Pro Soccer Team Sale Offers Supervised by Ohio Court Under Tax Law (1)

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By Alex Ebert

For the first time ever, a court will referee offers to purchase a professional sports franchise, mandated by a law attaching strings to teams that get taxpayer assistance in Ohio and seek to relocate.

Franklin County Court of Common Pleas Judge Jeffrey Brown on May 8 imposed a 90-day stay in an Ohio attorney general suit seeking to block the Major League Soccer franchise Columbus Crew from leaving Ohio’s capital for Austin, Texas. Brown said he wouldn’t rule on the team’s constitutional arguments to dismiss the suit at this time, but ruled he would perform the unprecedented task of overseeing “bona fide” offers to purchase the team through in-court negotiations.

The maneuver is unique in professional sports, where local governments have been defeated in their attempts to keep franchises that want to relocate. Courts unanimously denied those attempts and found that blocking franchise relocation would violate the U.S. Constitution’s prohibitions against states meddling in interstate commerce.

“This order is unprecedented for a few reasons. First, the court is saying, ‘we’re not deciding,’ but it’s effectively assuming the law applies,” Matthew Mitten, a Marquette University Law School professor and executive director of the National Sports Law Institute, told Bloomberg Tax May 9. “Second, the court is itself acting as the de facto mediator rather than appointing a mediator and deciding what offer would meet the statute.”

“Like any court facing the prospect of litigation that could take years to resolve, Judge Brown is trying to facilitate possible resolution of our dispute at this early stage by overseeing a process that is fair to all participants,” Columbus City Attorney Zach Klein told Bloomberg Tax in a May 9 email.

90-Day Window ‘Reasonable’

The court is ordering negotiations under Ohio’s law that requires a local right of first refusal to purchase a professional sports franchise that “uses a tax-supported facility” and “receives financial assistance” from the state. Ohio and the city of Columbus argue the team has received at least $6.6 million in taxpayer support in the form of state and city improvements to a parking lot next to its stadium, an under-market-value lease of state fairgrounds on which its stadium was built, and infrastructure improvements.

The team and MLS argued they haven’t received any taxpayer assistance or have more than paid for any infrastructure improvements through the sharing of parking revenue.

Ohio Attorney General Mike DeWine (R) praised the court’s ruling as “reasonable and welcome.” He said the “ruling is a win for Crew fans and for soccer fans around the country who agree that Major League Soccer’s original franchise should remain in Columbus.”

The Columbus Crew and MLS didn’t immediately respond to requests for comment. However, they have filed motions seeking to dismiss the case, claiming that the statute’s time window for offers has expired, and arguing that the Ohio attorney general’s requests for information in the case were unreasonable.

Potential Conflicts from Detailed Negotiations

Under the order, Brown will supervise negotiations and might have to step in to resolve disputes about the production of team documents. That includes holding separate meetings with both sides, and fielding questions from purchasers interested in buying the team.

This could create potential conflicts and issues for appeal later in the case, Mitten said, because Brown could be seen as trying to mediate issues that he might later have to make a ruling on.

For example, the Crew was ordered to turn over “materials necessary for potential bona fide purchasers to make a valuation and offer to purchase,” but if the state and the team don’t agree on what that includes, the court must step in and decide.

From there, Brown said he will work with the parties to determine what constitutes a “bona fide purchaser” and offer for the team. That could mean wading into what a reasonable valuation of the team is. The state has asked for documents showing the team’s “ticket-sale revenue, sponsorship revenue, annual revenue, merchandise revenue, and the overall value,” but that might not be enough.

Researchers and economists have commented that many things go into the pricing of pro sports teams other than their revenue. Pricing can include market size, what other teams are selling for, or the tax advantages a billionaire might get through a purchase.

“Part of it is a trophy asset, but the other part is the pricing game is in full play,” Aswath Damodaran, a professor of finance at New York University’s Stern School of Business said in a 2015 panel on sports team pricing. “And to try to justify these prices with cash flow, you might be able to get there but you’d be looking like a yoga instructor when you’re done because you’re going to bend yourself into pretzels trying to justify a number that is completely and totally unjustifiable on a cash flow or value basis.”

The case is Ohio v. Precourt Sports Ventures LLC , Ohio Ct. Com. Pl., No. 18-cv-1864, 90-day stay 5/8/18 .

To contact the reporter on this story: Alex Ebert in Columbus, Ohio, at aebert@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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