SPORTS ENTERTAINMENT AND THE LAW: THE ROLE OF GOVERNMENT REGULATION, INTELLECTUAL PROPERTY, AND CONTRACTS IN WRESTLING AND MIXED MARTIAL ARTS BY PIERRE BEDARD TABLE OF CONTENTS I. Introduction ………………………………………………....……2 II. Two Dominant Players………………………………………..…3 III. Government Regulation………………………………………...8 IV. Intellectual Property Rights…………………………………..14 V. Contracts……………………………………………………...…25 VI. Conclusion: The legal future of sports entertainment……....30 Pierre Bedard Page 1 of 33 I. INTRODUCTION Professional wrestling and Mixed Martial Arts (MMA), two forms of mayhem known collectively by the euphemism “sports entertainment,” are like double-wide trailers. To some, a double-wide is nothing more than a tornado magnet, a nest for white trash. To others, it’s home. In some social circles, admitting a love for wrestling or cage fighting is a form of intellectual suicide, the moral equivalent of lighting a Camel no-filter in an aircraft lavatory.1 Yet, many of us are drawn to wrestling through childhood memories or cultural ties. The memory of my Dad and uncles, playing cards, while watching wrestling on a 15-inch black and white Dumont television set and drinking room temperature O’Keefe’s beer in East Montreal is an early memory. When we moved to Southern California, Freddie Blassie, being told by the LA Olympic Auditorium crowd to “Bite, Freddie, Bite!” welcomed me to Orange County. Visions of Mad Dog Vachon, accidentally opening up a vein in his head on a steel post, blood spurting out marking each heartbeat, stay with me to this day, and not in a post-traumatic way. But wrestling is less ethereal than my random memories of violence past. The sports entertainment industry has left a rich historical trail of case law about government 1 Well, it may not be as bad as a federal crime, but professing a love of professional wrestling or MMA makes people question your demographic. Pierre Bedard Page 2 of 33 regulation, intellectual property rights, and contract law. This paper attempts to gain insight on the industry through these cases. II. TWO DOMINANT PLAYERS Sports entertainment as a concept has ebbed and flowed over the years. Emerging from circus sideshows, carnivals, and traveling strong men, this form of sports entertainment is arguably as legitimate as any sport, requiring conditioning, training, and in wrestling’s case choreography and acting needed to get a performer “over” with the crowd. Today, sports entertainment is dominated by two players – one in professional wrestling and the other in MMA. World Wrestling Entertainment (WWE) The WWE, headquartered in Stamford, Connecticut is a publicly traded on the NYSE (WWE). Once known as the World Wrestling Federation (WWF)2, the company had revenues of $485.7M in 2007 and market capitalization of about $1.2B. The WWE segments its revenue in four categories; 1) Live and TV entertainment, 2) Consumer Products, 3) Digital Media, and 4) WWE Films.3 The WWE’s longterm financial objectives are 10% average revenue growth and 12% average earnings growth year-to-year from 2006 to 2011. Their primary path is 2 Until sued by the other WWF – the World Wildlife Fund. See WWF vs WWF: The trademark war http://slam.canoe.ca/SlamWrestlingArchive2000/oct26_wwf-ap.html (last visited May 14, 2008) 3 See Current WWE 10-K Report http://corporate.wwe.com/investors/documents/200710-KFinal.pdf (last visited May 14, 2008) Pierre Bedard Page 3 of 33 through international expansion, the exploitation of Digital Media opportunities including website advertising, the sale of hard goods through wwe.com, and the strengthening of the core businesses, especially pay-per-view.4 Business Segments 2007 Revenue ($M) Percent of Total Percent Growth Revenue Live & TV Entertainment $ 316.8 65% 8% Consumer Products $ 118.1 24% 24% Digital Media $ 34.8 7% 24% WWE Films $ 16.0 3% N/A Total Revenues $ 485.7 17% Just like they segment their business, the WWE knows how to segment the demographics they serve. Their segmentation philosophy is a roadmap for growth. They manage the business with an eye to trends and shifts. If they see an opening to micromarket a t-shirt geared towards 35 year old divorced grandmothers, they exploit it and a t-shirt geared to the demographic emerges on the WWE storefront at wwe.com. While Live & TV Entertainment represented two-thirds of the revenue in 2007, its growth (8%) lagged behind the other business segments. Was it because Live & TV Entertainment is more susceptible to economic petroleum and agricultural shocks? Did 4 See WWE First Quarter 2008 Conference Call Presentation http://corporate.wwe.com/investors/documents/1Q2008Presentation_004.pdf (last visited May 13, 2008) Pierre Bedard Page 4 of 33 the rate of growth correlate to the rise in the price of gasoline? Was the pay-per-view market saturated? Their Trending Schedule5 dissects each granular part of each segment and guides investment (and