The AAF’s Suspension Triggers a Number of Lawsuits
It didn’t take long for the sudden collapse of the Alliance of American Football to trigger legal problems. Former AAF employees and displaced AAF players have sued the league in two lawsuits, both of which were filed in California. Tom Dundon, Charlie Ebersol, Bill Polian, Troy Polamalu and Jared Allen and others who led the AAF before it suspended operations on April 2 are also named as defendants. Meanwhile, the AAF reportedly won’t allow its former players to play in the Canadian Football League, thus setting in motion a potential legal challenge over player movement.
Former AAF employees: the AAF broke the law by failing to provide advanced notice of the league shutting down
John Swope and Jay Roberson, both of whom were assigned to business positions with the Birmingham Iron before the AAF’s nationwide layoff, have filed a lawsuit in the U.S. District Court for the Northern District of California (San Francisco/Oakland area). They argue that the AAF failed to follow the federal Worker Adjustment and Retraining Notification Act—better known as the WARN Act or simply WARN. The two men seek class certification so that they could represent other dismissed AAF employees.
Swope and Roberson are represented by three Alabama attorneys, Lee Winston, Roderick Cooks and Byron Perkins. The trio drafted the plaintiffs’ complaint and will take on the AAF, or whatever is left of it, near the league’s headquarters in San Francisco.
Employers with at least 100 employees are generally required to follow WARN, which obligates businesses to provide employees at least 60 days’ written notice of closings or mass layoffs. Failure to follow WARN can lead to court-ordered back pay and benefits for up to 60 days. WARN can also trigger fines of up to $500 per day.
The AAF’s startlingly short history highlights the importance of the 60-day window. The AAF effectively shut down on April 2, meaning if WARN applies, the AAF had to provide notice of the impending closure by Feb. 1. That, of course, did not happen. The AAF’s Week 1 games started Feb. 9 and were nationally broadcast on CBS, earning TV ratings that eclipsed those of the NBA on ABC. A notice of closing or layoffs would have overshadowed any ratings accomplishment.
AAF employees would contend that the league’s financial problems and organizational woes were apparent long before Week 1 and ought to have compelled AAF executives to provide advanced notice. Many of those employees started their jobs in the fall of 2018 and thus had first-hand knowledge of the AAF’s chaotic state. Those problems came to public light within days of Week 1 when reports of the AAF potentially failing to meet payroll obligations surfaced.
Disputes over league ownership also emerged. The AAF is a single entity sports league, meaning the league owns all of the teams. Therefore, every player, coach and staff member worked not for any one AAF team but for the AAF itself. In February, venture capitalist Robert Vanech sued Charlie Ebersol. Ebersol and Polian are identified as the co-founders of the AAF and both enjoyed leadership positions. Vanech, however, argues that he co-conceived of the AAF and is entitled to a 50% stake. The ownership battle was another sign of turbulent waters for the AAF.
It appeared that the AAF was rescued in mid-February when Dundon, a Dallas-based billionaire who also owns the Carolina Hurricanes, pledged a $250 million investment in the AAF. He then became the league’s chairman. However, there remains uncertainty over whether Dundon gained absolute authority over the AAF or whether decisions had to be made through consensus with Ebersol, Polian and other league executives.
At the time of his arrival, Dundon’s public remarks assured fans—and, more importantly, AAF players and other AAF employees—that the league’s future was secure. “There’s a difference between commitments and funding,” Dundon told media in February. “They had the commitments to last a long time, but maybe not the money in the bank. My money is in my bank. I’m sure of it … That’s enough money to run this league for a long time. We’re good for many years to come with what I just did.”
Six weeks later, the AAF abruptly suspended all operations. There are rumors that Dundon’s decision to invest in the AAF was pretextual: while he publicly claimed a desire to fund and sustain a pro football league, he may have been more interested in a supposedly innovative sports betting app being developed by AAF employees. Some persons familiar with the app and its data are skeptical of this suspicion. For one, the app may not have been all that innovative. For another, MGM Resorts International, rather than the AAF, may own the app’s intellectual property due to a contract between the resort and the AAF.
The AAF’s homepage is still online, though it contains little content other than a statement reflecting the league’s suspension of operations. As I recently wrote, the end of the AAF could trigger a wide-range of lawsuits. They could include disputes over: adherence to league governing documents; ownership of intellectual property developed by the AAF; contractual obligations; and fiduciary duties. The WARN lawsuit, along with the players’ lawsuit discussed below, are probably just the first of numerous AAF cases.
