty exit price violates this law because it “prevent[s] [FSU] from competing in the marketplace to obtain the best economic terms for its athletic media rights, its student-athletes, and its athletics programs in the relevant market,” the relevant market being the market for athletics and athletic media rights.[xxii]

The problem with this claim is that Section 542.18 is concerned with protecting the public from harm to competition, not protecting “the competitiveness or incentives of individual actors.”[xxiii] An analogous situation arose in Capital Wealth Advisors, LLC v. Cap. Wealth Advisors, Inc. where a Florida court addressed a contractual dispute between an agent and a company over whether the allegedly lopsided incentive structure in their commission-sharing agreement was a restraint of trade under Section 542.18. The company claimed it was because of the “substantial financial disincentive” it created.[xxiv]  The court rejected this argument, holding that while the agreement’s commission structure “might very well have been — or became, in light of circumstances developed after its execution — quite advantageous to the Agent and disadvantageous to the Company…This does not make it a restraint of trade or commerce.”[xxv] Antitrust laws are not implicated where a contract later turns out to be financially unfavorable to one party, as that is the deal the parties struck and under which they operated for some time.[xxvi]

Here, too, while the ACC’s exit fees may have turned into a “substantial financial disincentive” to withdrawal, that does not make them a restraint of trade. Rather, this was the bargain FSU struck and that worked quite well for many years until FSU’s media football appeal outpaced what it was receiving from the ACC. Moreover, other ACC members, including its newest entrants Cal, Stanford, and SMU, are not complaining that they are trapped by the onerous exit price, further demonstrative that it is not inflicting general competitive harm.

Unenforceable Liquidated Damages: Even if not a restraint of trade, the contractual price of exiting the ACC — i.e. $429 million in forfeited revenue plus a $130 million withdrawal payment — may nonetheless be deemed an unenforceable penalty because it bears no reasonable relationship to the actual damages suffered by the ACC from a member’s exit.  Under Florida law, although “parties to a contract may stipulate in advance the amount that is to be paid or retained as liquidated damages in the event of a contract breach,”[xxvii] a liquidated damages clause may be held invalid where the stipulated sum is disproportionate to actual damages incurred, its purpose being merely to deter breach or compel compliance with contractual terms.[xxviii] As such, in Goldblatt v. C.P. Motion, Inc., the court found that a liquidated damages clause awarding a party $250,000 per contract breach, without regard to actual harm, was unenforceable, because “[i]t is…conceivable that the non-breaching party could collect more in liquidated damages than the actual harm suffered. Thus, the liquidated damages sum has the potential of conferring a windfall to the non-breaching party.”[xxix] In this instance, the non-breaching party “may only recover the actual damages pled and proven at trial.”[xxx]

Applying these principles, it is notable here that while the ACC’s Constitution indeed describes the $130 million withdrawal payment as “liquidated damages,”[xxxi] the ACC’s complaint contains no exposition of either the actual damages it would suffer from FSU’s exit or how the withdrawal payment and revenue forfeiture provisions were designed to approximate any such damages. Instead, the ACC takes the position that because FSU knowingly and voluntarily entered into the Grant of Rights, and accepted benefits thereunder, it is estopped from challenging its validity. However, the law on liquidated damages, whether in Florida or North Carolina, is not dependent on contractual parties having acted under an agreement. In every case where a liquidated damages provision is challenged, the parties have acted under, breached, or accepted benefits pursuant to the contract at issue. Yet the analysis as to whether a liquidated damages provision is void as a penalty turns on none of this. Rather, in making this determination, courts consider whether the stipulated damages is disproportionate to the harm actually suffered from one party’s breach, allowing the non-breaching party to reap a windfall.[xxxii]

Here, a court may find the $429 million in forfeited revenue and the $130 million withdrawal payment, to be disproportionate, arbitrary sums, bearing no relation to actual damages, and designed solely to penalize breach. Were the ACC to collect these amounts upon FSU’s withdrawal, it will likely reap a windfall, especially as the ACC’s complaint does not allege any actual damages from FSU’s withdrawal. Also, while FSU does not plead duress, it does hint at the unequal bargaining power between the ACC and its members in entering into the Grant of Rights. FSU alleges that the ACC refused to provide members with a copy of the Grant of Rights, only allowing members to inspect the document at the ACC’s headquarters “while under the ACC’s watchful eye.”[xxxiii] This too militates in favor of finding the withdrawal fee and revenue forfeiture provisions unenforceable.

