Cumulative Guide to the Upcoming NBA Lockout and Labor Dispute

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Right now the hot topic amongst NBA owners, players, and fans alike is the possibility of a work stoppage come July 1, 2011, which would have a devastating impact on the league and potentially destroy what can only be called an incredible comeback from the 1998-99 NBA lockout. It is clear that the owners and NBA Players Association (“NBAPA”) are at an impasse when it comes to several critical issues which include: (1) Player salary rollbacks; (2) a hardened salary cap; and (3) the potential threat of decertification.


The following is my take on some of those issues while looking into the legal aspect of what may be ahead if a work stoppage does come to fruition.

Player Salary Rollbacks:

The underlying issue behind the idea of player salary rollbacks and really the entire owner-based argument in the labor negotiations is the notion or need to cut salary. National Hockey League (“NHL”) owners were in a similar situation in 2004 and in an effort to achieve the same goal of slashing costs, the NHL and its Players’ Association came to an agreement to “rollback” 24 percent on existing contracts. Fast forward to 2011 and NHL league revenues have reportedly exceeded $2.7 billion while the hardened salary cap for this season is set at $59.4 million and the floor is at $43.4 million – $4.3 million more than the ceiling in 2005-06.

A look into the payrolls of most NBA rosters shows exactly why NBA owners are so interested in the idea of salary rollbacks especially with 22 NBA teams reporting substantial losses. The league is full of players collecting money on contracts they never deserved and never should have been given. These are contracts given on “potential” and often made by incompetent GM’s that sold their owner on the hype or need of a player. That GM is likely long gone while the owner is left to foot the bill on a bloated contract that is not yielding on-court production. The deal then handcuffs the team from making “basketball decisions” and wins and revenue dwindle as the team has to find ways to shed salary without sacrificing talent which is a near impossibility.

Solution(s):
– Lower the salary cap percentage – The salary cap position can be cut from 57 percent of basketball-related income to 49 percent which, in turn, sets the rate for maximum salaries. Additionally, reduce the maximum salary percentage of the salary cap from the current 35 percent.

– Eliminate Annual Raises – While players may scoff at this idea, at the end of the day they receive the same amount of money at the end of their contract as they would under the current arrangement. If players do not like this, they can ultimately sign a shorter deal (i.e. LeBron James and his extension in Cleveland) and hope that their play translates to a larger salary on their next deal.

– Team Options – Make team options in the final year of a multi-year deal a mandate. This lowers the risk of giving a “potential” player too rich of a deal and allows teams to recover from mistakes one to two years faster than if the contract was fully guaranteed.

A Hardened Salary Cap:

A hardened salary cap is sure to be leading issue in negotiations between the league and the NBAPA. Many owners want a hard salary cap, similar to what the National Football League (“NFL”) has had. Such a structure has helped make the NFL the king of parity and competitive balance of all the major professional sports. Thus, the purpose of hardening the cap would be to make better players available on a broader basis.

However, in this league, there are some owners who would prefer a soft cap since they have the ability to dip into the luxury tax and the resources to house a robust payroll. Small market teams disagree with this philosophy since some ownership groups simply do not have the funding to have a top-tier payroll and would prefer a hardened cap which would place teams on a level playing field – no matter the financial state of the team. The level playing field would lead to an increase of parity amongst the league but may have a devastating impact on the “dynasty” teams that have helped bring the NBA to the forefront of professional sports.

Without a hard cap, small to medium market teams have very limited options to improve – tank and luck into a high lottery pick or spend to assemble a strong, deep team that can compete with the star-studded big market teams. Neither of these options is good for the league.

Tanking a season has a drastic impact not only on the team itself, but fans and local businesses alike. Fans do not want to pay to see a bad product. By not paying, those potential fans are not buying concessions at the arena, they are not buying team merchandise, and they are not supporting local business near and around the team’s arena. Such a “strategy” is hardly fool proof because while hurting the local economy, the team is not even guaranteed to “win” the draft lottery. Since 2004, the team with the worst regular season record has an average lottery finish of third. During that span, the team who won the draft lottery had the fifth worst record on average. However, let’s say that the team that tanks does win the draft lottery, that is hardly a fail safe plan in and of itself.

