The Kovalchuk Signing & The NHL CBA – How It All Works

It’s official: Ilya Kovalchuk has signed a 17-year, $102 million deal with the New Jersey Devils. The 27 year old forward is locked in through the 2026-2027 season.

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.

He will be 44 years old when his contract expires. However, the expectation is that he won’t play until then. Unless your last name rhymes with Recchi or Chelios, playing into your 40s is unlikely.

It’s no secret that NHL teams are looking to ink star players to long term deals:

Henrik Zetterberg - 12 years/$73 million         Mike Richards - 12 years/$69 million

Vincent Lecavalier - 11 years/$85 million        Johan Franzen - 11 Years/$43 million

Roberto Luongo - 12 years/$64 million           Alexander Ovechkin - 13 years/$124 million

Marian Hossa - 12 years/$62.8 million                                                                           

In a lot of these cases, the player will probably retire before his contract is up.

So why are these types of deals structured this way and are they permitted under the NHL Collective Bargaining Agreement (CBA)?

Let’s start at the beginning – the salary cap hit. Under the CBA, the annual salary cap hit for a player’s contract is the average yearly amount of the total contract. So while Hossa is slated to make $7.9 million this coming season, the actual yearly cap hit for the Hawks is actually $5.23 million ($62.8 million divided by 12 years). In the case of Kovalchuk, his yearly cap hit will be $6 million, even though he will be making $11.5 million in 2011.

In the first 10 years of the contract, Kovalchuk will make $92.5 million dollars. By that time he will be 37 years old, and on the downside of his career. Should the Devils decide to part ways with Kovalchuk at that point, they could buyout the remaining 7 years of his contract, which would be two-thirds of the remaining $9.5 million. Beneficial for the Devils is that the buyout money is paid out over twice the remaining years of the bought out contract (note though that the resulting cap hit is not the buyout amount; that’s calculated by more complicated means). If Kovalchuk were to retire at any time, both sides walk away from the deal with no cap hit at all.

(Note – if a player is 35 or older when he signs, a buyout does not reduce the cap hit. This is why you generally see these players signed to 1 year deals).

So Kovalchuk is getting the money he wants with this heavily front loaded contract. The Devils are getting the man they want, but are able to soften the yearly salary cap hit by extending the contract by a number of years. This will put the Devils in a better position to surround Kovalchuk with good players, and possibly help re-sign a player like Zach Parise (although no guarantees on that).

Are these contracts permitted under the CBA on the assumption that a player very likely won’t play until he’s 44? Well, the CBA doesn’t expressly say that they are not permitted. So then you need to turn to the part of the CBA that talks about doing things to get around the CBA or to circumvent it.

Paragraph 26.3 of 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.

So if the NHL can show that a player or team entered into a contract that was intended to get around the salary cap or entered into a deal whose net effect was to get around the salary cap, then that contract could be up for challenge.

At law, showing that parties intended to do something can be tough. In the case of the Kovalchuk contract, you would need some clear evidence that either party intended to get around the CBA. If you don’t have that, it will be tough to succeed.

You can still succeed on the second part of the test: even if there was no intention of circumventing the CBA, does the deal have the effect of defeating the CBA and the salary cap?

In theory, the structure of a contract itself can be evidence of cap circumvention if the team and/or player is unable to provide a reasonable explanation for its structure. The argument from the NHL could be, for example, that the structure of the deal by itself constitutes a cap circumvention by artificially lowering the cap hit with the last “throwaway years”. The NHL could say that the long term contract has allowed a team to manipulate the salary cap.

So why didn’t the NHL challenge the Kovalchuk contract? It may be tough for the NHL to take issue with a contract that expires when Kovalchuk is 44 years old since other deals are pretty close. Luongo’s deal expires when he’s 42, and the same with Hossa. Both Franzen and Zetterberg’s contracts expire when they turn 40.

Genie's out of the bottle.

All that and the CBA does not expressly rule out those types of contracts.

For the always astute Devils GM Lou Lamoriello, 17 years was probably as far as he thought he could push things.

In theory, this means that teams could sign players to 30, 40 or even 50 year deals. If an owner wanted to buy the Stanley Cup, it certainly could under the current CBA.

It wouldn’t be a surprise if the NHL wanted to impose a maximum contract length in the next round of CBA negotiations, or otherwise try and address this issue. The CBA expires in September 2011, although the union holds the right to extend that deadline by a year - which it did in June 2010. Until then, we will continue to see these types of deals.