Category: Contracts

$500 Million New Years Resolution

The National Basketball Association’s (“NBA”) 2014 New Year resolution: Get out from underneath the worst sports contract in the history of sports (well, maybe with the exception of the 1st Century Roman Gladiators).   Meet Ozzie and Daniel Silna – Brothers who once owned the Spirits of St. Louis in the defunct American Basketball Association (“ABA”). It all began with the Spirits exclusion from the 1976 merger of the NBA and the ABA. The Silnas watched unhappily as the New York (now Brooklyn) Nets, the Denver Nuggets, the Indiana Pacers and the San Antonio Spurs were absorbed into the NBA, while they were left on the sidelines – scheming. And successfully scheme they did. The Silnas and their attorney, Donald Schupak, slyly negotiated an astonishing benefit that was critical to the merger: an agreement to be paid one-seventh of the national television revenue that each of the four teams was to receive, as long as the NBA continued to exist.  Yes that is right – That amounted to be paid in perpetuity- forever. To date the deal has provided the Silnas with approximately $300 million.

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The NBA has repeatedly been reminded of  its haste and folly in structuring the deal and has repeatedly tried to buy the Silnas out.  However, the gold nest egg of the Silnas’ has remained elusive in light of ever growing popularity of the NBA. Finally, earlier this month, the Silnas, the NBA and the four former ABA teams announced a conditional deal that will end the Silnas’ access to the gold pot at the end of the rainbow. Well sort of. The Silnas are to receive a $500 million upfront payment, financed through a private placement of notes by JPMorgan Chase and Merrill Lynch, according to sources familiar with the proposed agreement. The deal would end the enormous perpetual payments and settle a lawsuit filed in federal court by the Silnas that demanded additional compensation from sources of television revenue that did not exist in 1976, including NBA TV, foreign broadcasting of games and League Pass, the service that lets fans watch out-of-market games.

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The “sort of” part of the deal is that the Silnas’ will continue to get some television revenue, some of it from the disputed sources named in their lawsuit, through a new partnership that is to be formed with the Nets, the Pacers, the Nuggets and the Spurs. Albeit, the Silnas can be bought out of their interest in the partnership in the future.

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Age Before Bonus…

In a saga more than four years in the making, the Washington Nationals are suing Westchester Fire Insurance Company in an effort to recover $1 million of the signing bonus they gave to a fraudulent Dominican prospect Carlos David Alvarez Lugo – aka Simley Gonzalez. The implications/effects of this suit are far reaching and potentially will change the way that many MLB teams sign foreign talent.

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In 2006, the Nationals signed 16-year-old shortstop Smiley Gonzalez with a $1.4 million signing bonus. Gonzalez’s story is murky, involving his own impoverished past and the way lives can change with a sum as great as $1.4 million, the largest bonus the Nationals have ever granted a Latin American prospect. However, in 2009 it was discovered that Gonzalez had actually lied about his true identity. Gonzalez was in fact 20-years-old and thus his value as a baseball player was greatly diminished. The Nationals ultimately fired General Manager Jim Bowden and his special assistant in charge of Latin America, Jose Rijo in the wake of the scandal.  In 2008, Bowden and Rijo acknowledged speaking with the FBI about the matter as part of a federal probe into baseball’s Latin American scouting practices. Indeed, the practice of changing personal information is so common that it is an assumed part of the landscape in the Dominican Republic.

The Nationals are now trying to recoup the money they spent signing Gonzalez/Lugo, who, incredibly, has played this season in the team’s Gulf Coast League, the lowest rung of the minors. In their complaint against Westchester Fire Insurance Company, the Nationals make a claim that validates a long-speculated belief: the player once known as Smiley kicked back part of his signing bonus to Rijo. To bolster its claim, the Nationals had Lugo/Gonzalez  executed an affidavit detailing his fraud, including that “he kicked back $300,000 of his bonus to Jose Rijo.” In January 2011, Rijo told the Washington Post that he had not received any payment from Alvarez.

“Nobody ever said that I took money from him or that I changed his [expletive] age,” Rijo then said “Nobody can ever do that, because it never happened. It never happened. I don’t even know that kid.”

(Note: It was later discovered that the facility where Lugo/Gonzalez honed his skills after signing with the Nationals is owned by Rijo). To make matter worse, in July 2012, Rijo, the 1990 World Series MVP, was charged in the Dominican Republic with money laundering for a suspected drug trafficker.

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The Nationals, who are represented in the case by D.C. law firm Williams & Connolly, claim Westchester “denied the claim without reasonable basis and only after dragging its feet and delaying its investigation for months.” The Nationals claim that this is an incident of “employee theft and fraud” following the revelation that Lugo/Gonzalez had faked his age and identity. “Had they known Lugo’s true age and identity at the time, more likely than not, the Nationals would have paid Lugo no bonus at all,” the suit reads.

“The $1.4 million signing bonus thus represented a complete loss resulting from the employee dishonesty, theft, and fraud of Rijo, Jose Baez and Lugo.”

