Why do sports organizations need in-house legal teams? A point of view from a General Counsel

Wednesday, 11 March 2015

Throughout the past decade, most sports businesses, including professional sports teams and leagues, have hired and retained a general counsel (GC) to oversee their legal and business affairs.

In fact, in the major professional sports, many CEOs and team presidents are realizing that those legal needs are increasing substantially, and many teams/leagues now have multiple lawyers on the payroll to handle team, league, facility and other-related issues. However, in smaller sports businesses, those legal roles rarely exist. CEOs rely on a trusted outside lawyer that they have become acquainted with in other roles to handle the “occasional” legal issue that may arise. These trusted legal advisors are the ones who later get asked to join the team when the demand for legal needs would seem to justify that decision.

In this article, I will try to provide some insights drawn from my experience as a general counsel in the sports business world, and from some distinguished colleagues with the hope that sports businesses will be better placed to make an informed decision about whether or not they should start to build and/or grow their in-house legal teams.

Background - The Growth of the Sports Market

The business of sport is a multi-billion dollar global industry¹ propelled by enormous consumer demand.

For ease of reference, there are six primary focuses within the sports business:

Properties (teams/leagues/events/athletes/universities);
Corporate Participants (advertisers/sponsors);
Venues (arenas/stadiums);
Media (radio/print/TV);
Merchandising (sporting goods/logoed apparel/merchandise/memorabilia); and
Agencies (sports marketing focused on properties/ sports marketing focused on sponsors/ sales promotion/advertising agencies).

While other focuses, such as compliance, may exist, each of the above areas represents significant slices of the sports revenue pie and they are all intertwined. Needless to say, they have all grown significantly in financial relevance each year for quite some time, and each of these focus areas present a myriad of complex legal issues for professionals to navigate.

In fact, many estimate the global sports industry to be worth between €350 billion and €450 billion (in the U.S., $480 billion-$620 billion²). In the U.S., it is considered one of the largest grossing industry sectors, even ahead of steel and the railroad industries, but its role in societies that are so entertainment-driven presents a skewed perception to many because of the dollars, attention, and controversy that it generates.

The Role of In-House Counsel/Legal Team

The role of the General Counsel (GC) depends upon a number of factors about the actual organization, such as its size, the industry where it operates, or even the states or countries where it operates. That said, there are several core legal functions that most in-house lawyers provide for their organizations. These core areas include, but are not limited to, the review of all organizational contracts, oversight of all litigation involving the organization, governance and compliance issues, the drafting and review of any and all policies and procedures, and intellectual property monitoring and protection. Each of these core areas are vital to the success of sports.

According to David Cohen, the General Counsel of the Tampa Bay Buccaneers of the National Football League (NFL), “a good general counsel is the proverbial 12th man in every department of the organization. A GC is one of the few executives that has deep involvement in every primary area of the sports business, from the venues and the media down to the sponsors and the merchandise. As such, a good GC can provide advice that fits within the big picture of an organization”. According to Cohen, with the increase of commercial value of sport comes the increasing need for more commercial contracts, regulations and governance, as more is at stake for everyone involved.

How do in-house legal team fit within sports organizations?

A critical function of the GC, and their team, is to serve as a trusted business advisor to the management team. An important part of a GC’S job is to ensure that the CEO sees them in their true light, namely as an integrated, effective and multi-faceted core member of the management team, much like the CFO who is perceived as capable of reviewing contracts and providing risk management oversight in addition to finance management. There can be a perception that the lawyer will prevent sales, stifle creativity and drown the organization with policies, procedures and unnecessary details which, if allowed to persist, undermines the GCs role and seemingly vindicates the CEO’s initials views.

GCs are at their most effective when they are completely embedded within the very fabric of the organization, are ultimately vested in its success, and are afforded the latitude to deal with issues proactively, cutting them off before, for example, they become more expensive and impact the organization’s revenues or causes damage to its reputation/brand.

