Monday, August 9, 2010

Copy of Decision & Legal Analysis of Kovalchuk Decision

8:12pm - I have a copy of the Kovalchuk decision in hand. The arbitrator found in favour of the NHL. This decision marks a seminal moment under the current CBA and is groundbreaking.


Apart from finding for the NHL, the arbitrator also wrote that the contracts signed by Luongo, Pronger, Savard and Hossa are being reviewed by the NHL and could be challenged. Read below for more on this.

Here is my preliminary review:

You can divide the decision into 2 parts: (1) is it proper to review this contract to begin with, and if so, (2) was this contract designed to circumvent the CBA?

Part 1 - Is This Contract Open to Review?

1) The NHLPA argued that the CBA does not expressly preclude contracts like the Kovalchuk deal. If it doesn't expressly rule out these contracts, the CBA wasn't circumvented.

2) While the NHL conceded that the CBA does not expressly preclude these types of deals, it argued for a "broader inquiry" and a more "comprehensive examination" of the deal. The language of the CBA, the NHL argued, is sufficiently broad that a comprehensive review of the contract is permitted and in fact warranted.

In this regard, Article 26(3) allows for a finding of circumvention if the intention of the parties was to circumvent the CBA OR if the net effect of the deal, intention aside, was to get around the CBA.

On top of the, the CBA also provides that a club or player can't enter into an agreement that is "designed to" defeat the CBA.

As well, the CBA precludes "understandings of any kind" that undermine the CBA.

3) The arbitrator agreed with the NHL: even though the CBA does not expressly rule out these contracts, the language of the CBA supports a comprehensive and broad review of contracts.

Part 2: Was This Contract Designed To Circumvent the CBA

4) The arbitrator found that the effect of the contract, when considered in its entirety, was to artificially push down the yearly salary cap hit by adding 6 throwaway years at the end of the contract. This served to defeat the intentions of the parties as provided by the CBA and therefore constituted a circumvention of the CBA.

Overall, the arbitrator found that the elements of the contracts were "unique", and had the aggregate effect of getting around the CBA.

Here are the main factors relied upon by the arbitrator in making his finding:

- The front loading of the compensation, which calls for $98.5 million in first 11 years, which is about 97% of the value of the contract.

- The dramatic drop in pay after 11 years ($3.5 million over last 6 years), which amounts to 3% of the value of the contract. As well, this compensation will be well below league minimum.

- In the last 6 years of the contract, the comprehensive "No Move" clause is replaced by a "No Trade", which gives the Devils the ability to rid itself of Kovalchuk during the throwaway years of the contract.

- Empirically, it is unlikely that Kovalchuk will play to the end of his contract, when he will be 44 years old. The parties could not have reasonably expected that Kovalchuk would play out his contract.

- The contract undermines the competitive balance the NHL was trying to instill when they agreed to the salary cap.

- The structure of the contract is such that the hope is not that Kovalchuk will play out his contract, but rather the hope is that he won't.

5) The arbitrator found that the Devils and Kovalchuk did not intend to get around the CBA. Instead, the ruling was that the effect of the contract was to circumvent the CBA.

6) In a footnote to the decision (footnote 23), the arbitrator indicates that similar contracts signed by Luongo, Pronger, Savard and Hossa are being investigated by the NHL with the possibility of withdrawal of approval (and registration).

While the arbitrator suggests that these contracts may be problematuc, he does add, however, that the Kovalchuk contract is "more dramatic, including a 17-year term length, a $102,000,000 salary total and precipitous drop that lasts for the final six years of this contract".  This suggests to me that he is stopping short of an indictment of these other contracts.

As discussed in a previous blog entry last week, under Section 26.10(b) of the CBA, the NHL can investigate a possible circumvention even if the player's contract has been "approved and registered". On top of that, Section 26.10(d) provides that there is no time limitation barring an investigation ("There shall be no limitation of time barring the investigation of a Circumvention by the Commissioner").

Implications of Decision

This decision is a very important one for the NHL, the NHLPA and NHL clubs.

