Monday, July 30, 2012

Why The NHL's 46% Revenue Share Proposal Isn't Nuts

Many were not happy with the NHL's proposal to roll back the players share of revenue by 11 points - from 57% to 46%.

Some described the proposal as unrealistic, crazy, obtuse, a slap in the face and off the charts crazy. Others have just said that it was not terribly polite.

The NHL's revenue share proposal wasn't nuts. A new industry standard has emerged in big league North American sports leagues when it comes to what share of revenue the players get. That new industry standard is somewhere between 47 and 51%.

In the NBA, the players get 50% of revenue give or take 1% depending on the health of the league. NFL players get about 48.5% of league revenue. MLB does not have a cap but rather a luxury tax; however the player shares works out to about 47%.

Prior to the lockout, NBA players were getting 57% of revenue (just like the NHL) and the NBA's first proposal was 46% (just like the NHL). The leagues can be distinguished to a certain extent given that NBA owners were claiming losses in excess of $1 billion over three years and also allged their business model was broken. Still, the comparison is noteworthy.

So it wasn't unreasonable as an opening move for the NHL to come in at 46%. The league has sought to align itself with other North American leagues.

Will it stay at 46%? That is unlikely. That number will probably climb to the 50% mark - or perhaps slightly higher. For that to happen, though, expect the NHL to seek other concessions from the NHLPA.

Thursday, July 19, 2012

Would The NHL Season Ever Start Without a CBA In Place?

NHLPA Executive Director Donald Fehr has said that the Union would have no problem with the NHL season starting without a negotiated CBA. Here's what Fehr said:

"The law is that if you don't have a new agreement, and as long as both sides are willing to keep negotiating, you can continue to play under the terms of the old one until you reach an agreement. All I know is that in baseball, there were any number of occasions in which we played while the parties were continuing to negotiate."

Assuming the sides are fine with it, Fehr is correct in that the old terms of the CBA would govern the terms of employment until such time as the sides agree to a new deal.

However, the real question is this - would the owners allow the season to start without a new deal in place?

As a lawyer, I'm totally fine making things far more complicated than they need to be. It pays my mortgage and lets me buy lots of golf balls. If there is a grey area, I'm happy to pitch a tent and hang out there for a while.

In this case, there is no need to qualify my response. The answer is this - there is no chance that the owners would ever start the NHL season without a new CBA in place.

Zero. Nada. Zilch. Nill. Zip. Niente. Noll.

There are a couple of reasons for that. First, the owners would never give up the leverage associated with locking out players. Being able to deprive NHL players of their employment and income can be pretty powerful. To forfeit that option would be to undermine your own negotiating position (I'm sure this is covered somewhere in the first couple of chapters in Getting to Yes).

Second reason is this - if the season ever started without a new CBA, the NHLPA would suddenly gain some leverage. If the owners did start the season without a CBA, their expectation would of course be that the entire season and playoffs would be played. The owners would not, for example, lockout the players mid-season and risk losing the playoffs.

However, without a new CBA it would be open, in theory, for the NHLPA to strike mid-season if it feels that things are not going well. That could wipe out the final part of the season and the playoffs. This approach would apply tremendous pressure on the NHL to get a deal done. 

Want a precedent? MLB owners started the season in 1994 without a CBA. The same Donald Fehr was unhappy with the offer on the table (which included a salary cap and rollback on free agency eligibility), and the players went on strike on August 12.

The rest of the season, including the World Series, was called off by Bud Selig on September 14. The move to cancel the rest of the season meant the loss of $580 million in ownership revenue and $230 million in player salaries.

There is simply too much to risk for owners to start the season without a new CBA. That scenario is just unlikely. No grey here.

Wednesday, July 18, 2012

Mike Richards Show - TSN Radio Clip: NHL CBA & Rusty Hardin

I join the Mike Richards Show on TSN Radio and speak with the very energetic Matt Cauz.

We covered Rusty Hardin/Adrian Peterson, the NHL CBA and why I far prefer being called a 'Legal Eagle' over 'Legal Beagle'. One is a bird that soars and the other is a dog.

Jeremy Lin and the Economics of His Departure

The New York Knicks have decided not to match the Houston Rockets 3 year/$25.1 million offer made to Jeremy Lin. So Lin is now headed to the state of Texas and gets a lot closer to Rusty Hardin in case he ever needs a good lawyer.

Some have been saying that the Knicks were nuts not to match the offer strictly from a revenue standpoint. Lin has massive appeal, can be used to target the lucrative Asian market - domestically and abroad - and has sold a bunch of merchandise, tickets, beer and food. And what of the MSG stock price, owned of the Knicks - didn't he help that and won't it be hurt by his departure?

