Is Relocating to Los Angeles Really a Financially Viable Option for an NFL Club?

On February 7, 2013, in NFL, Sports Law Blog, Stadiums, by iozzia

February 7, 2013

by Chris Helsel

Greater Los Angeles, the nation’s second-largest metropolitan area and home to nearly 13 million people, has found itself devoid of an NFL franchise since the Rams and Raiders left town in 1995. The region is home to six major professional sports franchises (MLB, NHL, and NBA), as well as two professional soccer teams. With NFL clubs thriving in comparatively miniscule markets such as Green Bay and New Orleans, fans and commentators alike have, with increasing frequency and volume, posed the obvious question: Why not L.A.? As with most things, the answer is more complicated than it seems… and ultimately boils down to money.

First Things First: Ownership Group + Stadium Deal

The potential return of the world’s most successful sports enterprise to the City of Angels has been discussed continuously in the years since the Rams and Raiders departed; in fact, NFL owners awarded Los Angeles an expansion franchise in 1999, but the city failed to produce an acceptable ownership group and stadium deal. The league ultimately settled on its second choice, and the Houston Texans were born.

Farmers Field (Photo: Business Insider)

Recently, NFL-in-Los Angeles talks have begun to heat up once again. In 2010, Anschutz Entertainment Group (“AEG”) unveiled a proposal for a new stadium to be built in Downtown L.A., adjacent to the Staples Center, home of the NBA’s Lakers and Clippers, NHL’s Kings, and WNBA’s Sparks. In February 2011, AEG announced that it had sold the proposed stadium’s naming rights to Farmers Insurance Group – a deal spanning 30 years and worth a reported $700 million. The City Council signed off on the stadium proposal in September. Construction crews are now waiting, shovels in hand, to break ground and begin assembling the latest step toward the revitalization of the city’s historic core. None of this can come to pass, however, until an NFL club or two agree to call Farmers Field home.

Workers’ Compensation: California Clubs’ Exposure to Limitless Future Liability

One major concern that any non-California team considering relocating to Los Angeles must address is the increased future financial liability guaranteed to result from California’s employee-friendly workers’ compensation laws. Because playing professional football exacts such a toll on the body and players’ careers are generally short, it is very common for retired players to file for workers’ compensation.

In the forty-nine states not named California, workers’ compensation claims are centered on specific injuries, and a set amount of money is usually awarded or agreed to in a settlement. California, however, allows for “cumulative trauma” claims. Cumulative trauma encompasses all wear-and-tear injuries suffered from constant overuse on the job. Claims in the other states have been mostly manageable, because NFL clubs and their insurers have a fairly accurate idea of their average annual liability based on the most common and obvious specific injuries suffered by players.

With cumulative trauma cases, however, the potential liability is limitless, subject to the whim of California judges. Retired player benefits have already been calculated at more than $1 million per year. Further, this applies to any player who has ever played for a team based in California, regardless of whether the player was employed elsewhere before retiring. With ever-increasing health costs and the fact that benefits extend to the full life expectancy of the player, the potential liability of a team based in California is enormous.

Consequently, the California workers’ compensation regime exposes California clubs to financial liability exponentially greater than that incurred by other NFL clubs. Recently, however, opportunistic attorneys attempted to take advantage of California’s favorable workers’ compensation laws, and an increasing number of retired NFL players who never suited up for a California team have begun to submit workers’ compensation claims in the state. They argue that California jurisdiction is proper due to their having practiced or played in the Golden State at least once while employed by an NFL club. What’s more, the statute of limitations to file workers’ compensation claims in California does not kick in until an employer informs the employee of his right to seek compensation there, and out-of-state NFL clubs typically do not go out of their way to suggest that players head to California and file workers’ compensation claims.