disinvestment) decisions. For example, in 2007, sensing an overload in the pay-per-view schedule, the WWE canceled at least one show. The WWE is growing the product line by looking to the international market. They’ve determined that the US market is relatively saturated, with almost one pay-per- view scheduled per month. The WWE has signed affiliates like BSkyB in Europe, taking them into new markets and hoping to keep TV revenue on a positive slope. Consumer Product revenues, which includes license fees, royalties, home video sales and magazine sales was strong in 2007. From 2006 to 2007, licensing increased 47%. In Q1 2008 alone, licensing revenue rose 27% year to year based on the sale of 5.2 million units of WWE’s flagship videogame published by THQ. The strength of the Consumer Product segment clearly demonstrates that the WWE is not just about professional wrestling. With a deep intellectual property portfolio ripe for licensing, the WWE is an entertainment company. Zuffa Zuffa, LLC, located in Las Vegas, Nevada, was formed to purchase the Semaphore Entertainment Group (SEG) in 2001. Because Zuffa is a privately held limited liability corporation, it is hard to pierce the veil surrounding internal financial 5 See WWE First Quarter 2008 Trending Schedule http://corporate.wwe.com/investors/documents/TrendingScheduleQ12008.pdf (last visited May 13, 2008) Pierre Bedard Page 5 of 33 machinations of the company. Thankfully, an enterprising blogger / law student / writer, Adam Swift, has been able to piece together some interesting facts harvested from a Standard and Poor’s report downgrading Zuffa’s corporate debt rating in late 2007. According to MMA Payout, Zuffa was carrying about $350M in debt at the end of 2007. The money was most likely used to issue dividends to the partners, and refinance existing debt needed for operating expenses and the purchase of three (3) MMA promotions, the World Fighting Alliance, World Extreme Cagefighting, and PRIDE Fighting Championships (PRIDE). Mr. Swift was also able to determine that about 100% of Zuffa’s 2007 revenues came from live matches, television revenue, and pay-per-views. If we look at the same metrics used by the WWE to evaluate their business, we can surmise the following about Zuffa. First, we can assume Zuffa’s revenues are approximately $300M per year based on pay-per-views, gate receipts, and television contract revenue. Today, their revenue is wholly from the Live TV Entertainment segment as defined by the WWE in its segmentation. To truly grow, they need to follow the WWE’s game plan, expanding into consumer product and digital media sales. The UFC has started selling DVD editions of its The Ultimate Fighter television show which appeared on SpikeTV. They are about to enter into consumer products with the release of a UFC videogame by THQ in the Spring of 2009, but at best, this might return $20M per year since the octagon is not located in Liberty City. With every live event, they are building a catalog of digital assets and intellectual property Zuffa can Pierre Bedard Page 6 of 33 repurpose into licensing and merchandising opportunities. But, Zuffa does not appear to have a viable merchandising storefront, nor do they have a vast stable of characters they own all rights to for exploitation. Can Zuffa maintain its revenue and service its debt while trying to follow a strategy perfected by the WWE? Can they expand the other segments of the business while not going broke financing the expansion? On today’s trajectory, the only thing standing in their way is execution. As long as cash flow is maintained and the proper infrastructure is put in place, Zuffa will likely raise capital through an Initial Public Offering (IPO) in an attempt to replicate the WWE’s success as sports entertainment powerhouse. Pierre Bedard Page 7 of 33 III. GOVERNMENT REGULATION Government regulation has reared its head in many human enterprises, especially in the MMA industry. Women’s rights, the First Amendment and taxation, and the regulation of professional fighting have all been tackled in the courts. The following cases examine government’s role in sports entertainment. “Because there are too many blondes!” - Women in wrestling (1955) In 1955, Rose Hesseltine, also known as Rose Roman, sought a license from the Illinois Athletic Commission to wrestle. The Commission, citing “unladylike behavior”, denied her the right to wrestle. 6 Rose, sporting purple hair, won her case based on a 6 WOMEN GRAPPLERS ADD BIT TO GROANERS (Williamsport PA Gazette Bulletin, Friday, Aug. 26, 1955) Reprinted from http://www.f4wonline.com/content/view/3216/105/ (last visited May 12, 2008) CHICAGO -- Women wrestlers like Rose Roman Hesseltine believe a woman's place is in the ring. She ranks as a top hand among the 40 members of the fairer sex in the United States who have invaded man's wrestling domain for a share of the loot.