Remedies for Breach of Season Ticket Contracts
posted by Lawrence Cunningham
Nationally, and lately here in Washington, DC, sports fans are learning hard lessons in contract law. When franchises, like the Washington Redskins football team, built expensive new stadiums during the economic boom of the mid-2000s, they supported funding with multi-year ticket sales. Partly to get long-term construction loans, teams sold season tickets for up to 10 years, promising designated season tickets in exchange for fan promises to make stated annual payments during the term.
Amid today’s economic recession, many fans, unable to afford the luxury they promised to pay for in flusher times, breached those promises, not paying for tickets. In response, teams have taken self-help measures and sued fans, for breach of contract, seeking damages.
Self-help includes reselling this season’s tickets to other fans, usually at lower prices or, when tickets cannot be sold, using seats for other purposes, like promotional or charitable events. Teams also resold future seasons’ seats, again usually at lower prices, or hold them, hoping for future increases in market price. Measured today, what are a team’s damages?
As a basic matter of contract law, aggrieved parties like these teams are entitled to recover the money equivalent of the promised performance. This protects their expectancy interest by putting them in the position performance would have done. Hawkins v. McGee. Though this compensation principle is easy to state, difficulties appear in working through alternative ways to measure the recovery and limitations on it.
The market price of this season’s tickets is below the contract price for those tickets. If a fan agreed to pay $100 for this season’s seats, now trading (on E-Bay, say) for $75, the measure of the team’s damages would be the $25 contract-market differential. Acme Mills.
For this season’s tickets the team actually resold this year, the measure could be the difference between the contract and resale price (analogous to the market-cover differential awarded to aggrieved buyers in goods transactions). Cf. Missouri Furnace. Supposing re-sale prices ranging from $60 to $80, damages would be $40 to $20 apiece.
For future seasons’ tickets, current fan defaults amount to anticipatory repudiation of future performance. It is not necessary for the teams to wait until future performance dates arrive, years in advance, to sue or recover damages. Hochster v. de la Tour. They are entitled to sue now and recover damages based on the foregoing formulas for tickets to be delivered in the future.
For this season’s or future season tickets, it does not seem possible for teams to claim lost profits on these sales. For some sellers, like retail dealers of standardized goods, it is possible to imagine a capacity to generate additional sales without regard to whether a particular buyer breaches. Neri v. Retail Marine. For such lost volume sellers, the contract-market (or contract-cover) differential may be inadequate to put them in the position performance would have done, entitling them to seek lost profits instead. See UCC 2-708(2). Given finite limits of stadium seating capacity, it would be difficult for teams to sustain this lost volume/profits argument.
What of limitations on contract law’s compensation principle, particularly concerning avoidable losses? This mitigation doctrine is implicit in law’s recognition of awarding the contract-cover (or resale) differential when aggrieved parties take that step. In effect, the breaching party compensates the aggrieved party by amounts the aggrieved party did not recover using self-help. Yet teams have been unable to resell some tickets, elected not to do so in favor of using them for promotion or charity, or hold them until the economy recovers to get higher prices in the future. Should team damages nevertheless be reduced by the amount obtainable, without unreasonable burden?
In principle, if teams are able to resell tickets but do not, it seems relatively simple under the mitigation principle to charge them with that cost, using the contract-market differential. But if it is not feasible, can customers nevertheless insist on some reduction in damages? A standard way to think about this problem is to award aggrieved parties the contract price, less costs saved as a consequence of the breach. Rockingham County v. Luten Bridge.
Analysis then distinguishes between fixed costs, not saved by a breach, and variable costs, that are saved. To what extent do fan breaches of ticket sales contracts, which may free up seats in the stadium, result in saving the team costs? Teams will say breaching fans save them nothing because costs are fixed, including player salaries, lighting and ventilation, construction loans, publicity and broadcast. Fans may contend that some costs vary with attendance, such as security, concessions and custodial services. Vigorous disputation ensues over this pervasive challenge of classifying costs as fixed or variable. Langbein; Kearsage.
Further, may teams recover losses beyond standard measures relating the contract price to market or cover prices, with or without mitigation? Teams may claim losses not only pivoting around the ticket price but arising from how empty season-ticket seats may lead to other losses, such as reduced advertising revenue, diminished ticket sales in other parts of the stadium, and deterioration in the team’s brand name and franchise value. Contract law classifies such losses as consequential damages and recoverable under limited circumstances. Several tests are offered to define the scope of recoverable consequential damages, all of which focus on the time of contracting.
