NASL retains IP unless buyout clause is paid
Image credit: NASL
USL v NASL
Among the prevailing perceptions about the NASL and USL is that the latter has an ironclad franchise agreement that retains intellectual property, trademarks, and logos of any teams that depart the league. We previously outlined several key provisions of the standard USL franchise agreement.
On the other hand, it’s widely believed that clubs exiting the NASL are not subject to similar retention of intellectual property or other restrictions.
However, based on a copy of the NASL’s 2013 membership agreement provided by attorney Miki Turner, it appears the situation is more complicated.
Soc Takes examined the 2015 amendments to the NASL agreement, and found no differences in the specific subsections applicable to the information provided above. It is possible that further changes to the operational agreement have been made since 2015.
Exiting the league
First of all, a recap of the NASL’s exit fees. Much of this was reported by FiftyFive.One’s Wes Burdine last year.
According to the NASL’s agreement, a class A member of NASL, LLC can withdraw from the league in one of a several ways:
Proper Withdrawal – This would allow a team to play out the current season and exit the league on December 31 of that year. There are exit fees associated with this withdrawal depending on when the letter of withdrawal is received.
- Before June 30th – $500,000
- Between June 30th and the championship game – $1.5 million
- Between the championship game and Dec 15th – $2 million
- If at any time an owner signs over all its intellectual property and trademark, the withdrawal fee can be reduced to $250,000.
Practical conseq of NASL losing D2 is members can exercise clause to immediately withdraw from LLC w/ dramatically lower termination fee
— Neil Morris (@ByNeilMorris) November 4, 2017
Default withdrawal – The execution of this option would remove an owner and his team from the league effective immediately. The exit fee for this withdrawal is $2.5 million.
Operational withdrawal – If the league loses Division II status or there are less than 7 teams, the remaining teams can exit for $25,000.
Death of the principal owner – No withdrawal fee.
Image credit: USL
Buy me out
But, here is where it gets interesting. As reported by Kartik Krishnaiyer in an article for Soc Takes, the USL franchise agreement prevents teams exiting the USL from competing in rival leagues for two years and restricts their use of trademarks outside of USL during that time. As it turns out, similar clauses have long existed in the NASL agreement.
Per the NASL’s 2013 membership document, for two years after withdrawal (described above), a class A member cannot:
- Own another professional team in North America;
- Operate a team in a different professional league; or
- Use their trademarks and intellectual property in a non-NASL professional league.
If an owner wished to switch their team from the NASL to another league with its marks and IP, there are “buyout” clauses to accomplish that. These are penalties in addition to the exit fees described above. These fees depend on the divisional status of the league the team would join.
More specifically, if a team were to leave the NASL to join MLS, the buyout fee would be 10 percent of the MLS expansion fee, subject to a minimum of two million dollars and a maximum of five million dollars. If the NASL team left to join another Division II professional league, the penalty would be 1.5 million dollars. Finally, if the league of destination were a non-Division II professional league, the penalty would be 1 million dollars.
One caveat: any NASL member departing the league via an operational withdrawal is not subject to an additional buyout fee in order to immediately join another professional league and port their intellectual property.
The takeaway
These non-compete and buyout clauses raise interesting questions. In effect, a team exiting the NASL for another league is liable to pay an exit fee of $500k-$2M plus a buyout fee of $1M – $5M. So, did Minnesota United, Ottawa Fury, Tampa Bay Rowdies and North Carolina FC pay these exorbitant fees to exit the league? Soc Takes contacted the NASL for comment on the story but was not given any response at the time of publishing.
The non-compete clause also further highlights some similarities between the USL and NASL’s operational plans. The USL franchise agreement includes an “upward movement fee” imposed on teams leaving the USL for MLS, equal to 7 percent of the MLS expansion fee, with no minimum or maximum. However, the USL franchise fee does not contain an exit clause or fee accompanying a move to a different professional league outside of MLS.
Multiple sources – members of both NASL and USL – inform SocTakes that clauses within the operational agreements are open to negotiations between the franchisee (owner) and the franchisor (league). Yet, if this were true, could exit fees also be open to negotiation?
And if exit fees are negotiable, it is remarkable that NASL made it to 2017.
Neil Morris and Kartik Krishnaiyer contributed significantly to this article. Thanks to Ben Bromley and Keyser Todd for providing information for this article.
Follow Nipun on Twitter: @NipunChopra7.
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