NAFTA chapter 11 and professional sports in Canada.

Author:Schmoll, Robert A.


Modern professional sports leagues are significant economic enterprises, the most prominent of which span the political border between the United States and Canada. In recent decades, local governments in the United States have invested heavily in professional sports franchises by building stadiums and arenas, hoping either to prevent the home team from moving out or to entice someone else's home team to move in. The willingness to pay of U.S. local governments, coupled with apparently disadvantageous economic conditions in Canada, has resulted in a net loss of professional franchises for Canadian cities, in particular franchises in Canada's national game, hockey. This Note inquires whether this process harms Canadian investors in professional sports franchises in a way that implicates the North American Free Trade Agreement (NAFTA), specifically the Agreement's rules governing investment. Although there is a growing body of adjudications under NAFTA Chapter 11, U.S. local assistance to professional sports franchises has not, to date, been the subject of a claim. This inaction may result from the inertia of U.S. municipal investment in professional sports, the confusion created by the unique economic structure of the professional leagues, or the perception that the professional sports industry is somehow less worthy of attention. Based on a survey of the types of aid provided by local governments to professional franchises, the recent movements of teams in the three relevant leagues, and a close examination of the economic relationship between franchises in a single league, this Note argues that Chapter 11 is a potentially relevant, if overlooked, part of the regulatory landscape. After sketching a hypothetical claim under Chapter 11, the Note concludes with an examination of the NAFTA's Cultural Exception in light of the steady migration of National Hockey League franchises out of Canada.

TABLE OF CONTENTS I. INTRODUCTION II. MUNICIPAL INVESTMENT IN PROFESSIONAL SPORTS FACILITIES A. Modern Stadium Finance and Economics 1. Stadium Finance: Transfers from Local Governments to Professional Sports Franchises a. Direct Payments b. Favorable Lease Agreements c. Advertising and Other Revenue d. Loans and Additional Facilities 2. Stadium Economics: Returns on Municipal Investment in Professional Sports Franchises B. Overview of Relevant Events in the Professional Sports Leagues 1. Major League Baseball (MLB) 2. National Basketball Association (NBA) 3. National Hockey League (NHL) III. REGULATION OF INVESTMENT UNDER THE NORTH AMERICAN FREE TRADE AGREEMENT A. Basic Elements of a Claim under the NAFTA Chapter 11 1. The Claimant Must Be an "Investor" 2. The Claimant Must Have an "Investment". 3. There Must be a Government "Measure". 4. The Measure Must Breach One of the Substantive Guarantees of Chapter 11 B. The Canadian Cultural Exception to the NAFTA C. Is the Chapter 11 Dispute Settlement Mechanism Constitutional? IV. A HYPOTHETICAL CLAIM UNDER CHAPTER ELEVEN A. Professional Sports Franchise Owners are "Investors" under Chapter 11 B. Professional Sports Franchises are "Investments" under Chapter 11 C. Public Assistance to Sports Franchises Constitutes a Government "Measure" D. Does Public Assistance to Sports Franchises Violate the Substantive Protections of Chapter 11? 1. Is the Claimant "In Like Circumstances" with Favored Domestic Investors? 2. Has the Claimant been Treated Less Favorably? 3. Is there a Reasonable Policy Justification for Less Favorable Treatment? E. U.S. Municipal Assistance Injures Canadian Franchises V. WHY NOT PROTECT PROFESSIONAL HOCKEY FRANCHISES THROUGH THE CULTURAL EXCEPTION? I. INTRODUCTION

During the mid 1990s, Rod Bryden, owner of the Ottawa Senators franchise of the National Hockey League (NHL) watched two of Canada's eight NHL franchises relocate to U.S. cities. (1) The departing teams found that as player salaries and other operating expenses increased, their 50-year-old arenas could not produce enough revenue in small Canadian towns like Winnipeg and Quebec City to make the franchises profitable. (2) At the same time, U.S. cities seeking franchises offered to team owners inducements of every stripe--publicly-funded arenas full of luxury boxes and modern amenities, favorable leases on these facilities, and relocation bonuses worth as much as $20 million. (3) In stark contrast to the incentives offered by many U.S. cities, Bryden's Senators franchise labored under an immense tax burden imposed by both the Canadian federal government and the provincial government in Ottawa. (4) Viewed together, the playing field for North American professional sports seemed to be something short of even. (5)