This strategy was dealt a crushing blow by the Ninth Circuit’s ruling in Bruce Matthews v. NFL Management Council last August, which held that a player must establish sufficient contacts with California to “come within the scope of its workers’ compensation regime.” Because Matthews had neither played for a California club nor could point to a specific injury he suffered in the state, the court could not justify nullifying his contract’s forum selection clause and allowing his claim to proceed in California. The Matthews ruling therefore precluded thousands of potential claimants from filing claims in California, much to the delight of NFL owners and league officials.

Additionally, in the months since Matthews, both a U.S. District Court and the California Workers’ Compensation Appeals Board have held that forum selection clauses in NFL player contracts are valid and that their enforcement does not violate California public policy.

Cost-Benefit Analysis

While Matthews and the aforementioned subsequent cases were celebrated as a major victories by most NFL teams, those clubs based in California are still stuck with the limitless workers’ compensation exposure outlined above. Therefore, any team that voluntarily relocates into California must be willing to bear the severe workers’ compensation financial burden that is guaranteed to result.

In addition to the added workers’ compensation liability, any owner considering relocation into California must also bear in mind the state’s newly passed Proposition 30, which raises the state income tax rate on individuals earning more than $1 million from 10.3% to 13.3%, the highest rate in the country.

In order for such a move to be financially prudent, the relocating club must conduct a cost-benefit analysis to determine whether its profits will increase to such an extent as to cover all liability incurred by its increased workers’ compensation exposure and tax hike. In doing so, the club must not be short-sighted; it must be confident that once the shimmer of a new team in town fades, the club can maintain consistent profits for decades to come, despite the inevitable ebbs and flows of fan support and the team’s on-field performance. It must also remember that with every player it signs to a California contract comes the potential for a lifetime of medical coverage liability.

Receptive Market?

After a team determines that it can bear the burden of the increased workers’ compensation liability sure to result from a move to California, it must also consider a number of other factors before ultimately deciding to relocate.

Anecdotal evidence suggests that sports fans in southern California, though passionate about their Pac-12 football, are less enthused by the professional game. Perhaps football fans in the region are disenchanted with the NFL after watching both of their teams bolt a decade ago, or perhaps the local college game is considered to be professional enough in its own right, with ex-NFL head coaches at the helm of both local powers and recent NCAA pay-for-play sanctions still fresh in the minds of many. Additionally, the only NFL team currently residing in southern California, the San Diego Chargers, are near the bottom of the league in annual attendance.

Downtown Los Angeles (Photo: Nick Ut, AP)

Whatever the reason, it is no guarantee that the Los Angeles community will embrace an NFL team (let alone two) with open arms. When the NFL left the city in 1995, blame was cast upon aging stadiums and waning support. The stadium issue can be remedied easily enough, as all signs indicate that Farmers Field will provide fans with a state-of-the-art modern game-day experience. Fan passion and loyalty, however, may be more difficult to come by.

In a place like Green Bay, the sports fan has little else to cling to besides Packers football. In Los Angeles, however, the abundance of successful local professional and collegiate teams offers fans a plethora of other options. New York faces a similar issue, with many teams competing for fans’ allegiance (and money). However, like the Dodgers and Lakers in L.A., New York teams wisely harken back to their history and rely on the support of generations of dedicated fans. The Giants and Jets are able to co-exist in the crowded New York market partially because for many locals, fandom was bestowed at birth.

For a team moving to Los Angeles, like any other expansion or relocated team, it will take time to forge that special bond with the city. In a place like L.A., with so much else to offer, there is no guarantee that an NFL club will capture the city’s imagination and successfully cultivate the culture of devotion necessary to sustain such an expensive undertaking.

The League’s Take

Before an examination of which, if any, teams have a realistic opportunity to relocate to Los Angeles, it is important to note that the NFL has already weighed in on the issue and laid out a list of requirements to be met before any such relocation takes place. While recent media reports indicate that no NFL teams are planning on applying for relocation for the upcoming 2013 season, it is likely that relocation requirements will remain virtually the same for future seasons.

In a league-wide memorandum released last June, NFL Commissioner Roger Goodell indicated that any team wishing to relocate to Los Angeles for the 2013 season must file an application with the league between January 1 and February 15, 2013.