For the NHL, it has successfully drawn a line in the sand on contracts structured like the Kovalchuk contract.

As well, this win may inspire the NHL to challenge previously registered contracts, such as deals signed by Hossa and Luongo that also include throwaway years at the end. Indeed, the arbitrator mentioned this in his decision.

With the CBA expiring in 2012, the NHL could use this decision to fuel a push for a maximum limit on contract length.

For the NHLPA and NHL clubs, the question is now what is the standard for NHL contracts? What's permitted as far as the term of a contract? Is the Hossa deal the limit (12 years, 4 throwaway years and playing to 42)? Would another 'Hossa' type deal be challenged? What if the Hossa deal itself is challenged, what's the standard then?

From a legal standpoint, this decision could be relied upon as a precedent and therefore serve to guide parties moving forward.

Appeal

The NHLPA can appeal the decision to a court of law. The CBA provides, though, that the decision is final and binding. That means that a Court will not interfere with the ruling of the arbitrator unless there was a pretty obvious and big mistake by the arbitrator - and I don't see it. The parties have agreed that decision will be binding, and a judge will be sensitive to that and not want to interfere. The decision as a whole is well-reasoned, precise and falls within the 4 corners of the CBA.

Devils and Kovalchuk

Devils general manager Lou Lamoriello has confirmed that he is working on a new Kovalchuk contract.

Something tells me things are just getting interesting.


19 comments:

PopLoserTwit said...

Outstanding that you posted the decision.

I want to see the NHL challenge the other contracts mentioned - especially those that are already in effect like Hossa. I want to see the NHL try to void a contract of a player on the *Stanley Cup* winning team. To go back and void contracts that have been in place for years is beyond silly. Would the NHL claim that Hossa would have to repay the salary earned under the illegal contract? Would the teams who lost to the Blackhawks have a claim against the NHL for sanctioning the contract in the first place? Would the escrow level be revised for the entire year as if Hossa's contract was never valid?

What would be the NHL's purpose in challenging those contracts? The NHL's got everything it needed in this decision - a win, and a threat to any "front-loaded" contract that would be entired between now and the end of next summer (the last before the end of the current CBA). To go back and try to undo a contract that not only has been approved, but also been in force, would be to invite litigation going into the next round of the CBAs, for no reason benefit.

Anonymous said...

I'm surprised at this decision. I would have thought an arbitrator would take the position that these are sophisticated commercial parties, and the NHL could have easily adopted language preventing such contracts, but did not. I'm surprised that they succeeded on the catch-all language of 26.3 which, to me any way, is not clearly applicable in this case.

Eric Macramalla said...

You both raise terrific points. Moving to challenge previously-approved contracts is opening a can of worms as the implications are far reaching and perhaps in some case nebulous. Will the NHL be satisfied that they have drawn a line in the sand or will they stay on this path and keep challenging. It seems that players would have reasonable defence of reliance if they had these contracts voided.

Daniel Gilbeau said...

Shocking! Thank you for your coverage Eric on this subject, not only on your blog but on the Team 1200. I was so sure the league did not have a leg to stand on since it already approved those other contracts. A precedent was set when the league approved the other contracts. So much for precedent setting!
Ok, so now that this is finally resolved...sort of...back to the Brett Favre watch!!!

Anonymous said...

Atlanta fan here. This is a good thing for the NHL and hockey. All these front-loaded contracts are clearly designed to artificially lower the cap hit.

In principle, I urge the league to challenge them all. However, the message has been sent and this situation can be dealt with in the next CBA.

To that end, further challenges at this time may only serve to harden feelings between the league and the players union and fuel sentiment for another player strike/owner lockout. No one, certainly no fan, wants another work stoppage.

Giovanni said...

Your comprehensive explanation for the Kovalchuck contract and subsequent arbitrator decision is extremely well done. the best I've read so far.

Matt said...

Eric,
The arbitrator seems to have determined, among other things, that the final 6 years of the deal are "throw away" years. This implies he believes that Kovalchuk will not play these years and thus the salary cap will be intentionally lowered by having these years included in the deal.

