Is The University of Maryland’s Exit Fee Puny or Punitive?

Poe5 imageConference realignment in college sports has been on the upswing lately.  A few years ago, the Big Ten Conference added the University of Nebraska to its group of competing schools.  Last year, the South Eastern Conference (SEC) added Texas A&M.  Most recently, the University of Maryland and Rutgers joined The Big Ten Conference when the University of Maryland left the Atlantic Coast Conference (ACC) and Rutgers split from the Big East Conference.  With all the conference swapping that is happening, one could assume it is relatively painless to get up and leave a conference whenever the time is right.  The University of Maryland is finding just the opposite.

According to the ACC’s by-laws, The University of Maryland must pay a $50 million exit fee to leave the conference.  This fee does not make the University of Maryland’s President, Wallace D. Loh, very happy.  Just a few months before the school’s move, Loh voted against increasing the exit fee from $20 million to $50 million, arguing that the fee is more of a penalty and is illegal.  The University of Maryland’s athletic department is currently cash strapped and will find it difficult to foot a $50 million bill, so unless the University of Maryland and the ACC can agree to some other fee amount, the legality of the fee is likely to be challenged in court.

The key question in this case is whether or not the $50 million exit fee is reasonable and not merely a penalty.  The fee is written as a “liquidated damages” clause, and courts typically assess liquidated damages by looking at whether or not the fees are reasonable.  A fee that is disproportionate to the actual damages or viewed as unreasonable will be seen as a penalty and will not be enforced by courts.  The Uniform Commercial Code, a guiding authority on contract law, interprets liquidated damages in much the same way.

Is the $50 million fee reasonable?  Precise predicted damages will be calculated.  We can also compare the ACC’s exit fees to other conferences’ exit fees.  For example, Rutgers’s contract states it will have to pay a $10 million fee to leave the Big East.  Syracuse and Pittsburgh ended up paying only $7.5 million to the Big East when they left.  When Texas A&M and Missouri exited the Big 12, it was estimated that they would each pay more than $30 million, which is much closer to the $50 million fee in the ACC contract, but both schools ended up paying only about $13 million each.  When Nebraska left for the Big Ten, the fee was $9.25 million.  Just looking at these other numbers, it seems like the actual average fee floats around $10 million, far from the $50 million fee set by the ACC.  In this light, it would seem that the fee is not reasonable.

The University of Maryland will most likely settle this dispute outside of court.  The $50 million fee seems to be quite high comparatively to other schools and there is a chance it will be seen as a punishment to the University of Maryland, rather than as a fee that will make the ACC whole.  The ACC, however, has a strong incentive to keep the fee as high as possible.  If the fee is lowered too much, other powerhouse schools, like Florida State, will have less of an incentive to stay with the ACC, which could end up crippling the ACC.  The ACC is in a tough negotiation and will have to negotiate a number that is high enough to deter schools from leaving, but just puny enough to not be punitive.