The relocation policy requires teams to exhaust all reasonable efforts to avoid relocation. Specifically, before bolting for L.A., clubs must “work diligently and in good faith to obtain and to maintain suitable stadium facilities in home territories, and to operate in a manner that maximizes fan support in their current home community.” Therefore, relocation is appropriate only if “having diligently engaged in good faith efforts, a club concludes that it cannot obtain a satisfactory resolution of its stadium needs.”

Additionally, the league stressed that it views Los Angeles as a potential two-team market, and any stadium proposals must accommodate accordingly. In the June memo, Goodell wrote: “Consistent with our long-standing view, we have made it clear that any stadium seeking investment support from the 32 member clubs should preserve a viable option of being able to host two teams at appropriate times and on appropriate terms.”

Farmers Field will satisfy this requirement, and it appears that the league is awaiting news that one or more teams will apply for relocation. The only remaining question, it would seem, is which teams.

Candidate #1: Return of the Raiders

Considering the essentially limitless workers’ compensation liability an out-of-state team would voluntarily expose itself to by relocating to Los Angeles, the most logical choice for relocation to L.A. would be one or more of the teams already situated in California. The San Francisco 49ers, slated to begin play at a brand new stadium in Santa Clara in 2014, are not a candidate for relocation.

The Oakland Raiders present a more intriguing candidate. The team was founded in Oakland in 1960 and remained there through the 1981 season. The late Al Davis then moved the team to Los Angeles prior to the 1982 season, after negotiations with Oakland city officials for renovations to Oakland Coliseum broke down. The team called Los Angeles home for thirteen years, before Oakland finally acquiesced and agreed to renovate the Coliseum. With Davis’ long-coveted luxury boxes and a new upper deck in place, Oakland welcomed the Raiders back in time for the 1995 season.

During its time in Los Angeles, the Silver and Black formed a unique bond with the city’s inhabitants, although perhaps not of the kind most preferred by the NFL’s image-conscious league office. The team’s renegade reputation, spurred on by its brash owner and his win-at-all-costs mentality, was embraced by the city’s urban youth. Hip-hop groups regularly donned Raiders jackets and caps in music videos and during live performances, and before long sales of Raiders merchandise far outpaced that of any other NFL team. Unfortunately, by 1991 the connection between Raiders gear and gang activity had become so strong that schools throughout the western United States were banning Raiders paraphernalia from their hallways.

The Raiders have long profited from the unique aura surrounding the franchise, as well as the renegade reputation that comes with it. It is unclear, however, whether the powers that be at the league headquarters in New York are keen to re-associate the Raider brand with Los Angeles’ gang culture and the wave of negative publicity sure to follow.

Additionally, reports indicate that the other 31 NFL owners would not authorize the move (a ¾ vote of team owners is needed to relocate a team) unless the Davis family sells its controlling interest in the team. Considering how passionate Al Davis was about his Raiders, this scenario seems unlikely. It also remains possible for the Raiders to remain in northern California and escape their antiquated stadium: Santa Clara mayor Jamie Matthews has indicated that the 49ers’ new stadium was designed to house two teams and that it was the city’s “ambition to get a second team.”

Candidate #2: Return of the Rams

The St. Louis Rams (Los Angeles/Anaheim residents until 1994) cannot escape their current stadium lease until March 2015, except in the event of breach by the city. The team’s lease with the city requires the Edward James Dome to be a “first tier” facility among the top eight venues in the NFL, or the Rams can exit following the 2013 season. The team and city cannot agree on what renovations are necessary, how much it should cost, and who should pay for it. The issue went to arbitration last month, and a decision is expected sometime in March or April.

(Photo: ramsherd.com)

If the arbitration panel determines that the Rams’ proposed $700 million stadium overhaul is necessary (as opposed to the city’s proposed $124 million paint job), the city can reject the plan, freeing the Rams to return to Los Angeles in time for the 2015 season. However, there is no guarantee that the city will not ultimately accept to foot the bill for the Rams’ renovation plan, or that the two sides will not come to an agreement before then. While the eventual return of the Rams to Los Angeles is not out of the question, it certainly does not seem very likely. The stadium situation combined with the very real problem of exposure to California workers’ compensation liability makes this move a long shot.