It is true that Lin has had a substantial and positive impact on the Knicks. However, his departure is expected to only have a marginal impact on MSG's bottom line. By the calculations of some, Lin may have accounted for less than 1% of MSG's revenue, which also owns the Rangers and Liberty.

As for ticket sales, the Knicks already sell out most of their games, and having Lin in the lineup won't change that. From a merchandising standpoint, while Lin was responsible for a bump in sales, ultimately the revenue generated is insignificant to MSG's bottom line. And don't forget that merchandising revenue is also shared with other teams, further diluting the pot for MSG.

When Lin joined the Knicks, MSG's share price went up 36%. Now, it's down 8% according to the Wall Street Journal. Analysts believe the stock will settle down and Lin will not ultimately be responsible for its fate.

Another point - the Lin contract is structured in such a way that it would cost the Knicks between $35 and $45 million in luxury tax payments. That is not money well spent - particularly given that the entire contract is work $25 million. Fiscally, very tough to justify since this ends up being about a 3 year/$65 million contract.

Let's also remember that Lin is largely unproven. He's only played 64 games and sat out 17. He also only played in 35 games last season for the Knicks. So there are questions as to whether he is a great player or a good player that had a really good season.

Lin did help somewhere though - he got Time Warner and MSG to work out a deal to get the Knicks back on television. A dispute regarding subscriber fees resulted in the Knicks not being on television. Lin's appeal was so great that the sides felt tremendous pressure to work out their differences. Commissioner David Stern even encouraged the sides to work towards a resolution given how important it was to get Lin on television. New York Governor Andrew Cuomo and Attorney General Eric Schneiderman also stepped in. Ultimately, the sides worked it out and subscribers are now paying $4.50 a month to watch the MSG and MSG Plus channels.

From an emotional standpoint, some Knick fans won't be happy. From a fiscal standpoint, it is tough to argue that the Knicks should have matched Houston's offer.

Tuesday, July 17, 2012

Print Interview on NHL CBA

Ken Warren of Postmedia/Ottawa Citizen/Montreal Gazette, etc., interviewed me this week on the NHL's CBA proposal. The article is entitled, "NHL’s opening salvo to players not unexpected".

The article is located here.

Here is an excerpt:
The NHL’s “ambitious” initial proposals towards a new collective bargaining agreement with the players’ association aren’t completely surprising, according to sports business and law expert Eric Macramalla.
But Macramalla, a partner at Gowlings, who hosts the weekly show Offside: The Business & Law of Sports on The Team 1200-AM, anticipates the union to respond quickly in kind.
“I would expect the union to be equally aggressive,” Macramalla said Monday. “Negotiations are full of ebbs and flows. If (the NHL) proposal has been accurately reported, I would also suspect an initial ambitious response from the players’ association, so it doesn’t seem like they’re delaying before they come back.”
…When the NBA and its players’ association initiated talks towards a new agreement — the 2011-12 NBA season was delayed due to a lockout — the league originally asked players to accept 46 per cent of revenues, down from 57 per cent, exactly the same situation as the NHL.
Ultimately, NBA owners and players agreed to accept a 50/50 split of basketball related revenues.
Bill Daly, the NHL’s deputy commissioner, argues that the rest of the sporting landscape has changed since the current NHL CBA was signed in 2005. NFL and Major League Baseball players receive 48 per cent of revenues.
“I’m not surprised the NHL has tried to align itself with the other leagues,” said Macramalla.

Friday, July 13, 2012

The Freeh Report: Paterno Statue, Football Program, Spanier & Penn State Liability

Former FBI director Louis Freeh's report revealed that coach Joe Paterno, Athletic Director Tim Curley, Vice-President Gary Schultz (both depicted in the photograph on the left) and University President Graham Spanier acted in concert to cover up Jerry Sandusky's criminal acts.

The report is devastating (read it here). High ranking University officials showed a complete disregard for the well-being of children. Rather than take active steps to end Sandusky predatory behavior, the University engaged in a concerted institutional effort to safeguard the legacy of its football program, coach and brand.

While many their suspicions, Freeh's report confirmed that this seems to have occurred.

What is the fallout from Freeh's report? Here are some things to consider.

1) Penn State Liability

Your basic legal principle is this: an employer can be liable for the acts committed by an employee in the course of his or her employment. 

The employer won't be liable if an employee does something that is clearly outside the scope of his responsibilities. However, if an employee is discharging his duties but doesn't do it right or is negligent, liability can follow the employer.

And that's what we appear to have here. Spanier, Schultz, Curley and Paterno appear to have worked in concert to cover up Sandusky's actions. This creates liability for Penn State since its employees were, in part, negligent in discharging their duties. For legal purposes, these 4 people will be considered "Penn State" (although the school would argue that).

Remember up until sometime in September 2011, and despite retiring in 1999, Sandusky still had a Penn State office, email, telephone number and faculty listing, while also enjoying the title of assistant professor emeritus of physical education. So not only did Penn State keep him around, it also legitimized Sandusky on and off campus.