Since 2004, the top picks by successive years have been as follows:

2004- Dwight Howard

2005-Andrew Bogut

2006- Andrea Bargnani

2007- Greg Oden

2008- Derrick Rose

2009- Blake Griffin

2010- John Wall

Now, of those players, just three of them took their teams to the playoffs in their rookie season (Bogut, Bargnani, Rose), with none advancing to the second round. Two of those players (Oden and Griffin) missed their entire rookie campaign due to injury. Point being, if a team tanks and is lucky enough to land that year’s number one draft pick, success is hardly a guarantee.

But let’s say that the number one pick taken in a draft is a star. That the pick just needs some extra help to take his team to that next level. Let’s say that the team that took him goes to the lottery the following season and picks up a blue-chip talent which will create a dynamic duo for the franchise. Even in this rare situation, it takes time for a team to gel and during that time, the clock on the rookie contract has started to run.

Assembling veteran talent around these players will cost money and by the time the team clicks, it is possible that the team will have to let go of an important piece due to the fact that the team simply cannot dip far into the luxury tax. Thus, it would seem that a franchise is better served by assembling a deep team through trades and free agent acquisitions – but at what cost?

Small to medium market teams often have to overpay to get top talent. Players want sponsorship deals, they want the fame, and they want to win. It is a trifecta that is often hard for smaller market teams to obtain. So what do they do? They overpay for the talent in the hopes that an increase in wins will make their franchise a staple for future free agents which will, in turn, lead to sustained success. It is a novel idea but it, like tanking, is not fool proof.

Take the Houston Rockets for example. The Rockets, who won the 2002 draft lottery and selected Yao Ming, saw their payroll balloon to $72,758,481 (sixth in the league) this past season as they tried to assemble talent around their big man. Yao ended up missing most of the season while Houston was paying large salaries to the likes of Kevin Martin ($36,059,520 over three seasons), Luis Scola ($47,041,037 over five seasons), and Kyle Lowry ($23,460,000 over four seasons). The result saw the Rockets miss out on the playoffs for the second consecutive season.

So what is the answer? For many, it is a hard salary cap that would set a flat amount teams can pay players and that amount is it – no mid-level or bi-annual exceptions, no base-year compensation players, and no trade exceptions. A flat rate that would allow skilled GM’s to assemble teams on a level playing field.

Such a move may be frowned upon by the league’s brilliant front office personnel, those who have mastered the ins and outs of the current CBA and all “loopholes” within, but would be welcomed by the league’s top talent evaluators as they would be the ones plugging in the pieces to the proverbial puzzle.

The Legal Aspect of Negotiations: Decertification

Decertification would allow players to challenge antitrust laws by going from a labor organization to a trade association. What is antitrust? Antitrust law describes all laws that intend to promote and regulate competition and make the competitive economic system function. In this case, the NBAPA would notify the Department of Labor that it has terminated its status as a union. In short, for the players, decertification would be a means to an end with the end being the ability to bring an antitrust suit against the NBA.

Decertification would prevent a lockout, but at a great risk, as the players would be surrendering all their union protections, as well as the benefits they have won via past negotiation, such as minimum contracts, guaranteed salaries and pension plans. Not to mention the risk of losing over $4 billion in guaranteed player contracts. Foregoing those benefits and ultimately decertifying the union would aid the disbanded union in suing the owners under antitrust laws in order to challenge the league’s restrictions on salaries and player movement – rules that can be considered illegal restraints of trade in the absence of a CBA.

Because the players can choose to be protected by either the labor law OR by antitrust law – not both, the players would choose the protection of the antitrust laws by decertifying.

One of the issues the players would likely seek to have challenged under antitrust law is that of the NBA Draft eligibility restriction. In the past, the NBAPA has asked for the minimum age to be rolled back to 18 instead of 19. Currently, to be eligible for the NBA draft, an amateur player of American origin must be at least nineteen-years-old on December 31 of the year of the NBA draft and that at least one NBA season must have passed from when he graduated high school (NBA CBA, July 2005 p. 183). This rule originated in 2005 as a provision to the CBA. It will be argued by the players that the rule appears to promote the economic interests of colleges and universities as a greater influx of talent would spend at least one year at a collegiate program instead of potentially jumping straight into the NBA draft. If the players truly want to challenge the age eligibility restriction, this would arise under federal antitrust laws, and specifically the Sherman Antitrust Act. Section 1 of the Sherman Act, which prohibits agreements that unreasonably restrain trade, supplies the primary source of litigation.