The Nationals are not the first team to be suckered into paying a huge signing bonuses for a prospect whose value is greatly inflated due to fraudulent age assertions. However, like any savvy business organization the Nationals implemented a safety net that protected their investment in an asset. While the Nationals due diligence is less than desirable, their ability to effectively have a viable contingency plan in place is a great lesson for any aspiring business owner – preventative measure are always worth their time and money. For the Nationals, it is now time to see how effective of an insurance plan they actually negotiated.

NFL Tackles the Concerns of Retired Players

 

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  The NFL has taken some tough hits to its image this year.  First, fans were grumbling over a recently released statistic showing that of the 174 minutes devoted to an average NFL broadcast, only 12 are actual playing time.  Then there’s been the spate of suicides, homicides, and other issues attributed to lingering player brain injuries; a result of too many hard impacts out on the gridiron.  So it’s probably not a surprise that the NFL is seeking some public goodwill via announcing a settlement in the class action suit launched by a group of retired NFL players. The suit had been compared to the NCAA campaign by led by former college basketball star Ed O’Bannon (something I’ve previously discussed); the players alleged that their likenesses were used by the League without permission or compensation.  Though the suit was small in scope (only six players were named), retired football players have been increasingly vocal about their dissatisfaction with missing out on the League’s financial hey-day.  Iconic NFL personalities such as Mike Dikta and Jim Brown have both lobbied hard to get retired players medical benefits and other assistance. Retired NFLers have even gone to the public for support, cap-in-hand, via the benefit charity “Gridiron Greats.”  So the League’s concessions in the settlement are more than just a resolution to the suit, they’re a timely gesture of conciliation with the increasingly vocal dissatisfaction of retired players. Most of the headlines on the settlement have focused on the $42 million, but really this is the smallest part of the league’s offer.  The NFL is a multi-billion dollar enterprise; $42 million is a pittance.  The significant concession from the league was establishing a player-run board to manage the rights and distribution of images of retirees.  The  board is designed to both ensure that players get a cut of the proceeds from their image, and to streamline the process for player’s to license images of their playing days.  The ability of these players to access and license their image for their own financial benefit will go a long way towards helping them secure a financial future, and ultimately stands to benefit them far more than a single payday. Structurally, this licensing board is somewhat similar to the plaintiff’s proposed solution for how the NCAA can manage the likeness rights of college athletes.  The primary difference between the two is that the NCAA proposal calls for keeping player profits in trust to allow the college athletes to maintain amateur status.  The NFL players, pros all, would have immediate access to any money they earned.  Beyond that, the design would allow for players to draw on profits derived from their personal likeness, rewarding the talent and work of individual athletes for the effort they put forth on the field, regardless of when their image is used. I applaud the NFL for recognizing that the players have established sweat equity in their likenesses; they deserve to be able to profit from the years of toil and physical sacrifice.  I wish that other organizations (*cough* NCAA *cough*) would be more like them.  So good job on all that, NFL.   But the League has a ways to go before it’s done right by its retirees.  All of the other issues remain.  We’ve still got pro-ball players who are severely brain damaged, can’t pay their medical expenses, and in some cases, homeless.  This is a big black eye for a sporting franchise with the money and power of the NFL. Let’s hope they keep driving in the right direction.

Half Court Hail Mary

Alex Permann joined an unfortunate club Sunday night while attending the Missouri Valley Conference title:  he managed to sink the promotional half time shot from half court, but won’t receive the prize money.  To many fans, this kind of result is simply unjust.  How, they wonder, can we reach such a result?  Isn’t a deal a deal?  Alex made the shot, didn’t he? The answer is rarely so simple as that. These half court shot promotions and the ensuing fallout when a payout is denied give the average sports fan a window into the rough and tumble word of contract law.  Americans make contracts every day, but rarely do they see enforcement of the specific terms.  That’s because for many common contracts the cost of enforcing the full terms would be prohibitive, or enforcement is simply not desirable.  Businesses routinely waive contract terms because it is more advantageous for them not to.  If your receipt says “no returns after 30 days,” and the store manager lets you waive it on day 31, he’s waiving the term because your goodwill as a customer is worth more to him than exercising the 30 day limit.  He could, but he won’t. It’s a different calculation for a promotional endeavor.  Prizes are typically in the range of tens of thousands of dollars.  For example, Alex stood to win $50,000 for winning the promotion.  Arenas typically don’t have the payout on hand, but purchase insurance against the off-chance somebody wins.  However, the significant payouts and number of parties involved change the equation; good will’s value decreases and the value of  enforcement of all terms increases. For Alex, the contract he signed before taking center court indicated that he needed to make a lay-up, a free throw, a 3-point shot, and the half court shot within 24 seconds.  In Alex’s haste, he skipped the 3-pointer.  To most fans it’s an understandable and forgivable mistake for a guy lost in the excitement of the moment, but those fans aren’t the ones signing the $50,000 check either.  To the insurance company and the arena that’s a very important part of the contract.  A $50,000 part. That isn’t to say that promotions are entirely inflexible in terms of their payouts.  In January, Kentucky freshman Kenneth Swope’s half court shot was ruled inadmissible when the video replay revealed his foot had crossed the center court line by a few inches.  When Kentucky fans heard that sponsor Kroger might balk, a social media campaign (#OccupyKroger) ensued and was only calmed when the public was reassured that Swope would be paid.  Given enough attention, even the most inflexible contract term starts to bend. Promoters are savvy enough to head some of these public campaigns off at the pass, however.  In Alex’s case, he was offered lifetime tickets to the tournament and free airfare next year.  It allayed Alex’s disappointment enough that he was able to offer quotes such as this:
Overall, today was definitely a good [experience].  I’m happy they gave us tickets for life and all the other stuff. Money would be great, but that’s a pretty good consolation.
So Alex is (sorta) happy.  The insurance company is happy.  The fans got to see a great half court shot.  Still feels bittersweet though, right? To remedy that feeling (and in case this whole read has left you jaded about half court promotions), here’s a video of a fan fulfilling his contractual duties and winning $75,000.

