No Slam Dunk: Memphis Seeks Legal Action Against the NBA for the Lockout

The first two weeks of the NBA season have been canceled, as both the NBA and NBPA continue to work toward reaching a settlement to end the lockout imposed by team owners after the parties’ most recent collective bargaining agreement expired.

As both sides bunker down for long hours with federal mediator George Cohen, third-parties are contemplating their own reactions to the fiscal effects of the NBA lockout.

This week, the Memphis City Council approved a resolution to allow the Memphis City Attorney to investigate what legal options the city has with respect to recouping the revenue it is expected to lose as a result of a shortened or potentially non-existent NBA season.

Memphis is home to the NBA’s Memphis Grizzlies.  The Grizzlies play their home games at the FedEx Forum, an arena which opened in 2004 after municipal bonds in the amount of $250,000,000.00 were used to pay for its construction.  A municipal bond is a bond secured by a public entity–in this instance, the Memphis and Shelby County Sports Authority, Inc.  If certain revenues are not high enough to cover the bond payments, the City of Memphis and its taxpayers will be responsible to foot the difference.

Although other events are held at the FedEx Forum, including the University of Memphis’ home basketball games, generate revenue used to make the bond payments, a large chunk of the money used to make these payments is generated through the Grizzlies’ use of the facility.  In particular, per the parties’ Arena Use and Operating Agreement, the Grizzlies pay the City of Memphis a $1.15 “seat rental fee” for every ticket sold to home games.  Additionally, sales tax from items sold at the FedEx Forum are applied to the bond payments.

Thus, given its need to generate revenue to make its bond payment, the City of Memphis arguably has reason to be proactive in seeking out legal solutions to the cancellation of at least a portion of the Grizzlies’ season.  However, it is unclear if the city will find much legal success in recouping revenue lost as a result of the shortened season.

As noted above, the city and Hoops, LP–the limited partnership under which the Grizzlies are governed–entered into an Arena Use and Operating Agreement.  This agreement granted the Grizzlies the right to use the FedEx Forum in exchange for certain things, including the $1.15 “seat rental fee.”

Given the existence of this agreement, the City of Memphis may wish to assert a cause of action for breach of contract against Hoops, LP.  However, a review of the agreement does not demonstrate any provisions which are clearly breached as a result of the reduction of the NBA season by at least two weeks and subsequent reduced amount of seat rental fees the city will receive.  While Section 6 of the agreement requires Hoops, LP to pay the $1.15 “seat rental fee,” neither this section nor any other section in the agreement provides that Hoops, LP must collect a certain dollar amount of such fees.

Additionally, Section 13 of the agreement outlines acts constituting events of default.  While it is an event of default if Hoops, LP fails to pay the “seat rental fee” within the specified time period, as noted above, there is not a provision in the contract requiring that Hoops, LP obtain a certain dollar amount of such fees.

Should the City of Memphis nonetheless be able to assert that Hoops, LP is liable to it under the agreement, another provision in the agreement likely protects Hoops, LP contractually.

The agreement contains a force majeure clause.  A force majeure clause protects a party from liability when extraordinary events occur.  In relevant part, the agreement defines “force majeure” as,

“. . . any delay or failure by any Party to this Operating Agreement in the performance of any non-monetary obligations due to causes beyond its control (other than lack of funds), including but not limited to. . . suspension of NBA league play for all NBA franchises.”

The lockout and subsequent cancellation of the first two weeks of the NBA season likely constitute the “suspension of NBA league play for all NBA franchises.”  However, it is unclear whether the failure to obtain revenue by selling tickets and merchandise constitute a “non-monetary obligation,” as this term is not defined in the agreement.  Arguably, a non-monetary obligation is one which does not require the payment of money by Hoops, LP to the City of Memphis.  Because the agreement does not require Hoops, LP to earn a certain dollar amount of revenue through ticket and merchandize sales at the FedEx Forum, the present factual scenario likely constitutes a “non-monetary obligation.”  Therefore, Hoops, LP can assert that it is free from any liability under the agreement’s force majeure clause, as a result of the lockout.

However, because “non-monetary obligation” is not defined in the agreement, the City of Memphis can argue that failure to obtain revenue through ticket and merchandise sales does not constitute a “non-monetary obligation,” and as such Hoops, LP is not protected by the force majeure clause and thus can be found liable under the agreement.

There are many legal theories the Memphis City Attorney will have to sort through as a result of the resolution brought by the Memphis City Council.  However, one thing is certain:  obtaining legal relief will take longer than ending the NBA lockout.

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