SportsChannel Assoc. v Sterling Mets, L.P.

[*1] SportsChannel Assoc. v Sterling Mets, L.P. 2005 NY Slip Op 51303(U) Decided on August 17, 2005 Supreme Court, New York County Freedman, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on August 17, 2005
Supreme Court, New York County

SportsChannel Associates, Plaintiff,

against

Sterling Mets, L.P., Defendant.



603548/04



Attorneys for Plaintiff SportsChannel Associates

Sidley Austin Brown & Wood LLP

787 Seventh Avenue

New York, New York 10019

(212) 839-5300

By:John G. Hutchinson, Esq.

Elizabeth M. Zito, Esq.

Isaac Greaney, Esq.

Attorneys for Defendant Sterling Mets, L.P.

Davis Polk & Wardwell

450 Lexington Avenue

New York, New York 10017

(212) 450-4090

By:Robert B. Fiske, Jr., Esq.

Eric F. Grossman, Esq.

Brian S. Weinstein, Esq.

Helen E. Freedman, J.

The motions with sequence numbers 003 and 004 are consolidated for joint disposition.

In this dispute over broadcast rights for baseball games played by the New York Mets (the "Mets"), defendant Sterling Mets, L.P. ("Sterling"), the Mets' owner, and plaintiff SportsChannel Associates ("SportsChannel"), the Mets' current "pay television" broadcaster, separately move for summary judgment. In its decision and order dated April 7, 2005 (the "Prior Decision"), this Court granted Sterling's motion to dismiss the second and third counts of the complaint, but notified the parties pursuant to CPLR 3211(c) that it was converting the motion to dismiss the first count for breach of a covenant in the parties license agreement, and the fourth count for contractual indemnification, into a motion for summary judgment, and would defer decision until the parties made the appropriate record. After conducting discovery, the parties submitted these summary judgment motions.

For the reasons set forth below, summary judgment is granted to Sterling and the remaining counts are now dismissed.

Background SportsChannel currently holds the exclusive rights for its affiliated networks to broadcast regular-season Mets games on "pay television" (cable or satellite television) pursuant to its License Agreement with Sterling dated December 31, 1996 ("the License Agreement" or the "Contract"). The License Agreement superseded an earlier contract that the parties had executed in 1982 and amended in 1991 (the "Prior Contract"), which granted SportsChannel a 30-year license term through the end of the 2011 baseball season. The current License Agreement also extends through 2011 and carries over a number of provisions from the Prior Contract, but includes major new provisions. First, section 7.4 of the License Agreement (the "Buyout Provision") grants each party the option to shorten the license term by notifying the other party and paying it a buyout fee in an amount set by formula in the Contract. In May 2004, Sterling duly exercised its option under the Buyout Provision to shorten SportsChannel's license term to the end of the 2005 season (the "Option"), for which Sterling paid SportsChannel a fee of more than $ 54 million.

The License Agreement also added provisions that afforded SportsChannel with "first [*2]negotiation/first refusal" rights, which in some circumstances required Sterling (1) for a 60-day period, to negotiate exclusively with SportsChannel for a license extension past the Contract termination date, (2) to thereafter offer extension terms to SportsChannel, and (3) if SportsChannel rejected Sterling's terms, to afford SportsChannel the opportunity to match later offers by third parties. However, SportsChannel's "first negotiation/first refusal" rights ended when Sterling exercised its Option in May 2004.

Soon thereafter, both Sterling and SportsChannel issued press releases confirming that Sterling had bought out SportsChannel and that the latter would stop broadcasting the Mets after the 2005 baseball season. In October 2004, Sterling announced that it was joining with two broadcasters, Time Warner Cable Inc. ("Time Warner") and Comcast Corporation ("Comcast") to launch a new sports network (the "Mets Network") to telecast Mets games and related programming starting with the 2006 season, and that Sterling would license its pay-television rights for Mets games from the 2006 season and onwards to the Mets Network.

Complaint and Prior Decisions On October 27, 2004, SportsChannel commenced this lawsuit, and applied for a temporary restraining order and a preliminary injunction. The gist of SportsChannel's claim was that although the Sterling could buy out SportsChannel and shorten its license term, it could not launch the Mets Network, grant broadcast rights, or take any other steps to arrange for post-2005 broadcasting with anyone except SportsChannel before its License Agreement terminated on November 1, 2005, i.e., seventeen months after Sterling had bought out SportsChannel and only a few months before the 2006 baseball season was to begin.