The liability would likely only extend to when Penn State employees knew (or ought to have known) about Sandusky's molestation of children and did nothing. We don't know when that was. We do know that the University was made aware of a 1998 incident which included a police investigation. Despite the investigation, Sandusky was not fired; rather he was barred from accessing the Penn State locker room.

So for plaintiffs suing Penn State for money, that will likely be a starting point. Note that in one lawsuit already filed, a Plaintiff has alleged that Sandusky “had been molesting children since at least the 1970s”.

So when Penn State employees knew or should have known something was going on will become an important issue.

This report is devastating for Penn State and could result in massive - if not catastrophic - monetary damages against the University.

2) Paterno Statue

There is a 7-foot statue of Joe Paterno at Penn State. To the left on a wall are the words “Joseph Vincent Paterno; Educator; Coach; Humanitarian.”

The statue depicts Paterno, running in front of four players and his right index finger is pointed high. On the wall is a quotation from Paterno. “They ask me what I’d like written about me when I’m gone, I hope they write I made Penn State a better place not just that I was a good football coach.”

In light of Freeh’s report, the question is whether the statue, unveiled in 2001, should come down?

Paterno taught his players to do the right thing, to take responsibility for their actions and to admit when they were wrong. Paterno held his players to the highest moral standards and over the years became a symbol of morality.

Now his statue has become a symbol of a wholesale institutional failure to stop Sandusky. It has become a symbol of doing the wrong thing rather than the right thing.

The Paterno statue no longer stands for the right thing and for that reason must fall. 

3) The Football Program

Some people are calling for the termination of the Football Program. It is difficult to argue with that demand. However, if the people that are responsible are held responsible - and more precisely criminally responsible - is it then necessary to then deprive the University of its Football Program? 

While there is no right answer, there is the argument that terminating the program becomes unnecessary under those circumstances. By removing the program, we would be letting the actions - or inactions - of a small group of people deprive students that have done nothing wrong with the chance to watch and play football.

Football does seem trite when juxtaposed beside this entire affair. As well, punitive measures are critical here. Still, so many people that did nothing wrong would be penalized for something they did not do. This is a tough one.

4) Graham Spanier

Curley and Schultz are facing perjury charges and are headed to trial in the Fall. 

But what of University President Spanier?

Spanier denied that the incident was reported as “sexual in nature” and confirmed that Curley and Schultz did not indicate that they would report the incident to police.

Spanier also denied being aware of the 1998 incident.

Now we have learned that this was not the case. With respect to the 2001 incident, Curley changed his mind and recommended in an email to Spanier that they should not move against Sandusky:

"After giving it more thought and talking it over with Joe yesterday, I am uncomfortable with what we agreed were the next steps. I am having trouble with going to everyone but the person involved. I would be more comfortable meeting with the person and tell them about the information we received and tell them we are aware of the first situation".

Spanier responded with:

"I am supportive. The only downside for us is if the message isn't heard and acted upon, and then we become vulnerable for not having reported it."

So did Spanier lie under oath? This may be examined by the Attorney General to determine if perjury and obstruction of justice charges are appropriate. 

This horrific case has many tentacles and is far from over.

Radio Clip: Team 1200 - Penn State Investigative Report

I join Steve Warned and Shawn Simpson to talk about the Penn State investigation and its legal implications. 

Wednesday, July 11, 2012

TSN Radio Clip: Rick Nash, No Trade Clauses and NHL CBA Issues

Good little discussion on TSN Radio with Scott MacCarthur. We cover Rick Nash, no trade clauses generally, and the top NHL CBA issues. Click here to listen.

Tuesday, July 10, 2012

Top 8 NHL CBA Issues And Will There Be A Lockout

The NHL and NHLPA have been meeting to work on a new CBA.

Here are the top 8 CBA issues:

1) Player share of revenue

The bottom line is the bottom line and that means that the sides will negotiate what percentage of revenue players get. Right now it’s 57% of hockey related revenue. That percentage is a bit high when compared to the player share of revenue in the other 3 leagues. In the NBA, the players get 50% of revenue give or take 1% depending on the health of the league. NFL players get about 48.5% of league revenue. MLB does not have a cap but rather a luxury tax; however the player shares works out to about 47%.

So the 57% is arguably no longer the industry standard and the NHL will look to reduce the player share of revenue. Expect resistance from the Union. Stephen Fehr, brother to Donald and special advisor to the Union, recently said that last time around in 2005 the players made “massive concessions” and they were not prepared to do it again. Those massive concessions were a salary cap and a 24% rollback on salaries.

Ultimately, it would not be a surprise to see the player share of revenue fall to 52-53% together with the opportunity for an increase. However, for this to be realistic, the Union will need to concede on other key CBA issues.