Forum: Where Will the Case be Heard? It so happened that FSU filed its lawsuit in Florida state court just one day after the ACC filed its lawsuit in North Carolina state court. Based on principles of comity, Florida courts follow the rule that an action must be stayed “when the first-filed lawsuit involves substantially similar parties and substantially similar claims.”[xxxiv] Where the same parties and issues are involved, refusing to stay a subsequently filed state court action in favor of a previously filed state action, is an abuse of discretion.[xxxv]

Given this rule of comity, because the two lawsuits essentially mirror each other, both hinging on the enforceability of the Grant of Rights, it is likely that FSU’s action will be stayed in favor of the ACC’s suit in North Carolina. In that case, the legal issues surrounding penalties and antitrust injury would be decided in the ACC’s headquarters and principal place of business, perhaps not the friendliest forum for FSU.[xxxvi]

Conclusion: What Becomes of the ACC?

As a reminder of the Pac-12’s recent fate, FSU’s complaint frequently refers to the “Power Five (soon to be Power Four) conferences.”[xxxvii] While both lawsuits are in their infancy stages, a judicial finding that the ACC’s exit penalties are unenforceable would make it a lot easier for schools to depart for conferences distributing greater revenues to their members, in particular the Big Ten and SEC. It is left to be seen, but, if so, the “soon to be Power Four,” could quickly become the “soon to be Power Three.”

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[i] Atlantic Coast Conference v. Board of Trustees of Florida State University, North Carolina Superior Court, Dec. 21, 2023, ¶ 53 (citing Grant of Rights, ¶ 1).

[ii] Florida State University Board of Trustees v. Atlantic Coast Conference, Florida Circuit Court, Dec. 22, 2023, ¶ 90.

[iii] ACC Constitution, § 1.4.5 (annexed as Exhibit 1 to Atlantic Coast Conference v. Board of Trustees of Florida State University, North Carolina Superior Court, Dec. 21, 2023); Florida State University Board of Trustees v. Atlantic Coast Conference, Florida Circuit Court, Dec. 22, 2023, ¶ 90.

[iv] Florida State University Board of Trustees v. Atlantic Coast Conference, Florida Circuit Court, Dec. 22, 2023, ¶ 90.

[v] Id. at ¶ 47.

[vi] Id. at ¶ 49.

[vii] Atlantic Coast Conference v. Board of Trustees of Florida State University, North Carolina Superior Court, Dec. 21, 2023, pp. 1-2.

[viii] Id.

[ix] Id. at ¶¶ 145, 146

[x] Id. at ¶¶ 45-46.

[xi] Id. at ¶¶ 47-48.

[xii] Id. at ¶ 53 (citing Grant of Rights, ¶ 1) (emphasis added).

[xiii] Florida State University Board of Trustees v. Atlantic Coast Conference, Florida Circuit Court, Dec. 22, 2023, ¶ 90.

[xiv] Atlantic Coast Conference v. Board of Trustees of Florida State University, North Carolina Superior Court, Dec. 21, 2023, ¶ 65.

[xv] Id. at ¶¶ 97-98.

[xvi] Florida State University Board of Trustees v. Atlantic Coast Conference, Florida Circuit Court, Dec. 22, 2023, ¶ 88.

[xvii] Atlantic Coast Conference v. Board of Trustees of Florida State University, North Carolina Superior Court, Dec. 21, 2023, ¶ 99.

