## Facts

- In December 2004, Major League Baseball (MLB) allowed the Montreal Expos to relocate to Washington, D.C., becoming the Washington Nationals Baseball Club (Nationals), over the objection of the Baltimore Orioles (Orioles).
- MLB, the Nationals, the Orioles, and TCR Sports Broadcasting Holding, Inc. (operating as Mid-Atlantic Sports Network (MASN)) entered into an agreement tied to the relocation under which MASN would televise Orioles and Nationals games in a defined territory.
- By 2012, the Nationals owned 13% of MASN, and the Orioles owned 87% and held nearly complete operational control of MASN.
- The agreement fixed the broadcast “rights fees” MASN would pay the clubs for an initial five-year period, with the clubs receiving the same amount starting in 2007.
- The agreement also created a mechanism for setting rights fees for each later five-year period.
- If MASN and a club could not agree on the new fees and mediation failed, the agreement required MLB’s Revenue Sharing Definitions Committee (RSDC)—a committee of representatives from three MLB clubs—to determine the telecast rights’ fair market value.
- The agreement directed the RSDC to use its established methodology for evaluating related-party telecast agreements, including review of the network’s income statements.
- MASN and the Nationals failed to agree on rights fees for the 2012–2016 period; the Nationals sought substantially higher fees than MASN proposed (for example, the Nationals sought $109 million for 2012 while MASN proposed $34 million).
- The parties submitted the dispute to the RSDC and provided financial and industry evidence addressing, among other points, the level of operating margin MASN should retain after paying rights fees.
- The RSDC received evidence that MASN’s operating margin was 6.2% in 2007 and ranged from 25.1% to 33.4% from 2008 through 2011.
- The Orioles argued MASN should earn a 20% annual operating margin after rights fees.
- The RSDC also received evidence that the market value of live sports programming had risen substantially in both large and small markets and that rising rights costs reduce broadcasters’ operating margins.
- In 2014, the RSDC issued an award setting the Nationals’ rights fees for 2012–2016 at levels substantially higher than MASN’s proposal.

## Issues

1. Under the parties’ agreement, what was the fair market value of the Nationals’ local telecast rights for the 2012–2016 term, as determined by the RSDC using its established related-party methodology and MASN’s financial statements?
2. In determining fair market value, what operating margin (if any) was reasonable for MASN to retain after payment of rights fees in light of industry evidence showing increased prices for live sports rights?

## Decision

- The RSDC determined the fair market value of the Nationals’ telecast rights for the 2012–2016 period under the contract’s required methodology.
- The RSDC set rights fees at amounts substantially above MASN’s proposed figures for the period.
- In reaching its valuation, the RSDC considered MASN’s income statements and evidence of MASN’s historical operating margins.
- The RSDC also considered industry evidence that increasing market prices for live sports rights place downward pressure on network operating margins.
- The RSDC rejected a valuation approach that would preserve the level of operating margin urged by MASN and the Orioles if doing so would prevent payment of fair market value rights fees.

## Legal Principles

- When a contract assigns valuation of sports telecast rights to an arbitral committee, the committee’s authority and decision rule come from the contract.
- “Fair market value” determinations may be made using an established related-party valuation method when the broadcaster and rights holders have common ownership and control features.
- Financial statements and operating margins are relevant inputs to valuing media rights, but historical margins do not control when market conditions for comparable rights materially change.
- Evidence of market-wide increases in sports-rights prices supports the conclusion that a broadcaster may earn lower margins while still operating within commercial norms.
- Where the governing agreement requires the decisionmaker to apply a specific methodology and consider defined categories of financial information, the central question is whether the valuation reflects that method and those inputs.

## Conclusion

In this 2014 RSDC arbitration, the committee applied the settlement agreement’s required related-party methodology, reviewed MASN’s income statements and operating history, considered evidence that sports-rights values had increased across markets, and set the Nationals’ 2012–2016 rights fees at fair market value substantially above MASN’s offer.


TCR Sports Broadcasting Holdings, LLP v. Washington Nationals Baseball Club, MLB Revenue Sharing Definitions Committee (2014)