So let's suppose that Kovalchuk now signs a deal for less money, for example $80 million. And let's also suppose that he does eventually play in the league until he is 44. Could Kovalchuk argue at that point that those were not "throw away" years since he eventually played to that age and could he sue the NHL for the difference between the $100M deal that was rejected and the $80M he eventually earned during that period?

Anonymous said...

The league CANNOT legitimately challenge the Hossa et al. contracts. Pursuant to Sec. 11.6(b) of the CBA, the league cannot deregister a contract on the grounds of circumvention after 60 days from the date on which the FACTS of the circumvention became known or reasonably should have been known to the league. The league has/should have known everything there is to know about Hossa's contract since it registered it. No new facts regarding Hossa's contract have come to light.

Robert said...

The "throwaway" years are based more on the $ being paid being unreasonably low, than on the age of the player in those years. There are several examples of players currently playing at age 40 or older, and lets not forget how long Gretzky the great one played. Therefore, I think the weakest argument the arbitrator used was that the contract went until Kovie would be almost 44 and thus was a retirement contract. However, given the low $ in the last 6 years, I think the arbitrator's decision was reasonable.

Anonymous said...

Can the NHL please "reexamine" DiPietro's contract too?

Ben S. said...

To the "Anonymous" poster who posted at 12:48 PM (about the league's inability to challenge previous contracts like Hossa's):

You are wrong, especially after this decision. All of the elements of section 11 relevant to this case pointed to a decision that this Kovalchuk contract should not be rejected. However, it is CRUCIAL to note that the arbitrator used the far more "comprehensive" language of section 26 ("comprehensive" really meaning vague and manipulatable) to uphold the NHL's rejection.

Why does this matter to your comment? Well, because while the article you cited may seem to preclude the NHL backtracking and rejecting/deregistering those previous contracts, section 26 affords the NHL the power to investigate, reject/deregister, and assess penalties for any contract, IRRESPECTIVE of the amount of time that has passed since the contract's approval/registration.

I know that section 11 seems to run counter to this decision (indeed, it does), and I know that 11 seems to preclude the NHL's ability to do what I described above, but the language in section 26 does allow for the NHL to basically do anything it wants with/to any contract, regardless of any and all variables (there is specific language regarding ability to investigate, deregister, and/or assess penalties, so look at that).

Now, while the language in 26 seemed far too vague and manipulatable to justify the NHL's rejection, this arbitrator has, by upholding the rejection largely based on section 26 and not section 11, given the NHL free reign to use the vagueness of 26's language to take action that previously seemed outside the bounds of the power provided to the league by the CBA. Additionally, this vagueness isn't even that necessary to the point you made, since the ability to investigate/reject/assess penalties it specifically addressed in 26.

Anonymous said...

Ben S., that is incorrect. While Section 26 does address investigations of previously registered contracts, it does not permit the deregistering of a contract contrary to the provisions of Sec. 11. Kovalchuk's situation is different from Hossa's in a number of respects, not the least of which was that it was rejected as a circumvention before it was ever registered. Once the league registers a contract, it cannot deregister it unless it discovers NEW FACTS that constitute circumvention that were not or should not have been known to the league 60 days prior. Under section 26, yes, the league can investigate Hossa's contract, but unless, through that investigation, it discovers NEW FACTS that were not known to it 60 days prior, it CANNOT challenge that contract. The terms of Hossa's contract have obviously been known to the league for more than 60 days. They cannot now be heard to argue that those very terms constitute circumvention. In order to challenge the contract, they would need additional new facts hitherto unknown.

GSC2K2 said...

Regading Anon's post above (get yourself a screen name, guy), while we exchanged views on the other thread, a review of section 26 indicates that the deregistration of the contract under seciton 11 is little more than a red herring.

Section 26.13(c) of the CBA permits the Commissioner to void any contract when the parties are (both) found to have committed a Circumvention.

Hopefully this disposes of that matter.