Candidate #3: Return of the Chargers

In addition to the Raiders, there exists one other in-state relocation candidate: the San Diego Chargers. The franchise was founded the same year as the Raiders, 1960, and played its inaugural season in the L.A. Coliseum as the Los Angeles Chargers. The following season they packed their bags and headed to San Diego, and have enjoyed moderate success there, even reaching the Super Bowl during the 1994-1995 season.

In recent years, however, the team has failed to sustain consistent fan support, despite reaching the playoffs in five of six seasons from 2004-2009. The club’s 48-game sellout streak was snapped in 2010, and seven of its past twenty-one games have been blacked out on local television as a result of insufficient ticket sales. Additionally, several other recent games have narrowly avoided blackout by last-second ticket sales or mass ticket purchases by corporate sponsors.

The Chargers appear to be the most likely candidate for relocation, due to their favorable stadium lease terms in San Diego. Though the club’s Qualcomm Stadium lease with the city extends until 2020, the Chargers have an exit clause that can be triggered between February 1 and April 30 each year with a buyout that decreases annually. This three-month opt-out window overlaps with the league’s relocation notification policy (described above) by fifteen days. The buyout would have cost the club around $21 million in 2013, but the club recently announced that it would stay in San Diego for at least one more season, so any relocation will have to wait until at least 2014.

If the team seeks to relocate to Los Angeles for 2014, it would also be able to satisfy the league’s requirement that a club seeking to relocate exhaust reasonable efforts to remain in its current city. The club worked through 2012 to find a publicly acceptable way to finance a new stadium in Downtown San Diego near Petco Park, home of MLB’s San Diego Padres. Those efforts were derailed when state redevelopment funds were cut, and it is looking increasingly unlikely that a new stadium will be built in San Diego at any point in the near future.

Other Candidates: Unlikely

In addition to the Raiders and Chargers, a handful of other NFL clubs have been mentioned as potential candidates to fill the void left in Los Angeles by the joint departure of the Rams and Raiders following the 1994 season. However, it seems unlikely that any non-California team would be willing or able to shoulder the financial burden of leaving its current home and taking up residence in Downtown L.A.

The Minnesota Vikings, long a candidate for relocation, were removed from this list with approval of a new stadium in Minneapolis this spring.

The Jacksonville Jaguars are locked into an ironclad stadium lease that keeps them in North Florida through 2029. The only way to escape the lease is for the club to prove operating losses in three consecutive years – a tall task in this age of increasing league-wide profits and new, rich television deals in place for 2014. Further, the Jaguars would owe the city of Jacksonville the balance of the remaining rent and nearly $1 million annually in various fees.

In addition, when Jaguars owner Shahid Khan purchased the team, the agreement included a clause requiring Khan to make a $25 million donation to the charity of former owner Wayne Weaver’s choice if he moves the team before 2017. While it would not be impossible for the Jaguars to relocate to L.A., it certainly seems unlikely, given the difficulty of proving three years of operating losses in the most profitable sports league in history.

The Carolina Panthers have been mentioned as another relocation candidate, especially because the franchise is one of only four in the NFL that owns its own stadium, and therefore would not have to break a lease or deal with litigation on its way out of town. Reports indicate that owner Jerry Richardson plans to sell the team within two years of his death (he is 76 with quadruple bypass surgery and a heart transplant behind him), having already forced his sons out of the family business in 2009.

However, all other signs point to the Panthers staying put: Richardson, the only current franchise owner to also have played in the NFL, is a North Carolina native and has been adamant about his intention to keep the team in Charlotte; the city council recently approved a tax increase to pay for stadium upgrades; the Panthers have sold out every home game since 2002; the franchise is worth over $1 billion, placing it in the top half of the league; and finally, if the Panthers exit Carolina, the NFL will be left without a club between Washington, D.C. and Atlanta.