There are three requirements for a viable section 1 claim: (1) a contract, combination or conspiracy; (2) the contract, combination, or conspiracy produced a restraint of trade; and (3) the restraint affected trade or commerce among several states.

The argument can be made that the draft serves an ulterior motive by preventing amateur players from negotiating with multiple teams, thus limiting player salaries and employment autonomy. In a sense, the league controls the buying of talent but not the selling.

This type of claim has been seen before by the NBA in Haywood v. National Basketball Association, a 1971 decision from the United States Supreme Court. At the time, Section 2.05, in conjunction with Section 6.03 of the NBA Bylaws, required that players be four years removed from high school in order to be eligible in the NBA draft. Haywood, who had played for the University of Detroit prior to attempting to turn professional after his sophomore season, was threatened to have his NBA contract voided for violating the four-year provision. The Court looked at the provision and found that the age requirement constituted a per se illegal boycott because, “if Haywood is unable to continue to play professional basketball for Seattle, he will suffer irreparable injury in that a substantial part of his playing career will have been dissipated, his physical condition, skills and coordination will deteriorate from lack of high-level competition, his public acceptance as a super star will diminish to the detriment of his career, his self-esteem and his pride will have been injured and a great injustice will be perpetrated on him.” Haywood v. Nat’l Basketball Ass’n, 401 U.S. 1204, 1205 (1971). This is the type of precedent that could impact the NBA and college athletics in a major way should the union decertify.

In 1995 (Ewing v. National Basketball Association), the league had another near brush with the NBA draft and antitrust law when the NBAPA stated that the draft was illegal because the previous CBA had expired. The Court ruled that it would wait to see whether the NBA players would vote for decertification and if so, the Court would move to hear the case. The issue was never presented, however, since the NBA players voted 226-134 against decertification which led to a new CBA being agreed upon.

Eligibility requirements were challenged in the NFL when Maurice Clarett of Ohio State fame sought to participate in the NFL draft before the three-year anniversary of his high school graduation. Clarett v. Nat’l Football League, 369 F.3d 124 (2d Cir. 2004). However, the problem for Clarett arose when it was determined on appeal by the NFL that the eligibility rule was immune and exempt from antitrust law because the rule was bargained for and held within the NFL’s collective bargaining agreement. This type of immunity qualified as a non-statutory labor exemption. On appeal it was found that because rules on eligibility are mandatory subjects of collective bargaining, the NFL and the NFLPA were free to agree on any rules affecting who can be considered for employment as long as those rules do not violate federal law. Therefore, while the Court found for the NFL, this was because of the protection the agreed upon collective bargaining agreement provided.

The NBA, if decertification were to take place, would not be protected by such an agreement since the collective bargaining agreement and NBAPA would cease to exist, thus the NBA would be subject to a potentially different ruling if so challenged. This would be especially so if it can be determined that a bargaining relationship no longer exists between the NBA and its players.

Haywood will likely be cited by the players to show a similarity to the facts shown in Judge Nelson’s ruling to lift the NFL’s lockout. Judge Nelson, who lifted the NFL lockout last month, made his ruling based upon the fact that the likely harm to be suffered by the players was of irreparable nature (a harm that cannot be adequately remedied by money damages). It is likely that the players would make the argument shown in Haywood that missing a year of basketball could result in the deterioration of skill to which money damages would not remedy.

This, however, is where the similarity between the NFL and NBA labor dispute ends.

Unlike the NFL, professional basketball exists in venues outside of the United States, whether it be in Europe or Asia. Therefore, comparable employment could be found by players and an argument would be made by the NBA stating that irreparable harm is not present when an alternative form of employment is available.

Additionally, Judge Nelson’s ruling was a product of the fact that not a single NFL team could show that it was losing money and said absence did not produce the requisite evidence of harm needed by NFL owners. The NBA, however, claims to have proof that 22 teams are losing money. If that can be shown as fact, it is likely that the evidence would be more than speculative and could go a long way in showing that a lockout is needed to sustain a viable product.

For this reason, while decertification offers the NBAPA options going forward, the NBAPA would be wise not to rely solely on the NFL’s current labor dispute as a guide.

Decertification is serious and should be taken so by both the players and the owners alike. If such an action does take place, such a case will surely be ground breaking and set the stage for future collective barganing strategies and negotiations for years to come.

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