David Cohen sees the GC “as a flag person- detouring their clients around risk, not as a stop sign”. In fact, GCs are often intertwined with driving revenue, and are integral in the sales process by ensuring that deals are structured smartly and efficiently. Because they are in-house, they are more likely to be comfortable taking on some of those risks that are necessary to propel the organization forward in a calculated manner, or at least bring them to the attention of the CEO and/or CFO so they can prepare and plan accordingly. “A good in-house GC understands how to best assist his/her colleagues within the risk tolerance level of the organization so that negotiations can lead to solid deals and relationships with third parties,” says Frank Pulice, VP & General Counsel of the Indiana Pacers from the National Basketball Association (NBA).

The GC can do this effectively because the organization is their only client. As a result, there is an understanding and appreciation for its corporate culture, and arguably a greater awareness of the organization’s institutional knowledge and history, the subtleties of its strategies and objectives, and the markets in which it operates. Further, the GC has a global view of the organization and understands how each department is interconnected. Part of the GC’s value is the synergy and personal relationships developed with the internal teams to understand their respective business goals and concerns, and how those goals and concerns fit within the organization’s overall strategic goals, ensuring a stronger alignment. By engaging with each of the various departments, they can bridge gaps, eliminate redundancies, enhance efficiencies and really add value to the overall bottom line of the organization.

Further bolstering these shared objectives is the fact that the GC’s compensation is typically tied to the overall success of the organization through the alignment of personal compensation incentives. Outside counsel and outsourced legal models just cannot achieve the same results because they may have different incentives, multiple clients, restrictions on hours, limited relationships with internal personnel and/or different access to the management team. The value discrepancies can be enormous. According to Frank Pulice, “being in-house allows one to be entrenched in the inner workings and needs of the organization and available in a minute’s notice for an impromptu meeting of the management team on a potentially hot topic or a developing situation”. Pulice goes on to state that, “outside counsel still can play a very important part of the overall legal and risk management team, and may very well be engaged on the particular issue, but those initial discussions with the in-house GC may help reduce or even potentially avoid certain outside legal expenditures for the organization”.

In-house legal support is not just a cost on the balance sheet

CEO’s or team presidents can view GC’s as an unnecessary expense on the payroll. However, when lawyers showcase their broader business and legal background(s), their solid foundation in the industry (in this case, sports), and then talk, think and act like a true business person the business case and associated benefit speaks for itself. As the former General Counsel for the Pittsburgh Pirates of Major League Baseball (MLB), Larry Silverman explained, “a good GC rarely, if ever, says 'no'. Rather, he or she attempts to modify the program in ways that allow the business people to meet their goals while minimizing the organization’s legal risks at the same time”.

For example, the chief marketing officer, or other operational team leaders are charged with bringing in the revenue, but GC’s can still be an equally important part of that process, especially if they truly understand issues associated with digital media rights, and how to market to the core demographic (whether it be through promotions and/or e-commerce initiatives) - these are the layers that CEOs often don’t see in lawyers. GCs are more than capable business people, often active in their communities, sitting on boards to provide strategic advice.

According to Bill Heller, General Counsel for the NFL’s New York Giants, its member teams are facing increasing demands to increase fan satisfaction through in-game experiences, which usually focus on digital media. “Understanding the issues arising from the use of digital media to enhance fan engagement while also addressing the issues of data privacy and compliance with FTC and state privacy laws is a balance that only an in-house GC can understand from the client perspective.” Heller further states that, “the goal of an in-house general counsel is best characterized as ‘how to get to yes’ while minimizing legal risk."

"As someone who served the Giants for ten years as outside counsel before joining the Giants as its GC, the leap in understanding this client from the inside also has increased the value of the legal insight that makes deals work while protecting the team from unnecessary risk.” Silverman agrees. He further adds that, “more often than not, the marketing officer or CEO agrees that the 'changes' made by the GC are workable and, in some cases, actually improve the overall program”. Once these business people realize they can accomplish their business objectives and reduce their legal risks at the same time, they begin to have a greater appreciation of the value of a GC so that the next time they engage the GC earlier in the process.

The GC should be considered part of the foundation for the organization. An analogy can be made with when a person purchases a home, that person would need to do their due diligence to ensure that the home is fundamentally sound. While the frills of the property initially generate all the attention, if the foundation of the property is not solid, those issues or problems will eventually come to the surface. One may not visibly see the cracks in the foundation (e.g. in a corporate setting, - a toxic corporate culture, poor business practices, uncalculated risks, etc), or be willing to incur the costs and expense to make the necessary repairs at that time, but at some point, those recurring issues will need to be handled at a significant expense.