[xviii] Florida State University Board of Trustees v. Atlantic Coast Conference, Florida Circuit Court, Dec. 22, 2023, ¶¶ 116-117, 120.

[xix] Id, at ¶ 119. SMU is redirecting all of its media revenue to the ACC, while Cal and Stanford are redirecting 67%, for the next seven years.

[xx] Id, at p.1.

[xxi] Fla. Stat. Ann. § 542.18.

[xxii] Florida State University Board of Trustees v. Atlantic Coast Conference, Florida Circuit Court, Dec. 22, 2023, ¶¶ 134, 137.

[xxiii] Capital Wealth Advisors, LLC v. Cap. Wealth Advisors, Inc., 335 So. 3d 164, 166 (Fla. Dist. Ct. App. 2021), review denied, 2022 WL 2981775 (Fla. July 28, 2022) (citing United Am. Corp. v. Bitmain, Inc., 530 F.Supp.3d 1241, 1266 (S.D. Fla. Mar. 31, 2021).

[xxiv] Id.

[xxv] Id. at 167 (emphasis added).

[xxvi] Id.

[xxvii] Goldblatt v. C.P. Motion, Inc., 77 So. 3d 798, 800 (Fla. Dist. Ct. App. 2011).

[xxviii] Goldblatt, 77 So. 3d at 800; Humana Med. Plan, Inc. v. Jacobson, 614 So. 2d 520, 522 (Fla. Dist. Ct. App. 1992).

[xxix] Goldblatt, 77 So. 3d at 801.

[xxx] Id.

[xxxi] ACC Constitution, § 1.4.5 (annexed as Exhibit 1 to Atlantic Coast Conference v. Board of Trustees of Florida State University, North Carolina Superior Court, Dec. 21, 2023).

[xxxii] Tate v. Action Moving & Storage, Inc., 95 N.C. App. 541, 549 (1989) (contract clause providing for forfeiture of plaintiff’s belongings on breach held unenforceable penalty where no showing that value of plaintiff’s belongings pre-estimated damages for breach); Burzee v. Park Ave. Ins. Agency, Inc., 946 So. 2d 1200, 1203 (Fla. Dist. Ct. App. 2006) (amount specified as damages in noncompete bore no relation to actual damages, thus constituting unenforceable penalty).

[xxxiii] Florida State University Board of Trustees v. Atlantic Coast Conference, Florida Circuit Court, Dec. 22, 2023, ¶ 47, fn.3.

[xxxiv] Pilevsky v. Morgans Hotel Grp. Mgmt., LLC, 961 So. 2d 1032, 1035 (Fla. Dist. Ct. App. 2007) (citing Cuneo v. Conseco Servs., LLC, 899 So.2d 1139, 1141 (Fla. 3d DCA 2005)).

[xxxv] Id. at 1034-35 (citing Florida Crushed Stone Co. v. Travelers Indemnity Co., 632 So.2d 217, 220 (Fla. 5th DCA 1994)); Sorena v. Gerald J. Tobin, P.A., 47 So. 3d 875, 878 (Fla. Dist. Ct. App. 2010) (“trial court departs from the essential requirements of law by failing to grant [] a stay, when the first-filed lawsuit involves substantially similar parties and substantially similar claims”).

[xxxvi] FSU is also unlikely to get the ACC’s action dismissed for lack of personal jurisdiction, as its Board members have regularly attended ACC meetings in North Carolina since 1991. (Atlantic Coast Conference v. Board of Trustees of Florida State University, North Carolina Superior Court, Dec. 21, 2023, ¶¶ 8-10). And, dismissal for forum shopping is unlikely because the ACC could lodge the same accusation that Florida is a favorable forum to FSU.

[xxxvii] Florida State University Board of Trustees v. Atlantic Coast Conference, Florida Circuit Court, Dec. 22, 2023, p.2,  ¶¶ 10, 27, 70, 106, 116.