To Eric,

While the voiding of contracts seems to have caught the fancy of many in the media, to me there are many more potent remedies available to the commissioner in the event of a Circumvention, as set out in section 26.13(c). To me, stiff fines against the clubs (and commensurate reductions in cap space), forfeiture of draft picks and suspensions of executives would seem to do the trick quite nicely. It would achieve the same end of deterrence, without the PR problems inherent in the voiding of contracts (which, in truth, would not be THAT big of a problem, but would cause the appearance of "chaos" to a story-starved hockey press).

A $5M fine and $5M cap hit would be a heavy blow against any team who has done this since, by definition, they are hard up against the cap to have felt a need to do it in the first place.

Your views on these otehr remedies and their potential PR value would be interesting to hear.

Andrew S (Devils Fan) said...

It would seem to me that the NHL owes it to the 30 teams to clarify what it regards as the new line here, so that GM's can execute with some understanding of the rules again.

If the salient points of Hossa's contract is retire at 42 and 4 throwaway years, and DiPietro is good with a 15year deal, then it implies that Kovalchuk should be good with a 100m / 15 year / 4 throwaway deal.

What I think makes things intolerable for all participants here (GM's, players and agents) is the fact that the rules are seemingly arbitrary now. Surely this itself is a circumvention of the CBA in favor of the NHL against the teams and players?

Let's at least have consistency for all teams, and not an arbitrary decision that disadvantages the Devils to the advantage of the teams that have 'similar' deals still outstanding. If this is left to stand, then what value has the league's so-called competitive balance principles?

Chicago Lawyer said...

GSC2K2, you are incorrect. You are failing to read the CBA as a whole to see how the various sections relate to one another. Yes, Sec. 26.13(c)(vi) allows the Commissioner to void a contract, in the event that the System Arbitrator finds that a Circumvention has been committed. But you have to look at that provision in the context of the entire CBA to understand under what circumstances and procedural mechanisms that issue could ever properly be before the System Arbitrator for disposition in the first instance!

The CBA is clear that there are two circumstances under which Circumvention of the salary cap can be brought before the System Arbitrator: (1) where the league rejects (rather than timely registers) a contract on the ground of cap Circumvention and (2) where, subsequent to league registration of a contract, it deregisters/challenges that contract, which it is ONLY permitted to do where the facts of the Circumvention were not or should not have been known to the league more than 60 days prior. (Sec. 11.6).

The arbitrator in Kovalchuk's decision was very clear that the arbitration was the result of the League's rejection under provision (1) above. Hossa's contract has already been registered. In order to deregister that contract giving rise to a dispute that could be brought before the System Arbitrator, the league would have to do so under provision (2) above. The league cannot deregister the contract under that provision unless it finds facts that were not or should not have been known to it more than 60 days before such de-registration. In other words, the league cannot deregister the contract on the ground of Circumvention citing merely the terms of the contract, because those terms have been known to the league for more than 60 days.

However, the league can - and is - investigating the circumstances surrounding the formation of that contract under the provisions of Sec. 26. There is no time-bar to such an investigation. But in order to actually claim Circumvention in such a way that the issue could ever properly be presented to the System Arbitrator, the league now must discover additional facts of which it was not and should not have been aware more than 60 days prior to making such a claim. For example, were the league to discover in the course of its investigation, that Hossa communicated to the team or his agent his intent to retire at age 39 and nonetheless entered into a front-loaded contract that provided for his retirement at age 42, that would be a new fact under which Circumvention could properly be claimed. But unless the league discovers such new information, it CANNOT challenge Hossa's contract pursuant to Sec. 11.6(b).

Hopefully this disposes of that matter.

Anonymous said...

Chicago Lawyer is correct. The league's decision to "investigate" Hossa, et al.'s contracts looks like a PR move to assuage the fans of teams (and teams themselves) who were late to the front-loaded contract party.

Chicago Lawyer (f/k/a Anonymous) said...

Except, of course, it has been known that Hossa's contract has been under investigation for about a year now. This is not news. The arbitrator's footnote that gave rise to all these rumblings has largely been misunderstood and the media have made much ado about nothing with respect to Hossa's contract in particular.

bdh said...

