Monday, August 16, 2010

Kovalchuk Decision: Why It Was Right & A Roadmap For Future Contracts

As the dust settles on the landmark Kovalchuk decision, we are left with some questions.

What is the new standard on NHL contracts?

Is there a new standard, or have we just seen a market correction?

Does arbitrator Richard Bloch’s decision provide a roadmap for future deals, or are things more uncertain for NHL Clubs, Players and Player Agents than Stephen Strasburg’s career outlook?

The reaction to the decision hasn’t been overly positive, with some people taking the position that Bloch’s decision doesn’t provide much of a roadmap for future deals.

Some have also expressed that in upholding the NHL’s decision to void Kovalchuk’s contract, and sending him back on the UFA market, Bloch went too far – after all the CBA doesn’t expressly rule out deals like the one Kovalchuk signed.

And some have said that the decision was just flat out wrong.

These positions are not unreasonable. However, in my opinion, the Bloch decision was well-reasoned, sound and most of all, correct. In fact, Bloch didn’t have to go too far to make his finding and his reasoning was in keeping with a traditional legal analysis focusing on the intention of the parties.

Was The Contract Open To Review

Issue #1 – did the CBA allow the NHL to challenge the contract to begin with?

Short answer – yes.

The NHLPA said no, arguing that the CBA doesn’t expressly bar these types of contracts. It’s not in the CBA, and if the NHL doesn’t like it, the NHLPA argued, that’s too bad. If they wanted to bar these types of deals, they should have accounted for it in the CBA.

The NHL conceded that the CBA didn’t expressly bar these deals. However, it argued that when the language of the CBA is considered as a whole, there is plenty of support for the position that the NHL was not only permitted to investigate the contract, but was mandated to do so.

The NHL argued that the CBA provides that the parties can’t do anything that is “designed to” defeat the CBA or enter into “understandings of any kind” to undermine the CBA. It also allows the NHL to consider the effect of a contract, intention aside, when considering whether a circumvention has occurred. Looking at “effect” over “intention” is a lot broader – something the parties agreed to. This too is really important.

Bloch agreed with the NHL, making a finding that there was support in the CBA allowing the NHL to void the contract. He concluded that a “contrary conclusion would effectively read” out the circumvention provision.

Bloch’s conclusion was a good one. At law, if an agreement is silent on a specific issue, the practice is to review the agreement as a whole to determine the intention of the parties.

In this case, the language in the CBA in a few spots supports the position that the parties intended for the NHL to be able to review these types of contracts. While the CBA may seem ambiguous, the circumvention language, from a legal standpoint, makes for a convincing case endorsing the review.

Frankly, it’s tough to imagine a different outcome given the way the CBA is worded.

Striking Down The Contract – The Right Move

Issue #2 – was it fair to conclude that this was bad contract?

Short answer part 2 – yes.

Here is the key question to consider: why was the Kovalchuk contract structured the way it was?

The contract was designed to artificially push down the yearly salary cap hit by boldly adding 6 throwaway years at the end of the contract. The only reason the contract was designed in this way was to circumvent the CBA - and for no other reason.

To put it in perspective, if you drop those last 6 years at the end of the contract, and make it an 11 year deal, the Devils cap hit goes from $6 million to about $9 million.

How front loaded was the contract? Kovalcuk was slated to make $98.5 million in the first 11 years of his contract, and only $3.5 million in the last 6 years, which are the throwaway years. This translates to 97% of the contract being paid out in the first 11 years of the contract, and just 3% in the last 6 years. 

Also important is to look at the typical arc of a player’s career. Yes, Mark Recchi signed a one year deal with the Bruins taking him to the age of 43. And yes, Chris Chelios laced them up for the Thrashers at the age of 48. However, these cases do not represent the norm. Empirically speaking, a player won’t play into his 40s. Kovalchuk would have been 44 years old when the contract expired, which was a problem for the Devils.

The contract also provides for a transition from a “No Move” to a “No Trade” in year 12 – the first of the 6 throwaway years. With the comprehensive “No Move”, a club can’t remove a player’s cap hit by sending him down to the minors. However, with a “No Trade” clause, a team can send a player down to the minors and bury his contract. This migration to a “No Trade” suggests that the Devils did not expect Kovalchuk to play out is contract, and frankly, hoped he wouldn’t. It also suggests that Kovalchuk himself didn’t expect to play out his contract.

What of competitive balance as well? It’s not mentioned in the CBA. However, the whole point of the salary cap is to control costs and maintain competitive balance. So while it’s not in the CBA, it’s all over the CBA. Legally, that’s the proper interpretation, and to get there isn’t a big stretch.

Ask yourself this: is it fair that the Capitals have a yearly cap hit of $9.5 million over the 13 years of the Overchkin contract, while the Devils’ cap hit is just $6 million? The Ovechkin contract has no throwaway years in it, with the winger making more in the last 7 years of the contract than in the first 6. If the Caps had signed Ovechkin to a 23 year deal they could have dropped their cap hit significantly (see Burke, Leonsis Not Fans of Kovalchuk Contract).

So the Kovalchuk deal upset the competitive balance and didn’t create an even playing field for all teams. You had some teams like the Caps playing by the rules, while others were not (ironical, I guess, that they are called the Caps).

Kovalchuk Decision: Roadmap For The Future

Bloch’s decision sets a standard for NHL contracts: a contract that artificially pushes down the yearly cap hit by adding throwaway years at the tail end may be seen as a transparent attempt to circumvent the CBA and will be open to scrutiny. That’s going to be the case with a contract that has just 1 throwaway year or 6 years.

Remember Bloch wrote that he wasn’t a fan of Savard’s contract, which only has 3 throwaway years at the end, as well as the contracts of Hossa, Pronger and Luongo. While this discussion was a footnote in the decision, it was actually very important: Bloch was providing guidance as to what was a good contract.

The most prudent approach for clubs is not to add these throwaway years (although I suspect they will keep trying).

The question on these contracts will always be, “why was the contract designed the way it was?”.

So clubs that add on 1 or more throwaway years should expect the contract to be carefully reviewed by the NHL.

That, in my opinion, is the standard for NHL contracts.


Daniel Gilbeau said...

Were you on holidays Eric? What's with the lack of blogs lately.
Ok, let's get back to Kovalchuk and I will again say that I totally disagree with the ruling. I think Bloch was wrong in a way in giving this ruling. Others like Hossa, Zetterberg, Franzen, Luongo have similar contracts that were accepted.
I do want to thank you for your insights on the CBA and all your interviews on the Team 1200. I actually learned something listening to you. You clearly pointed out that in the CBA it is written that even though a contract is signed and agreed to, the league can come back and decide that the contract is not valid later on. Why in the hell would the players agree to and sign a CBA with this language in it is crazy!
Although I have said all along that this contract should be valid because there were no clear rules stating it is illegal, I am not a fan and do not agree with teams and players doing this kind of contract.

Eric Macramalla said...

You make a great point Dan - why would the players agree to the NHL being able to deregister contracts.

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