This Court denied SportsChannel's application for a temporary restraining order on October 28, 2004, and denied its application for a preliminary injunction by a decision dated December 16, 2004. In that decision, this Court found among other things that SportsChannel failed to show both that the balance of equities favored it and that it was likely to succeed on the merits.

In December 2004, Sterling moved to dismiss the complaint, which set forth three counts of breach of contract and a fourth seeking indemnification for Sterling's alleged breach. In its first count, SportsChannel claimed that Sterling's plans for the Mets Network breached section 2.4 of the License Agreement (the "Covenant"), a carryover provision from the Prior Contract which restricted Sterling's ability to "grant, transfer, license, sell, produce, distribute or otherwise exploit or use" its broadcast rights to third parties while SportsChannel's license was in effect. According to SportsChannel, Sterling's present commitments to launch the Mets Network and license post-2005 Mets games to it breached the Covenant. SportsChannel further claimed that the Covenant restrictions bound Sterling until the Contract terminated on November 1, 2005. In the Prior Decision, this Court denied Sterling's motion to dismiss the first count, because "[l]ooking at the allegations in the complaint and the face of the Contract in the light most favorable to SportsChannel, an inference that Sterling may have 'used' or 'exploited' its rights within the meaning of the Covenant could be drawn."

In its second count, SportsChannel claimed that Sterling breached a representation in the License Agreement that it had not granted any pay television rights to third parties (the Representation"). That count was dismissed because the Representation related only to the day that Sterling executed the License Agreement, namely December 31, 1996.

In the third count, SportsChannel claimed that Sterling's plan to launch the Mets Network [*3]with Time Warner and Comcast violated the FN/FR Provisions. As noted above, that count was dismissed because Sterling's exercise of the Option in May 2004 immediately terminated SportsChannel's rights under the FN/FR Provisions.

In its fourth count, SportsChannel sought contractual indemnification for its attorneys' fees and disbursements, based upon section 8.4 of the License Agreement (the "Indemnity Provision"), under which each party agreed to indemnify the other for losses arising from the indemnitor's breach of contract. This count is only viable if the count for breach of the Covenant survives summary judgment.

SportsChannel seeks equitable relief: it asks for an order (1) rescinding all contracts that Sterling has entered into with respect to the Mets Network [FN1], and (2) either (a) invalidating Sterling's exercise of the Option in exchange for a refund of Sterling's $ 54 million payment or (b) extending the date on which SportsChannel's rights under the License Agreement terminate by the amount of time that Sterling has been in breach, which SportsChannel calculated as seventeen months. As an alternative to equitable relief, SportsChannel seeks money damages for Sterling's breach, along with damages under the Indemnity Provision, and costs and attorneys' fees and disbursements.

The Covenant In relevant part, the Covenant provides that During the Mets Term . . . [Sterling] shall not, and shall not authorize any other [p]erson to, grant, transfer, license, sell, produce, distribute or otherwise exploit or use . . . any Pay TV Rights relating to any Mets Games. . . .

The capitalized terms in the Covenant are defined in the License Agreement: (1) The "Mets Term" means the period from the date that the License Agreement was executed (December 31, 1996) until the earlier of (i) the end of the 2011 Mets season or (ii) "the termination of this [License Agreement] pursuant to [the Buyout Provision or other specified means]"; (2) "Pay TV Rights" include among other things "all present and future rights and/or licenses of any nature to use and to authorize others to use . . . the transmission and exhibition . . . of Mets Games by means of [pay television]"; and (3) "Mets Games" means "any baseball game between the Mets and any other [Major League Baseball team]."

Issues The only remaining issue is whether the term "Mets Games", as used in the Covenant, should be construed to refer only to games that the Mets play before the License [*4]Agreement terminates on November 1, 2005. SportsChannel argues that "Mets Games" refers to all Mets games, whenever played, and accordingly the Covenant prohibits Sterling through November 2005 from entering into contracts or taking other actions in connection with licensing the right to broadcast future Mets games to the Mets Network.[FN2] Sterling's position is that the only reasonable construction of "Mets Games" in the Covenant, when viewed in the context of the whole License Agreement, is any Mets games played before the License Agreement terminates, and that when in May 2004 Sterling exercised its Option to curtail SportsChannel's license, Sterling immediately gained the right to license games played after November 1, 2005.