Bryden's concerns about the financial health of his franchise and the basic economics of the NHL were even more immediate when the Senators filed for bankruptcy protection in January 2003. (6) Despite having one of the lowest payrolls in the league, (7) and leading the NHL in points, (8) the Ottawa franchise buckled under the weight of more than $100 million in debt, including $14 million owed to the NHL itself. (9) Most critically for the future of hockey in Ottawa, the Canadian bankruptcy filing left only a short window of time in which Bryden could make a bid to purchase the team. (10) Bryden's plan to purchase the team fell apart in late February 2003 when the main investor backed out, citing concern over the limited partnership that was at the heart of Bryden's proposal. (11) Bryden told reporters that despite his inability to retain control of the franchise, he didn't expect it to be relocated when sold, (12) but sale on the open market introduces significant uncertainties about where the Senators will play their home games in 2004. (13)

In 1994, Bryden told reporters that "[i]t would be nice if free trade would include professional sports in what constitutes a subsidy." (14) "If we were making paper instead of entertainment, we'd trot off to the local tribunal and say this is unfair competition." (15) But to date, neither Rod Bryden nor the ownership of any other Canadian professional sports franchise has sought relief under an international trade agreement. No Canadian investor has filed a claim alleging that significant and ongoing financial assistance by U.S. local governments to the operation of U.S. franchises violates basic principles governing international investment under the North American Free Trade Agreement (NAFTA). But why not? (16) This Note addresses that question by considering the relevant events of the past 20 years of municipal investment in sports, the economic structure of the professional sports leagues, and the relevant provisions of the NAFTA. These topics relate generally to three barriers that might explain the absence of arbitration claims in this industry.

The first possible barrier to a claim under the NAFTA chapter on investment in this context is the sheer inertia of municipal investment in professional sports facilities. (17) So much money has flowed from U.S. cities to professional sports franchises in recent decades that it is easy think that it cannot be stopped. (18) But a few recent events suggest that transfers from U.S. local government to professional sports franchises are not inevitable, (19) and responsible public policy-making demands consultation with every relevant body of law and regulation before committing public resources to such a project. This Note promotes the proposition that NAFTA is a relevant, if overlooked, part of the regulatory environment.

The second possible barrier is the confusion possibly created by the unique economic structure of the professional leagues. (20) The mix of competition and cooperation necessary to carry forth the enterprise of professional sports has led to a complicated jurisprudential and regulatory context. (21) In the proposed application of the NAFTA to professional sports franchises, there is an important question whether the teams in professional sports leagues participate in any market that is sufficiently competitive that municipal assistance to one franchise can reasonably be considered a detriment to other franchises. Because in many cases U.S. antitrust law requires a definition of relevant product and geographic markets, (22) this Note addresses the question of intra-league economic competition by reference to the body of judicial decisions considering whether federal antitrust law should apply to the actions of professional sports leagues.

The third possible barrier is the perception that such a claim is less worthy of attention because the investment is in a professional sports franchise and not an "ordinary" industry. (23) The paucity of published arbitration history under NAFTA's Chapter 11 does nothing to dispel this misperception, (24) nor does the fact that it seems difficult to analogize to previous NAFTA claims in the areas of hazardous waste disposal, (25) the production and sale of gasoline additives, (26) or softwood lumber. (27) But the perception that professional sports are in some way less serious business matters is outdated, (28) and a close review of the Agreement and prior arbitrations indicates that there is a claim to be made on behalf of Canadian franchise owners. (29)

At the outset, it is important to articulate the limits and purpose of a claim based in the investment protections of the NAFTA. This Note is not intended to suggest that such a challenge could or would have an injunctive effect in the case of any particular franchise that faces possible relocation. Rather, this Note envisions the addition of the NAFTA's substantive guarantees to the regulatory context in which municipal governments provide assistance to professional sports franchises. If successful, the argument requires local governments to mind the terms of the Agreement, hopefully leveling the playing field between franchises in the United States that receive these benefits and...

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