Sorry…drunk and stuck in a cab that is stuck in traffic in a foreign country…this might be disorganized but ive got some time to rant – read at your own risk.

Arb. decision:
FACTS:
"...longest multi-year contract in NHL history."

[LOL - reminds me of the Keays case I read in law school, where the judge dolled out this winner: "This is the sad case of..."]

-------

We believe the structure of the SPC on its face constitutes an impermissible “retirement-contract,” pursuant to...which the parties can have no reasonable expectation of complete performance in accordance with its terms.

[i cant for the life of me understand why people are ok with this ruling and have quickly moved on to , as i think one commenter stated, more serious implications (referring to the can of worms that is other players contracts). how is it ok that people think it is unreasonable to imagine the 'player' would play till 44? why is this unreasonable? dont give me spirit of the cba as a whole crap especially when the cba itself refers to ”provisions” being circumvented , a point not lost on the nhl people when they used retirement as the scapegoat and whether the playa knew or reasonably knew he would retire – check the "rejection letter." oh, and why does the club assume so? because, in their words, the playa’s age at that time "is well beyond the typical retirement age for NHL players." huh? typical retirement age? where did this come from? im pretty sure that isnt the cbas language at all. What happened to reasonable and knwing and things like that? to completely contradict themselves the nhl people continued, as copied above, that the 'playa' (never gets old) by saying, "no reasonable expectation" in order to get some cba language in their muddled arguement...next time im in court and someone brings up a “typical” situation ill be sure to use its substitute, “no reasonable expectation.”].

finally...why do people, and by people i mean everyone commenting and, or, participating on or in the nhl arbitration racket (including the nhl people) think that it is so unreasonable to pay a player in his 40's the league min. when they, by their own admission, think that the playa cant even play at that age (all the retirement and old is me rhetoric)? can anyone else suck and blow at the same time? neat trick. (and i wont even go into the arguments (sic) about the no-trade clause that the nhl attached in case....)

Anonymous said...

Sorry…drunk and stuck in a cab that is stuck in traffic in a foreign country…this might be disorganized but ive got some time to rant – read at your own risk.

Arb. decision:
FACTS:
"...longest multi-year contract in NHL history."

[LOL - reminds me of the Keays case I read in law school, where the judge dolled out this winner: "This is the sad case of..."]

-------

We believe the structure of the SPC on its face constitutes an impermissible “retirement-contract,” pursuant to...which the parties can have no reasonable expectation of complete performance in accordance with its terms.

[i cant for the life of me understand why people are ok with this ruling and have quickly moved on to , as i think one commenter stated, more serious implications (referring to the can of worms that is other players contracts). how is it ok that people think it is unreasonable to imagine the 'player' would play till 44? why is this unreasonable? dont give me spirit of the cba as a whole crap especially when the cba itself refers to ”provisions” being circumvented , a point not lost on the nhl people when they used retirement as the scapegoat and whether the playa knew or reasonably knew he would retire – check the "rejection letter." oh, and why does the club assume so? because, in their words, the playa’s age at that time "is well beyond the typical retirement age for NHL players." huh? typical retirement age? where did this come from? im pretty sure that isnt the cbas language at all. What happened to reasonable and knwing and things like that? to completely contradict themselves the nhl people continued, as copied above, that the 'playa' (never gets old) by saying, "no reasonable expectation" in order to get some cba language in their muddled arguement...next time im in court and someone brings up a “typical” situation ill be sure to use its substitute, “no reasonable expectation.”].

finally...why do people, and by people i mean everyone commenting and, or, participating on or in the nhl arbitration racket (including the nhl people) think that it is so unreasonable to pay a player in his 40's the league min. when they, by their own admission, think that the playa cant even play at that age (all the retirement and old is me rhetoric)? can anyone else suck and blow at the same time? neat trick. (and i wont even go into the arguments (sic) about the no-trade clause that the nhl attached in case....)