How the AAF and the other defendants will likely respond to the WARN complaint
In the coming weeks, the AAF and the other defendants will answer the WARN complaint. They will almost certainly argue that no WARN violations occurred because—as they’ll tell it—the AAF’s demise reflected unforeseen business circumstances. An employer who shows that business closure or layoffs resulted from unforeseen circumstances can successfully escape liability under WARN. Similarly, the AAF might contend that while the league was faltering, league officials made good-faith efforts to seek additional sources of funding and had reason to expect those funds to materialize. Expect AAF officials to contend that they reasonably believed they had obtained financial sustainability upon Dundon’s pledge, but that league expenses escalated faster than anyone anticipated.
Whether AAF officials could support such a defense with evidence and sworn testimony is difficult to assess. Former AAF employees would likely insist that there were no “unforeseen circumstances.” The league didn’t lose a major contract, the players didn’t go on strike and neither the economy at large nor the stock market suddenly crashed. The AAF’s failings appeared to be the league’s own doing. From what is known, AAF officials seemed to lack sound leadership skills and good judgment. The leadership chaos—particularly with uncertainty over which person or persons was making decisions for the AAF—didn’t help, either.
Alternatively, the AAF might argue that its employees knew, and implicitly accepted, the risk of joining an upstart pro sports league. American sports history is littered with failed pro leagues, including in football. Over the last few decades, the United States Football League, the United Football League, the Indoor Football League and earlier versions of the Arena Football League and the XFL all rose and fell. While there is an intense appetite for professional football, it remains to be seen if a football league other than the NFL can sustain its own following. The AAF could thus argue that everyone who worked for the AAF should have known what they were getting into. The fact that employees who were hired in the fall stuck around till the end, in spite of witnessing some of the chaos along the way, possibly signals they accepted the risk.
While this type of argument may be true in a general sense, AAF employees were assured the league’s financial situation was promising. The “they should have known better” argument doesn’t comport to Dundon’s assuring remarks in February. Also, those employees may not have had access to upper level management decisions.
The AAF may have other arguments related to the employment status of its employees. The AAF featured approximately 450 AAF players, more than 100 coaches and dozens of league employees who were assigned to teams. WARN applies to employers with at least 100 employees, but “employees” normally does not include employees who worked fewer than 20 hours per week or those who had worked less than six months in the previous 12 months. Some AAF players might not “count” for purposes of employees since they worked for fewer than six months. Their season lasted only two months before the AAF suspended operations. Also, it appears that many players signed contracts in January—when AAF teams held training camps in preparation for the season—while others signed last fall. Some of the coaches and staff began work last fall, while others started more recently. Roberson and Swope started in September 2018, which would be long enough for six months. How many other AAF employees started more than six months prior, and whether they worked at least 20 hours per week, are unknown factors.
In addition, the AAF might argue that it is not closing down. The league describes itself as “suspending” operations, which implies it might resume those operations at some point. Such an argument would be difficult to take seriously. The AAF’s website explicitly says, “this is not the way we wanted it to end” (emphasis added) and also references trying to find solutions to “outstanding issues.” Even without language that clearly signals the AAF is winding down, ongoing legal fallout is a reason to expect the suspension is permanent. Likewise, many players, coaches and staff have already sought, and in some cases obtained, new employment.
Several of the individual defendants—including Polian, Polamalu and Allen—will probably insist that they are not personally subject to WARN. There is unsettled case law on whether directors and officers of a company can be held individually responsible for failing to meet WARN’s requirements. However, the traditional understanding has been that individual defendants—be they executives, managers, supervisors and staff—are not liable under WARN since they are not “business enterprise” as that term is defined by the statute.
Former AAF players: the AAF breached contracts and now owe us money
Approximately 450 AFL players lost their jobs when the AAF suspended operations, including Colton Schmidt and Reggie Northrup. The two are now suing the AAF, along with Dundon, Ebersol and others in San Francisco Superior Court. As detailed in a complaint drafted by attorneys Boris Treyzon and Jonathon Farahi, Schmidt and Northrup contend the AAF is liable for breach of contract, fraud and other claims. Their lawsuit is intended to become a class action on behalf of all other AAF players.
