Thursday, July 22, 2010

Kovalchuk Deal: NHL Draws Line in Sand & Handicapping the Arbitration Case

I’m reminded of Willie Nelson’s song Why are you picking on me?.

The New Jersey Devils and Ilya Kovalchuk must be feeling that way right about now.

After Kovalchuk signed a 17-year, $102 million deal with Devils, the NHL rejected the contract on the basis that the deal constituted a cap circumvention by artificially lowering the cap hit.

Kovalchuk will earn $6 million each of the next two seasons, $11.5 million for the following five seasons, $10.5 million in the 2017-18 season, $8.5 million for the 2018-19 season, $6.5 million in 2019-20, $3.5 million in 2020-21, $750,000 the following season and $550,000 for the final five years.

Arguably, there are a handful of contracts with similar terms. Henrik Zetterberg, Roberto Luongo and Marian Hossa have signed 12 year deals, and Franzen signed for 11 years. Both Hossa and Luongo will be 42 when their deals are up, while Franzen and Zetterberg will be 40. Kovalchuk will be 44 when his contract is expires.

So why has the NHL taken issue with this contract, but not others?

The answer: the NHL is drawing a line in the sand.

The Kovalchuk contract does have a unique combination of factors that may have irked the NHL. In the first 10 years of the contract, Kovalchuk takes homes $92.5 million dollars. At that point, he will be 37 years old. In the last 7 years of the contract, though, he is slated to make a combined $9.5 million, and $550,000 in each of the last 5 years. These are the throwaway years and it may be tough to argue otherwise. That together with the length of the contract - 5 years longer than the next contract in line - made the contract a problem.

You may remember that the NHL investigated the Hossa deal, but ultimately approved it. In retrospect, it may have been sending a message to NHL clubs that they needed to tread carefully with these contracts and not go too far. The Kovalchuk contract, in the NHL’s estimation, went too far.

So what’s next? After the NHL completed its investigation as prescribed by the CBA, it went to the Devils and informed them that the contract was rejected. The Devils are now trying to decide what they will do. They can accept the NHL’s decision and try and restructure the deal. However, if they elect to contest the NHL’s ruling, then the parties go to arbitration.

If the Devils decide to contest the NHL’s ruling, who will win?

This is always a tough question to answer as much depends on the evidence filed. If I had to handicap this case, I would say while it’s a close call, in my opinion the NHL stands on the stronger side of the case. However, I would never bet against Lou Lamoriello.

Remember the CBA provides that teams and players cannot do anything that is intended to or has the effect of defeating or circumventing the provisions of the CBA. Intention is tough to show, so the NHL in all likelihood would focus on the net effect of the contract.

Here are some possible arguments for the NHL:

One Reason and One Reason Only: The deal constitutes a cap circumvention as it artificially lowers the yearly cap hit with, at the very least, 6 throwaway years. The only reason the contract was designed in this way was to circumvent the CBA; there is no other reason.

Unique Contract: While there have been some long contracts signed, none are of this magnitude at 17 years and none are structured with so many inconsequential years at the end for so little money.

Career Arc: Looking at the typical arc of a player’s career (particularly a forward/winger), it is unlikely that Kovalchuk would play into his 40s. While, there are some players that have played into their 40s (Marc Recchi at 42 and Chris Chelios at 48), empirically that is not the norm.

Here are some possible arguments for the Devils:

No Max Years In CBA: While the NHL may not like the terms of the contract, the CBA simply does not preclude these types of contracts. If the NHL wanted to rule out these types of contracts, they should have done what the NBA did and expressly address it in the CBA.

Past Practice: The NHL has approved similar contracts. When Kovalchuk’s is up, he will be 44. That is not significantly older than the age of other players that have signed similar deals. Hossa and Luongo will be 42, while Franzen and Zetterberg will be 40. So this contract is very much in keeping with previous contracts.

The Hot Yoga Defence: With advances in training and nutrition, players are playing longer than ever. At the age of 42 and with the help of hot yoga, Marc Recchi has agreed to terms with the Bruins to play in his 22nd NHL season. He will turn 43 next season and continues to be a productive NHL winger, recording 43 points in 81 games last season. Enjoying the benefits of a rigorous fitness regime and good nutrition, Chris Chelios at the age of 48 played this past season. If he stays in shape and eats well, there is not reason to believe that Kovalchuk can play into his 40s. Simply put, the NHL doesn't have a crystal ball and is merely speculating.