Discussion Summary judgment is granted to Sterling because the term "Mets Games", as used in the Covenant, means games that the Mets play while the License Agreement is in effect, and accordingly, once Sterling exercised the Option the Covenant only restricted Sterling from exploiting its rights in Mets games played before November 1, 2005. Although the definition of "Mets Games" in the License Agreement does not specify this temporal limitation, it can be added by implication.

To interpret the contract, a two-step analysis is necessary. The threshold issue for the Court is whether the meaning of "Mets Games" in the Covenant is plain or ambiguous, because if it is unambiguous the Covenant must be enforced as written and is not amenable to judicial construction. See C. Union Trust Co. v. Trimble, 255 NY 88, 93 (1931). Whether a contract is ambiguous is a question of law. Kass v. Kass, 91 NY2d 554, 566 (1998). The court discerns ambiguity from the face of the contract alone and without regard to extrinsic evidence. Reiss v. Fin. Performance Corp., 97 NY2d 195, 199 (2001). To determine whether an agreement is ambiguous, the court should examine the entire contract and consider the relation of the parties and the circumstances under which it was executed. Particular words should be [*5]considered, not as if isolated from the context, but in the light of the obligation as a whole and and the intention of the parties as manifested thereby. Form should not prevail over substance and a sensible meaning of words should be sought.

Atwater & Co. v. Panama R.R. Co., 246 NY 519, 524 (1927) (quoted in Kass, 91 NY2d at 566).

It is useful to consider how the term "Mets Games," standing alone without a temporal limitation, is used elsewhere in the Licensing Agreement. The term appears in more than fifty places besides the Covenant, and it nowhere clearly means all games that the Mets will play in the future, including those they will play after the License Agreement terminates. In fact, in many instances the parties plainly use "Mets Games" to refer only to games that will be played while the Contract is in effect and SportsChannel has the right to televise the Mets. For example, Section 3.3 of the Contract requires Sterling to notify SportsChannel of "any circumstances that are likely to result in a Mets Game becoming [p]reempted [from broadcast by SportsChannel], [u]navailable [for broadcast by SportsChannel], non-exclusive or [played by non-regulars due to a players' strike]." This section cannot be read to oblige Sterling to notify SportsChannel about games that the Mets play after November 1, 2005, when SportsChannel has lost it right to broadcast Mets games. Implicitly, the section only applies to "Mets Games" played before that date. The Contract throughout qualifies "Mets Games" with a temporal limitation that it does not state explicitly.

In contrast, the Representation explicitly states that it applies to "any Mets Games to be played at any time after the date of this [License] Agreement." The inclusion of this temporal qualification in the Representation underscores the ambiguity of the Covenant. If the term "Mets Games" were used consistently throughout the License Agreement to include all games played after November 2005, it would be unnecessary to qualify the term in the Representation. In sum, the meaning of the term "Mets Games" as it appears in the Covenant is ambiguous.

If the language of a contract is ambiguous, its meaning must be ascertained. Where a contract's purpose is clear, individual terms are construed so as to harmonize them with that purpose. Kass, 91 NY2d at 567. If necessary, words will be supplied to a contract to clarify its meaning and purpose. Castellano v. St. of NY, 43 NY2d 909, 911 (1st Dept. 1978).

Moreover, a contract should not be construed to produce results that are absurd, commercially unreasonable, or contrary to the parties' reasonable expectations. Lipper Holdings, LLC v. Trident Holdings, LLC, 1 AD3d 170, 171 (1st Dept. 2003) (citing cases). While the meaning of an ambiguous contract ordinarily is a question of fact, where there is no need to resort to extrinsic evidence and no reasonable person could find otherwise, it may be determined as a matter of law. W.S. Hayes, Inc. v. Pub. Serv. Mut. Ins. Co., 12 AD2d 989, 990 (4th Dept.), appeal dismissed, 10 NY2d 826 (1961); see also Maio v. Gardino, 184 AD2d 872, 873-74 (3d Dept. 1992).