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If that’s not a happy ending, I don’t know what is.

Loria’s Letter a Good Example of How Not to Talk to the Public

Florida Marlins owner Jeffrey Loria took an unusual stance this Monday when he took out a full page ad to explain the dramatic restructuring the team has undergone following a dismal season last year. Loria starts out with a seemingly good intentioned statement indicating his determination to right a sinking ship:
[O]ur performance on the field stunk and something needed to be done. As a result of some bold moves, many grabbed hold of our tough yet necessary decision only to unleash a vicious cycle of negativity. As the owner of the ballclub, the buck stops with me and I take my share of the blame where it’s due.
Fans of a sports franchise (or consumers of a business product) appreciate when ownership is willing to honestly acknowledge and address problems.  However, he rapidly veers off course and squanders that good will as he continues:
However, many of the things being said about us are simply not true. I’ve sat by quietly and allowed this to continue. Now it’s time for me to respond to our most important constituents, the fans who love the game of baseball.
Red lights and flashing warning signs…..It’s one thing for ownership to acknowledge issues.  It’s another thing for ownership to take the position of an aggrieved victim.  By and large, sympathy for corporate leadership and billionaire team owners remains small, even when they are the wronged party.  Leaders are expected to lead and take ownership of their decisions, whether the reaction is positive or negative.  However, Loria’s position seems particularly vulnerable given where his letter proceeds:
We hope, with an open mind, our community can reflect on the fact that we had one of the worst records in baseball. Acquiring high-profile players just didn’t work, and nearly everyone on our team underperformed as compared to their career numbers.
Loria has just undone any goodwill he might have earned from his opening salvo.  Either the buck stops with Loria for failing to manage the team, or the buck stops with his players for under-performing.  As team owner, it’s Loria’s right to (mis)manage the team to his heart’s content and hire and fire players at will.  But he can’t have it both ways.  Either the Marlin’s dismal season was a result of Loria’s belief he could buy and build a team in a year and he’s accepting criticism for the mistake, or the player’s earned their firing by under-performing.  The realities of team sports suggest the former to be the case. However, whatever Loria’s sins in player management, he really shows chutzpah defending the Marlins stadium deal:
The majority of public funding came from hotel taxes, the burden of which is incurred by tourists who are visiting our city, NOT the resident taxpayers. The Marlins organization also agreed to contribute $161.2 million toward the ballpark, plus the cost of the garage complex. In addition, the Marlins receive no operating subsidy from local government funding. The ballpark required that all debt service is paid by existing revenue. Furthermore, many are attacking the County’s method of financing for its contribution, but the Marlins had nothing at all to do with that.
The Marlin’s stadium has been attacked far and wide for its reported $2.4 billion price-tag.  There’s no need to rehash all of that criticism here.  But for Loria to claim that resident taxpayers won’t pay for the stadium is a highly selective and therefore sensitive version of events.  Taxpayers aren’t paying–yet.  When loan payments become due in 2026, Lorai’s suggestion that locals won’t end up paying the bill is unrealistic at best.  According to the loan schedule, the 10th payment alone is $20 million dollars.  The 18th is $118 million.  That’s an optimistic expectation for the hotel tax, and if (when) the tax on out-of-towners is insufficient, the terms of the loan put the County’s general fund on the hook for the remainder.  Loria’s protestations of innocence regarding the deal sound mighty weak.
What’s done is done.  Loria’s sacked his high-priced stars and the stadium is long since built.  But Loria’s letter has done nothing to improve discontent stemming from either situation.  If leadership is going to tackle a tough issue, then straight talk is the answer, not carefully couched and crafted dissembling.
Loria’s letter should have been three lines:
Dear Marlin’s fans,
I apologize for the performance of the team last year.  As owner, I take responsibility and am making efforts to remedy that and rebuild the team.  We hope you will continue to support the team, and the Marlins are looking forward to put this difficult period behind us and playing some baseball.
-Jeff Loria
That one is free, Jeff.  The next one will cost ya’.