My initial reaction is that I would be surprised to see Lamoriello and the Devils go to arbitration as they would have a tough case. You can say past practice should be an endorsement of this contract; however, that alone is likely insufficient to sustain the position that the contract should be deemed valid. The other contracts are borderline and this one looks worse.

If I’m a betting man, I would put my money on the NHL if this case goes to arbitration. If I had some extra chips to put down, I would bet that the Devils don't go the route of arbitration.

I see a new deal for Kovalchuk somewhere in the neighbourhood of 14 years, and probably with the Devils.


Anonymous said...

I agree with your handicapping on this (and like your assessment). I wonder whether one of the the "intangible" factors in this siuation is the league's distaste for Kovalchuk's reported motive to be the highest paid player in the NHL (topping Ovechkin).

Eric Macramalla said...

I think it's relevant but not sure the weight it would be given. A lot of players have wanted to be the highest paid. In looking to show circumvention, a player's desire to be the highest paid may not come into play; a contract could make a player the highest paid but still be ok. Interesting point you raise.

Anonymous said...

Good analysis and summary of what you discussed on the radio. I too would put my money on the NHL - Lou won't challenge them. I see a restructure of contract. Unless agent gets greedy which may be possible.

Daniel Gilbeau said...

Thank you Eric for pointing out all the facts for the player, for the team and for the league.
As much as I am not a big fan of these contracts, I believe Kovalchuk has a legitimate beef and should be able to win in arbitration. What gives the league the right to say yes to the Hossa and Zetterberg contracts which are very similar.
As for Kovalchuk wanting to be the highest paid, well his goal was to get a contract of $100 million and I am sure he does not care if it is over 17 years or 10 years. He was doing this as a favour to the Devils who were trying to "play by the rules" like the other teams have. The NHL league office continues to prove it is a farce. Why say no now when you have already set precedent by approving the other contracts.

Eric Macramalla said...

Dan you have raised a good point. Shouldn't past practice govern future practice. So you are right when you say the NHL has the challenge of explaining these previous contracts away. Not an easy task for sure. My reaction, at least, is that they would try and distinguish the contracts and at this point having investigated the Hossa contract may help their case - the Hossa deal is really the only one that bears a lot of similairity to the Kovy contract.

Anonymous said...

Hey Eric, when do you expect we are going to hear something on this. What's the delay? This must be affecting the plans of a number of teams.

Eric Macramalla said...

As per the timeline prescribed by the CBA, we could hear by Monday and likely not before. The deadline can be extended though. If Devils/Kovy elect to contest ruling by NHL then we are headed for arbitration. While a decision would be due 7 days after an arbitrator is appointed, and while an arbitrator should be appointed within 2 days of deciding to contest the ruling, things could be delayed. For example, if the parties can;t agree on an arbitrator. Agreed - plans of teams are being held up.

Mike said...

Good stuff Eric. Can you offer an opinion on these 2 points:

1) Recchi & Chelios played into their 40s on 1-year contracts. It was impossible to project their longevity & productivity in their 40s when they were 27. Is that relevant?

2) If Kovy is still a productive player in his 40s, what logical reason could he have for locking himself into such meager wages for 6 seasons? Recchi will make ~2X more $$$ next season for example than Kovy would @ 42, not accounting for 15 years of inflation.

mike said...

The more interesting thing to me is that the Devils are trying to circumvent the cap by paying a player, and teams like the Rangers are going to be allowed to circumvent the cap by putting bad contracts in the AHL (think Brashear, Redden, and most likely Boogard). How can the league justify penalizing one manner of "cheating" the cap, and support another?

Eric Macramalla said...

Good point Mike - there are a number of ways GMs have figured out getting around the cap and some of these have gone uncontested. With the way owners spend, and overspend to be more precise, they really need to exploit every loophole in the current CBA.

mike said...

Any ideas on the next CBA? I'd imagine the NHL is going to make rectifying the current loopholes that the current cap provides. Any chance the NHLPA will support a system similar to the NFL, specifically, with guaranteed signing bonuses and the ability to "cut" underperforming players?