Schmidt, 28, was the Buffalo Bills’ primary punter between 2014 and ’18. He was cut in the middle of the 2018 NFL season and replaced by Matt Darr. Before the AAF abruptly stopped, Schmidt had played for the Iron—and played well. He was named the AAF’s special teams player of the week on Feb. 26 and finished third in the AAF in yards per punt.
Northrup, 25, was a linebacker for the Florida State Seminoles before joining the Los Angeles Rams practice squad in 2016. He later played for the CFL’s Montreal Alouettes. Northrup signed with the AAF in January and played for the Orlando Apollos.
The complaint draws on many of the same points raised in the WARN litigation discussed above. The AAF is depicted as knowingly misleading players into a false sense of assurance as to the league’s future. The complaint underscores public statements by AAF officials. Dundon’s remark, “there’s enough money to run this league for a long time, we’re good for many years to come with what I just did,” is understandably highlighted.
Likewise receiving attention in the complaint are Ebersol’s reassurances of the AAF’s supposedly long-term commitment. For instance, in March 2018, Ebersol pressed for patience. “If you are not committed seven to ten years,” Ebersol reflected, “you are not taking this seriously.” With the AAF signing multi-year partnerships with Starter and other brand-name companies, Ebersol referenced “a very sober business model, long term plan that over the course of many years is going to build into something worthwhile.” After Dundon rescued the AAF in February 2019, Ebersol characterized Dundon’s involvement not as a bailout but rather as a testament to the AAF’s high value: “After that first week of games, we were at the height of our valuation and were able to dictate our future.”
Both Schmidt and Northrup signed contracts that included a non-compete clause. It appears all AAF players contractually agreed to this clause. It states that AAF players could “not play football or attempt to play any type of football for any team, league or association of teams other than the [AAF] team which the player is allocated by the AAF, expect with the prior written consent of the AAF.” As depicted in the players’ complaint, the non-compete was interpreted as requiring players to complete their AAF season, even if an NFL team offered a job. In exchange, the AAF agreed to pay players a three-year contract an annual salary in 10 equal payments. In the first year, the player would be paid $70,000; in the second, $80,000 and in the third, $100,000.
The AAF didn’t live up to player contracts, as players went unpaid in April. There is no reason to believe that the AAF will pay the players at a later date, either. As a result, Schmidt and Northrup assert that the AAF and co-defendants are liable for breach of contract.
The players also argue that the AAF has violated multiple provisions of the California Labor Code. Section 201, for example, compels businesses to pay earned wages and reimbursable expenses within 72 hours of an employee being let go. Section 203 is also referenced in the complaint. It instructs that employers are liable for back wages if they knowingly fail to pay wages on time. The players also contend that the AAF failing to pay constitutes fraudulent practices under California’s Unfair Competition Law. Likewise, they contend that the AAF “intentionally concealed or suppressed their disregard for the long-term viability of the league intending to defraud players ... and intended to conceal the fact that the league was insolvent.”
The players hope for substantial damages, including for the physical pain and emotional pain associated with playing in the AFF. They note that they subjected themselves “to serious risk of physical harm and damage to health” and forwent other financial opportunities to sign with the AAF. The players insist that “if they knew the league was not financially viable from the outset, and that the intent of its main investor was to fraudulently, deceptively, and pretextually acquire underlying intellectual property and/or technology from the league and then cease league operations.” To that end, the players contend the AAF should be on the hook for future medical bills that resulted from playing in the AAF.
AAF reportedly won’t allow players to join the CFL: Setting up another potential litigation
The current legal relationship between AAF players and the AAF appears to be a matter of debate. Normally under contract law, when one party breaches the contract in a substantial way—such as by not paying the amount owed and by acknowledging the project is over—the other party is relieved of any contractual obligations. Although some obligations, such as non-compete clauses, sometimes last after one’s employment contract ends, judges are disinclined to enforce obligations if the employer breached the contract and has effectively gone out of business. Stated more basically, with the AAF no longer a functional league, it would face unfavorable prospects in courts if tried to enforce contracts.
To that point, AAF players are no longer being paid in accordance with their contracts and (as discussed earlier) have been notified the league is over. A reasonable interpretation, then, is that AAF players are no longer AAF players and are no longer bound by their contracts. AAF players thus shouldn’t need “permission” from the AAF to sign with other football leagues.
