NATIONWIDE: An Introduction to Sports Law

Chambers Overview

The sports industry has been subject to significant disruptions as a result of the COVID-19 pandemic. Professional, amateur and collegiate teams in all major U.S. jurisdictions have had to adjust courses of action and strategies to account for the effects of the pandemic. This has included the creation of novel and innovative business plans to ensure business continuity, to tap into new income streams and to ensure the safety of employees, players and live spectators. Over the last year, Herrick has advised sports clients on a spectrum of business related issues, including joint ventures, mergers and acquisitions, highly structured financings involving amendments of senior secured facilities and mezzanine debt facilities, offerings of secured convertible notes, stadium development matters, transfers of ownership interests, concession services agreements, mixed use developments and sports betting platforms. Advising on these matters involved additional factors and considerations resulting from issues that arose as a result of the pandemic. Herrick’s team also counseled sports clients in reevaluating new and existing deals and contract terms resulting from business interruptions—including ticket refunding issues, employment, insurance, concession issues, media rights, contract issues and compliance with current and changing public safety status and regulations. While the crisis is still ongoing, and additional unforeseen issues may arise, below please find some current considerations as well as trends that leagues, teams and stadium operators will have to consider going forward.

Ensuring Safety Protocols: To reopen stadiums at full capacity, teams must implement a thoroughly researched and detailed plan of action to ensure the health and safety of fans, players, employees and contractors. Considerations should include: (i) air and water quality management, (ii) cleaning and sanitization procedures, (iii) emergency preparedness protocols, (iv) health service resources, (v) contactless food and beverage services, (vi) wearing of masks and social distancing (vii) proof of vaccination or proof of a negative COVID-19 test and (viii) signage and other communications promoting health literacy to workers and other attendees at sporting events. By rigorously following safety protocols, teams can assert that they took reasonable steps to protect the health of players, vendors, employees and attendees.

Liability Considerations: With respect to liability, organizers of sports events generally owe a duty of care to both participants and spectators to ensure that the stadium and playing fields are reasonably safe and to avoid creating dangerous conditions. While organizers generally have a duty of care to take reasonable steps to provide safety, U.S. courts have repeatedly emphasized that total safety is not guaranteed. This duty includes pre-game safety checks of the playing surface and stadium, ensuring that participants are wearing the necessary protective clothing/equipment, ensuring that medical and emergency personnel can respond appropriately if required, and otherwise adopting and implementing training and safety protocols and procedures. Post COVID-19, this duty will include safety and sanitation regulations related to the preventing the spread of the virus, to the extent possible.

Waivers: Once restrictions on public gatherings are eased to permit significant attendance at live sporting events, teams and stadium operators can be expected to seek waivers of liability relating to COVID-19 exposure. It is common for event organizers to include disclaimer language in small print on the reverse of the ticket to disclaim legal responsibility for any injuries that might occur to fans at the stadium. These waivers would likely be included in the terms of admission applicable to sporting event tickets and suite licenses; thereby eliminating the need to obtain signed written waivers of liability. However, disclaimers and waivers do not necessarily protect facility owners from their own negligence. The validity of these disclaimers is an issue of state law, and states differ as to their enforceability.

Insurance: Insurance policies should be reviewed to determine possible coverage for cancellations or other business disruptions and all applicable notice requirements. Relevant insurance policies to review and consider may include business disruption (including contingent disruption policies), event cancellation, liability (commercial and general), travel and civil authority.

Review of Contracts: Force majeure provisions are crucial contract provisions that must be carefully reviewed and reconsidered in light of the COVID-19 crisis. These provisions are commonly found in commercial agreements and provide that, under specified conditions, a party’s contractual performance is excused when such performance becomes impracticable or impossible due to circumstances beyond such party’s control. Determination of whether pandemic is covered by a force majeure provision requires a case-by-case analysis of the specific provision under the governing law to which the contract is subject. In many cases where a pandemic is not specifically referenced in a force majeure provision, the parties to an agreement, and potentially a court, will need to determine whether actions taken in response to the pandemic fit within any of the specified force majeure events, such as governmental action. As an initial response to the pandemic, professional sports leagues were careful to announce the postponement, rather than cancellation, of regular seasons. This distinction enabled such leagues to preserve force majeure remedies by not being the proximate cause for loss of games.

As an alternative to invoking a force majeure clause, teams may be able to avail themselves of make-whole benefit provisions, which are contractual provisions that permit the parties to mutually agree on a substitute or replacement benefit with a value nearly equivalent to that of the intended original benefit.

Other contractual provisions that need close consideration in light of business interruptions as a result of the pandemic include termination rights, representations and warranties, conditions, performance thresholds and milestones, grace periods, defaults and remedies, notice obligations, and arbitration and other enforcement rights. It is crucial to evaluate any relevant contractual provisions as soon as possible. and, if possible, to come to a mutually agreeable resolution with any counterparties to the contract.

Access to Capital: Cash flow shortages relating to interruptions in sporting events can be mitigated by drawing on the team’s credit facility, a debt instrument available to most teams, league-wide credit facilities, potential payments from insurance policies and/or capital calls from team equity owners. These options, among others, help a team to bolster its balance sheet and provide liquidity in these uncertain times. In connection with drawing on or putting in place a new debt facility, an opportunity exists to ease current financial covenants and draft alternative covenants that provide greater flexibility for the teams. As many sports properties confront long-term cash flow and capital shortfalls, new variations on investment funds are likely to continue to develop.

Industry Trends: As professional sports resume normal operations, numerous trends have emerged indicating the overall health and growth of the industry. As U.S. leagues have modified ownership regulations to allow new investment opportunities, private equity funds have become a novel investment vehicle for minority ownership interests of professional sports. In addition, sports and entertainment venues have, in recent years, paired with and become integral components of mixed-use development projects. Another industry trend has been a rise in streaming services resulting in new ways of viewing sports programming, new industries entering the streaming market and new methods of consuming sports content. The rise in consumer interest in viewing sports on demand has increased during the pandemic. Sports teams and leagues are working to maximize revenue streams, mine data and provide novel services from increased streaming of programming that could lead to virtual and interactive technology.

The law surrounding COVID-19 is constantly evolving, and, as the sports industry welcomes people back to live events, we will continue to monitor the legal, business and operational issues as they arise.