Alternate Market Entry Possibility: Expansion

NFL Commissioner Roger Goodell (Photo: LA Times)

Ultimately, the most likely outcome is no NFL teams abandoning their current homes and relocating to Los Angeles. Instead, the Los Angeles market may become home to one or two new expansion franchises in the very near future. The NFL itself has admitted as much, as Commissioner Goodell recently stated that the league “doesn’t want to move any of its teams.”

Additionally, in the event that the league expands to Los Angeles, the city will probably become home to a pair of new teams, not just one. Adding only one franchise would create an odd number of teams in the league, creating a scheduling nightmare. According to Goodell, the NFL “probably [doesn’t] want to go to thirty-three.”

Final Verdict: Is Relocation a Realistic Possibility?

Due to the unique California workers’ compensation laws outlined above, it seems unlikely that an out-of-state team will be willing to move to Los Angeles and expose itself to a lifetime of virtually limitless liability. With that said, if any team is willing to take the plunge, the most likely candidates are probably the Rams or the Panthers.

If the city of St. Louis does not agree to foot the bill for stadium renovations, Rams ownership may decide that Los Angeles will provide sufficiently increased profit margins to cover for the increased workers’ compensation exposure. Similarly, because the Panthers own their own stadium, the door is open for them to test the L.A. waters.

However, for either team to do so would constitute an enormous risk, with potentially disastrous results. For that reason, both of these scenarios seem unlikely. Therefore, the leading candidate among current NFL franchises for Los Angeles relocation is not an out-of-state team, but rather the league’s only current southern California squad, the Chargers. A move north to L.A. would not expose the club to any increased workers’ compensation liability, and the franchise’s favorable lease terms make escaping San Diego financially feasible.

What remains to be seen is how the league office will react when only one team applies for relocation to Los Angeles. The commissioner’s June memo makes it clear that the NFL wants two teams in the City of Angels, and it will be very interesting to see whether a single club is permitted to move there and inhabit Farmer’s Field without a co-tenant.

Due to the financial risks posed by a current NFL team relocating to Los Angeles, it appears unlikely that any franchise will make the move. As stated above, it appears that the most feasible means of NFL entry into the Los Angeles market is a league expansion to thirty-four teams. While a number of current clubs may prefer Los Angeles to their current homes, the logistics of relocation appear to render the move entirely inadvisable at this time.

Sources:

1) http://www.ca9.uscourts.gov/datastore/opinions/2012/08/06/11-55186.pdf

2) http://profootballtalk.nbcsports.com/2012/06/30/if-l-a-move-will-happen-in-2013-chargers-are-the-most-likely-to-go/

3) http://profootballtalk.nbcsports.com/2012/08/14/bruce-matthews-case-gives-players-a-path-to-california-workers-compensation-benefits/

4) http://espn.go.com/espn/otl/story/_/id/8316657/nfl-teams-facing-large-bills-related-workers-compensation-claims-head-injuries

5) http://stlouis.sbnation.com/st-louis-rams/2012/1/28/2754331/st-louis-rams-stadium-lease-violation-london/in/2485068

6) http://profootballtalk.nbcsports.com/2011/12/18/a-move-would-cost-khan-25-million-extra/

7) http://www.courthousenews.com/2012/08/06/49032.htm

8) http://espn.go.com/los-angeles/nfl/story/_/id/8581593/farmer-field-los-angeles-set-built-disputes-settled

9) http://sports.yahoo.com/news/could-raiders-still-share-49ers-santa-clara-stadium-094200514–nfl.html

10) http://sports.yahoo.com/news/nfl-franchises-most-likely-relocated-024600081–nfl.html

11) http://www.nctimes.com/sports/football/professional/nfl/chargers/chargers-bolts-will-stay-at-qualcomm-stadium-for-season/article_27bc323f-77cb-5cfb-9ebc-da1dde287762.html