MLB's Civil War: An $800 Million TV Dispute Heats Up

Major League Baseball

As of 2014, ESPN will pay $700 million a year for the rights to broadcast MLB games -- totaling $5.6 billion from 2014 through 2021 -- almost twice what it now shells out.

On July 29, The Hollywood Reporter broke news about bombshell litigation between the Baltimore Orioles, the Washington Nationals and Major League Baseball over TV money. New information has surfaced as part of a broadcaster's emergency motion for injunctive relief to prevent the Nationals from terminating baseball game telecast rights.

To quickly review what happened prior to Thursday's intervention by a New York judge, when the Montreal Expos became the Washington Nationals in 2005, Baltimore Orioles owner Peter Angelos was upset by the prospect of potentially losing market share to another team in his region. So a deal was worked out whereby the Orioles would hold a majority partnership profit interest in Mid-Atlantic Sports Network (MASN), which would get to telecast Nationals games at a substantial discount from 2005 to 2011. After that, MASN would be obligated to pay the Nationals "fair market value."

The parties went to arbitration to determine that "fair market value." According to documents that have recently surfaced, the Nationals demanded $118 million a year from 2012 to 2016. The Orioles-controlled broadcaster thought fees starting at $34 million and rising to $45.7 million were more appropriate. On June 30, an MLB committee privately adjudicating the dispute issued a decision favoring the Nationals.

The broadcaster refused to pay, though, leading the Nationals to send notice of default, and MLB commissioner Bud Selig to threaten to "impose the strongest sanctions available" if the parties went to court. Despite the warnings, the teams and their broadcasters filed papers in New York state court. The MLB was one of the named respondents. The court action came after the Orioles told MLB they would be seeking no less than $800 million in lost asset value, according to a letter obtained by THR.

After our story went public, a MASN spokesperson attempted to calm nerves by issuing a statement that read in part, "Our loyal viewers should understand this is a business dispute and will have no impact on the telecast of the Clubs’ games."

But things were certainly less settled with a default notice being floated. MASN's emergency motion made this explicitly clear. The broadcaster's court papers warned of the irreparable harm that would follow if the Nationals pulled their games:

"MASN's primary and essential programming -- the telecast and distribution of the Nationals' and Orioles' games -- can not be replaced. MASN immediately would be in breach of nearly 30 affiliate agreements for the distribution of Nationals' games and with advertisers and sponsors who have bought time for their products during Nationals' telecasts. MASN's exclusive right to telecast the games of two MLB clubs (the Orioles and the Nationals) within the same geographical television territory would be forever lost."

The broadcaster's memo also revealed something else not commonly known about the arrangement worked out inside the sanctum of professional baseball. If the Nationals got a hefty increase in the amount of TV fees, MASN would be contractually required to pay "the same rights fees" to the Orioles. And because of MLB's revenue sharing agreement, the Orioles would then have to pay up to 34 percent of that amount to the league.

In other words, giving the Nationals more money not only represents less profit to the Orioles, but as the Orioles view it, a "tax," which explains why Angelos was willing to defy Selig's order and litigate the issue. MASN also believes it can't afford this outcome. There's less-than-subtle hints that the dispute could blow up the broadcaster's business, leaving Orioles and Nationals telecasts in some gray zone.

The basis for why MASN believes the arbitration award should be vacated is two-fold. First, the broadcaster points to a clause in a settlement agreement that allegedly sets forth a specific methodology to determine the fair market value of telecast rights fees. The formula was developed by MLB consultant Bortz Media & Sports Group. During the arbitration, though, a panel comprising the chief operating officer of the New York Mets, the president of the Pittsburgh Pirates and the owner of the Tampa Bay Rays is said to have abandoned that formula for another, "thereby diverting MASN's profits to the Nationals and MLB and reducing MASN to an economically unsustainable 5 percent profit margin," according to the emergency motion.

Second, the broadcaster challenges the impartiality of the arbitrators, and — in court papers that bring up such things as MLB giving the Mets $25 million to deal with a cash shortfall after team owners did business with Bernard Madoff — accuses the league of "corruption" and "fraud." According to the broadcaster's papers:

"At the time of the sale, MLB informed the purchasers that despite the terms of the Settlement Agreement, MLB would use its power over the arbitral process to control the determination of the Nationals' telecast rights fees and thereby restructure the economics of MASN to the Nationals' benefit. MLB made these promises to secure a high price for the team and, indeed, MLB received a $340 million windfall when it sold the Nationals. At the very first opportunity to reset the telecast rights fees, MLB effectuated the scheme; it instructed the [Revenue Sharing Definitions Committee] to depart from the Settlement Agreement's charge to use the RSDC's established methodology. In a telling moment during the merits hearing, the Nationals' counsel stated the Nationals have been 'waiting seven years to get our rights back.' "

The Nationals filed their own legal papers in response to the emergency motion, which they paint as an attempt to "trample" and "eviscerate" their bargained-for termination rights and threaten the "balance of power between the Orioles, as majority partner, and the Nationals" as minority partner.

The team also argued that it was within the commissioner's powers to order MASN to pay the Nationals, and as for harm, the team referenced its payroll. The team spends nearly $135 million on players -- ninth most in the league. If the judge grants the broadcaster's request, the team warns, it "would be forced to make arrangements to finance their ongoing operations and salary obligations, notwithstanding that the Nationals are entitled to meet cash flow needs through the rights fee payments the Agreement requires."

A New York judge has now ordered respondents including Commissioner Selig to show cause as to why a temporary restraining order shouldn't be issued, and in the interim, has restrained the Nationals and MLB from taking any action to terminate MASN's license to telecast Nationals games. It might be the first time that MLB has been enjoined by a club.

The case continues as this is only the early innings.

UPDATE: The MLB Commissioner's Office has filed this response in court that notes MASN's petition is a violation of the league's constitution, demands the dispute be thrown to arbitration and argues why MASN is unlikely to succeed on its arguments nor face irreparable harm.

Twitter: @eriqgardner