The oldest test requires that the aggrieved party communicated its special circumstances that risk extraordinary losses to the breaching party and the latter knew about them. Hadley v. Baxendale. An alternative formulation, the tacit bargaining test, asks whether a party, having considered that prospect when forming the contract, would have agreed to it. Globe Refining (Holmes). A commonly used contemporary test charges breaching parties with such consequential damages if they had reason to know of them (constructive knowledge). See Restatement (Second) of Contracts, 351. It seems difficult to imagine ticket customers being liable to sports teams for consequential damages under any of these tests.
Even if conceptually feasible for teams to sustain this claim of foreseeability of consequential damages, they would face a further limitation on compensation requiring losses to be proven with reasonable certainty. MindGames. (This would also impose a constraint on any effort to seek lost profits if, however farfetched, a team argued it was equivalent to a lost volume seller.) To prove consequential damages, teams could marshal evidence showing historical relationships between fan attendance (sold out games, high occupancy in season ticket holder seats) and advertising revenue. It may be more difficult to provide reliable evidence about that link to intangibles such as brand name or franchise value.
A final issue concerns the common practice teams have of circumventing all this by including liquidated damages clauses in season-ticket contracts. These express contract terms often provide that team damages for fan breaches are the full contract price, period. They purport to foreclose alternative measures, such as contract-market or contract-resale (cover) differentials, or even lost profits or consequential damages. They also purport to dispense with limitations on the compensation principle, whether the mitigation doctrine’s avoidable loss limit or the foreseeability limit on consequential damages.
As a doctrinal matter, such clauses are enforceable so long as actual damages are difficult to determine and represent a reasonable forecast of them in any event. Muldoon v. Lynch. The complexity of the foregoing analysis supports concluding that the clauses pass this test. A Massachusetts court, evaluating these issues in the context of the New England Patriots and its fans, took that position, suggesting the ex ante sense of the Patriots in-house ticket lawyers. Some teams, including the Redskins, are being even more prudent, ex post, withdrawing lawsuits against fans for breach of contract.
September 12, 2009 at 12:36 pm
Posted in: Contract Law & Beyond
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Responses (3)
1L - September 13, 2009 at 5:40 pm
Puts the first 3 weeks of Contracts I in compact context. Thanks.
Royce Barondes - September 14, 2009 at 5:28 am
I don’t understand the statement, “For future seasons’ tickets, current fan defaults amount to anticipatory repudiation of future performance.” “Such a repudiation, occurring BEFORE there has been any breach by nonperformance, is called an ‘anticipatory breach’ or, more precisely, an ‘anticipatory repudiation.’ ” Farnsworth, Contracts sec. 8.20 (3d ed) (emphasis added). What you are discussing appears to be a circumstance where there has been a breach, one that would, after the passing of time for cure, appear to be material and entitle the licensor to suspend performance and sue for total breach. It also does not appear that you are discussing a circumstance where there are multiple, separate contracts for futures years and it is argued that a failure to perform one contract acts as a repudiation of obligations under separate contracts that have not been breached. And it is not clear what words, if any, of repudiation were communicated by the fans.
Of course, as a general rule, an anticipatory repudiation by one may entitle the other party to suspend performance and sue for total breach. But I would think the more customary categorization is that an anticipatory repudiation by one may, subject to various exceptions not worth detailing here, entitle the other to treat the contract as if having been materially breached, not the other way around. To put it another way, even if Hochster were decided the other way, there would still be a current cause of action by the team, a promisee of a promise in breach.
Of course, as you suggest at the end of your post, discussing the typical default rules of remedies may be not all that relevant, as the express terms of the contract may significantly depart from those principles.
Lawrence Cunningham - September 14, 2009 at 7:32 am
Royce: Thanks for noting how some intricacies of anticipatory repudiation doctrine may not apply to many of these cases. I mentioned it to reference how that issue plays a role in some basic remedies contexts and to pick up any ticket cases where a holder renounces future performance or could raise an issue about whether the arrangement is a series of contracts or a single contract with installments. A separate post addressing those doctrinal matters, aside from the remedies questions, could be useful later.
The presence of a liquidated damages clause prescribing the contract price as the remedy may render standard doctrinal analysis less relevant. Yet the relatively simple fact context enables useful review of those tools and probing the alternatives is also useful to test the validity of the clauses. –Larry
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