The AAF seems to have adopted a different interpretation of the law. On Apr. 3, the AAF announced it had “authorized” AAF players to sign with NFL teams. Several dozen players haves since signed with NFL teams. Again, a sensible interpretation of the facts is that the AAF could not block players from signing with the NFL and thus no “authorization” was needed.
The AAF has apparently adopted a more exclusionary approach with respect to AAF players who want to play in the CFL. According to ESPN’s Adam Schefter, CFL executives have notified teams that the AAF “will not allow its players” to sign with CFL teams. Schefter also reports that the AAF sees its players’ contracts “as assets in potential bankruptcy proceedings.”
These reports are head-scratching.
First, breached player contracts would likely constitute liabilities, not assets, in any bankruptcy proceeding for the AAF. It’s true that employment contracts of a bankrupted business are considered “property.” When not already breached, such contracts are often classified as bankruptcy assets, namely “executory contracts”—meaning contracts where both sides remain obliged to each other. Executory contracts could provide substantial future value to the bankrupted business or any entity that takes control of it through bankruptcy. Here, however, AAF player contracts may have already been nullified by the AAF’s actions. Also, the league shutting down means there is no reason to believe the AAF will attempt to require players to play in the future. If courts find the players are owed money from the AAF, the players would become creditors, not sources of pending revenue.
In addition, bankruptcy proceedings tend to take months or years to play out. Generally, players have limited windows in their lives—typically from their early 20s to late 20s—to earn income from playing football before they age out of their prime. If the AAF sincerely believes it can prevent players from working in football for months or years while it tries to discharge debts through bankruptcy proceedings, it should expect an unfriendly reaction from the legal system.
Second, the CFL is unlikely to sign many AAF players. The CFL uses nationality restrictions that limit the number of roster sports for U.S. players. Each CFL team’s 44-man roster must contain at least 21 Canadians. To the extent the AAF envisions the CFL as a rival, it is a rival that largely doesn’t compete for the same group of players (of course, the AAF no longer competes for any players).
Third, the CFL could simply ignore the AAF’s alleged directive and sign the players. There is a good chance the AAF would take no action, save for sending a sternly-written letter penned by a lawyer. The AAF likely would not want to incur additional attorneys’ fees by suing the CFL. This is particularly the case given that the AAF will probably need to spend considerable monies defending against lawsuits. Of course, the CFL might be risk averse and not interested in taking a chance that signing AAF players would bring about a lawsuit.
Fourth, even if the AAF sought a court order to stop the CFL or any other league from signing players, a court would probably deny the petition. The AAF has effectively gone out of business and can’t enforce employment contracts that are no longer operable. The AAF has also publicly stated it “encourages [players] to continue pursuing their dreams and we wish them the best”—a statement that would be inconsistent with a prohibition on players signing with other leagues.
Also, the AAF would need to demonstrate that it would suffer “irreparable harm” in order to obtain a temporary restraining order. Such harm is of the kind that financial compensation can’t cure. It’s unclear what irreparable harm the AAF would suffer if players went on with their professional lives—especially when the AAF set precedent by not challenging its players signing with NFL teams. To the extent there is irreparable harm, the AAF would likely be the one causing it: football players’ development could be permanently harmed if they are contractually barred from playing football.
It’s possible the AAF’s alleged warning to the CFL is intended for other pro leagues, be they the XFL, Pacific Pro Football, or Your Call Football, all of which could compete with the AAF for players. It could also reflect settlement discussion leverage with players who sue the AAF. The league might offer to drop its alleged block on players signing with other leagues in exchange for the players relinquishing any claims they may have against the AAF.
Fifth, AAF players could seek declaratory judgment from courts that their AAF contracts are invalid and non-binding. Such a judgment could be used by the players and their agents to convince the CFL, XFL and other leagues that they can lawfully sign these players. This would not be a cost-free remedy for AAF players, however, as it would mean they would need to hire attorneys and commence legal action.
The MMQB will keep you updated on the continued fallout of the AAF’s collapse.
Michael McCann is SI’s legal analyst. He is also Associate Dean of the University of New Hampshire School of Law and editor and co-author of The Oxford Handbook of American Sports Law and Court Justice: The Inside Story of My Battle Against the NCAA.
Question or comment? Email us at talkback@themmqb.com