How to decide when to bring the legal function in-house?

How many CEOs get really excited about risk management initiatives that save the organization money? Not many. But, if the GC can pinpoint why it’s important to track that metric and reduce those claims by showing how an average claim translates into a “cost”, and then going through the analysis of how much gross sales/revenue needs to be generated in order to “cover that cost”, it might capture that CEO’s attention (and make a friend of the CFO).

Even the purely legal metrics showcase the undeniable value of the GC. If you took the GC’s annual compensation (excluding any equity, where applicable) and converted that number to the dreaded “billable hour”, it will easily amount to the lowest cost the CEO will find in the marketplace. For example, if the GC’s total compensation reached $300k, it would equate to a billable of less than $150/hr, which translates into higher quality at a lower cost. If the CEO sought out an experienced lawyer, those same total legal dollars (at a higher rate, typically double or triple that hourly rate) would likely result in only several months’ worth of work product without any of the benefits noted above.

While the private practice lawyer may have heightened industry knowledge, or better access to legal resources, especially given their breadth and exposure to many more issues throughout the industry, the GC still provides better value because the GC has the business mindset and the broader knowledge base, and the GC can always seek out this expert knowledge (if necessary) when the circumstances require it. For another perspective, layer in the metrics of costs per contract, or costs per claim, or any other applicable metric for the respective organization, and the case for the GC becomes clear. Yes, the legal department is a cost center, and who wants to incur the legal cost of a GC’s salary, but if those same fixed dollars come with a myriad of other tangible and intangible benefits, along with the peace of mind of knowing the foundation of the organization is secure, it seems like a relatively safe value proposition. The flip side would be that these contracts are just don’t get reviewed by a lawyer; or that certain business initiatives don’t get properly evaluated to understand the nature and extent of the legal risks incurred; but that creates exposure for the sports organization that can sometimes be catastrophic.

The most commonly expressed concern is that this analysis assumes the organization requires yearly legal services costing in excess of the GC’s annual salary when, in reality, it may not. Unfortunately, most CEOs don’t put a value on their total legal “need” because they may not always see it. They may view the CFO as a competent enough issue-spotter or risk manager when it comes to all contracts, but the general counsel arguably is better trained to identify more potential areas of exposure than the CFO and the GC will likely have a much more proactive and beneficial impact in other ways that may be difficult to measure. By the time the organization reaches out to find a lawyer for a particular issue, it is likely too late – the organization is either being “reactive” to the issue, or the outside lawyer is only focusing on one specific issue, while the ramifications of any decision on that issue could impact the organization in a variety of other ways. Also, sports organizations (like the business sector as a whole) can vary the compensation package for their general counsel. Typically, the general counsel (and legal departments) of bigger sports organizations generate greater compensation packages than those of smaller organizations with lesser annual revenues.

In the corporate world, CEOs look at the legal cost as a percentage to overall operational revenue, and the analysis for these sports organizations (when contemplating legal costs) should be no different. In short, while the CEO and CFO may never feel that it is the right time to bring a lawyer in-house, it will ultimately be prudent and more cost effective for that CEO to have the general counsel at his or her disposal from the onset.

The future of in-house legal teams in sports business

The current trend seems to justify this analysis. The legal departments of more and more sports organizations continue to grow, and whereas approximately one short decade ago, sports organizations did not have general counsels, that trend has completely reversed. More and more CEO’s and team president’s are learning the value of having their general counsel on-board, and the GC’s are now fighting for more prominent roles within the leadership of the organizations. The focus now seems to be on GC’s finding more and more ways to show value to the sports organizations through program improvements, risk mitigation and finding more organizational efficiencies that result in maximized revenues.

In the end, it is the CEO’s decision to retain a general counsel. It is the CEO’s decision to communicate with and involve the GC in the strategic management of the organization that helps drive the value. Their personalities have to mesh, and the CEO needs to understand that good GCs are more than the just legal issue-spotters, they truly can and usually do serve a crucial business purpose and are part of the foundation of any successful organization. According to David Cohen, “the best team presidents and CEO’s know how to use their GC wisely. The best GC’s make things easier for the entire leadership team”.