Pursuant to these well-settled principles, the term "Mets Games", as used in the Covenant, must as a matter of law be construed to refer only to games played through November 1, 2005. SportsChannel's contrary interpretation of the meaning of "Mets Games" in the Covenant is entirely at odds with the overall purpose of the Licensing Agreement, which can be [*6]discerned within the agreement's four corners.[FN3] The parties negotiated an arrangement whereby Sterling for a hefty fee could sever its business relationship with SportsChannel with "no strings attached." When it exercised its Option and paid SportsChannel $54 million well in advance (May 2004), Sterling terminated SportsChannel's license and the Contract, effective November 1, 2005. SportsChannel's rights under the "FN/FR Provisions" immediately terminated when Sterling exercised the Option, leaving it free to negotiate with and grant licenses to third parties for the telecast of games played after the 2005 season.

SportsChannel's interpretation of the Contract would lead to an anomalous result that is both commercially unreasonable and contrary to Sterling's reasonable expectations. It defies common sense that Sterling agreed to pay SportsChannel $ 54 million to curtail its license term and eliminate its "first negotiation/first refusal" rights for a new license, but also agreed to refrain from making binding arrangements with new broadcasters for Mets games until just before the beginning of the next baseball season. Accordingly, as a matter of law the term "Mets Game" as used in the Covenant must be construed to refer to Mets games played through November 1, 2005, when the License Agreement terminates, and Sterling's actions to launch the Mets Network and license its rights to Mets games played after the License Agreement terminates do not breach the contract.

For the reasons set forth above, it is

ORDERED that the motion by Sterling Mets, L.P. for summary judgment is granted and the motion by SportsChannel Associates for summary judgment is denied, and it is further

ORDERED that the complaint is dismissed, and it is further

ORDERED that the Clerk is directed to enter judgment accordingly.

Dated: August 17, 2005

Enter:

Helen E. Freedman, J.S.C.

Appearances

Footnotes

Footnote 1:SportsChannel objects to a number of agreements reached among Sterling, its affiliates, and third parties connected with the launch of the Mets Network and its broadcast of Mets games for the 2006 season onwards. These include (1) the October 2004 LLC Agreement to form the Mets Network among Time Warner, Comcast, and Sterling's affiliate, SEE Holdco, LLC; (2) an October 2004 Transaction Agreement among Sterling, Time Warner and Comcast, which provides that Sterling will license telecast rights for post-2005 Mets games to the Mets Network, pursuant to a fully negotiated licensing agreement that the parties will execute after the License Agreement terminates; and (3) unsigned but negotiated affiliation agreements among Time Warner, Comcast and the Mets Network that the parties will also execute after November 1, 2005.

Footnote 2:If SportsChannel were correct and the restrictions in the Covenant applied to Mets games played after the License Agreement terminates, then Sterling would have breached the Covenant by "exploiting" or "using" its rights in those games while the License Agreement is in effect. Sterling's contracts with third parties have been noted. See supra footnote 1. In addition, (1) Sterling sought and obtained approvals from its creditors and Major League Baseball to execute the Mets Network Licensing Agreement; (2) Time Warner and Comcast contributed cash to and Sterling's affiliate received equity in the Mets Network; (3) the Mets Network entered into a Network Management Agreement with Comcast, under which it manages the Mets Network and performs other services for a monthly fee; and (4) the Mets Network hired and trained employees and rented office space. Sterling argues that even if the Covenant applies to games played after November 1, 2005, the actions it has taken in connection with the Mets Network do not violate the Covenant because Sterling will not license rights to the Mets Network until after November 1. That position is unpersuasive, in that the Transaction Agreement presently obligates Sterling to license rights in the future, pursuant to a fully negotiated agreement. Sterling's existing obligation and the actions it is taking in connection with the future licensing constitute the current use and exploitation of its rights.

Footnote 3:The Contract was construed without recourse to any extrinsic evidence, see W.S. Hayes, Inc., 12 AD2d at 990, but it should be noted that Sterling offers evidence of the parties' intent that favors its construction of the Contract. David Howard, an attorney who negotiated the License Agreement on Sterling's behalf, submits an affidavit stating the parties extensively discussed whether SportsChannel would retain any telecast rights to Mets games played after the License Agreement terminated, and "the Mets were adamant that if it were to make a payment of $ 54 million to buy out of the contract early, the buyout should be free of any encumbrances on the Mets' ability to market its rights for 2006 and beyond." According to Howard, the Covenant, which was carried over from the Prior Contract, was never discussed during negotiations for the new Contract, and SportsChannel never claimed that the Covenant would restrain Sterling from transferring rights in games played after the new License Agreement terminated.