There are creative ways to adjust revenue so that it is simply not a flat rate of all hockey-related revenue. The NHL can look to give players a different percentage of different streams of revenue – like in the NFL. The sides will need to creative – and they will be.

Issues are not addressed in isolation – they will all collide to form the new understanding between the parties.

2) Salary floor

The salary floor for the upcoming season is $54.2 million. A number of NHL teams in non-traditional markets can’t turn a profit when they are forced to spend to the floor. For the health of those clubs, the league will argue that the salary floor will need to be adjusted.

The Union’s mandate is to look out for the best interests of its members/players. That’s the Union’s job. So they will resist.

However, ultimately the players will be getting a fixed percentage of revenue. So this means even if there is no floor, the players will still get the full percentage. The bigger issue is that of competitive balance. Without a floor, some teams will be significantly outspent by others. 

3) Free agency

Under the old CBA, players became unrestricted free agents (UFA) at the age of 31. Now players become UFAs at the age of 27 or if they have played 7 years - whichever comes first. That’s why it’s called the 7/27 rule.

The new UFA age of 27 is a problem for NHL teams. A big problem and one that perhaps is undervalued in its importance. By dropping the UFA eligible age by 4 years, teams are faced with the potential of losing really good players when they hit their prime. So what teams have been doing is signing players in their mid-20s to long-term deals – which include buying up UFA years.

Case in point: Canadiens goalie Carey Price just signed a 6 year/$39 million contract. Price would have been a UFA in 3 years. The Canadiens didn’t want to lose him come UFA time, so they bought up 3 UFA years. Under the old system, Price would have still been a restricted free agent at the age of 30. It is therefore unlikely that he would have received such a big deal.

So we have really long deals being given out to young players for a lot of money.

This is something the league will want to address by pushing the UFA age to something like 29. However, expect resistance on this one from the Union. Players are getting well paid as a result of the earlier UFA eligibility and they won’t want to give that up. There is also something quite fundamental to be said about players being able to move freely within the league. Union like to protect the right employees to seek employment where they wish.

It doesn’t help that the NHL calculates its cap hit as the average yearly value of the contract and not what a player makes in a year (like the NFL for example). Being able to artificially reduce the cap hit by adding throwaway years may provide teams with an added incentive to extend contracts even longer. But that applies to signing older players mostly.

4) Contract Length/Structure

The NHL may explore restrictions on contract length. Ultimately, however, the sides may agree to restrictions on how long-term deals are structured and not on the number of years that may be allocated to a player.

5) Escrow

The league gives players a share of PROJECTED revenue and not actual revenue. So if the NHL guesses wrong on revenue that have to get money back from the players. So rather than ask for it back, they set some aside during the season in escrow. Initially, players were giving up about 8% of their salaries and now the number has climbed to over 20%. That’s high for players so they will seek to address that.

6) Burying contracts/Buyouts

Some say that the CBA has loopholes in it, allowing teams to bury contracts in the minors and not have the salary count against the cap. In reality, however, this is not a loophole. A loophole is an unintended consequence. This scenario, however, was not unintended – it was contemplated by the CBA.

NHL teams wanted to have some type of cap space relief for underperforming players and bad contracts. The NHL may have tried, by way of example, not to have buyouts count against the cap. However, they do. So the compromise was being allowed to send players to the minors to create cap room (with the exception of 35+ players).

Realistically speaking, the NHLPA knew that there were only a few teams that could afford to bury contracts in the minors solely for cap reasons. Indeed, this has been borne out by the facts as relatively few players have been sent to the minors for cap reasons.

There is also another relief valve – placing players on long-term injured reserve. As explained here, if a player is deemed “unfit to play”, the team can place him on LTIR, and by doing so, can exceed the cap in an amount equal to that player’s salary if needed.

Buyouts do count against the cap so that is unlikely to change.

Some teams may not be happy that rich teams can gain, in their view, a competitive advantage, by burying contracts. However, it doesn’t happen too often.

It would be surprising to see this provision of the CBA amended to preclude burying contracts in the minors. It may be tweaked though.

7) Safety/Equipment

Big big issue. Both sides will want to address this as it's in the best interest of the league, the Union and its members that the league have a safe work environment.

8) Conference alignment

In the proposed realignment of the league, the NHL proposed two Conferences of 8 teams and 2 Conferences of 7 teams. The Union exercised its right to veto the proposed realignment – and given that it came up right before CBA talks it made all the sense in the world for the Union to say no. Why give up any leverage going into negotiations.

With the proposed realignment, the NHL has set the table to expand by 2 teams. Owners would love that because expansion fees are not shared with the players. Expansion fees can start at about $250 million – but could be a lot more depending on the market.

The Union would like expansion since it would create new jobs.

So the NHL will want to get the Union to agree to realignment, and the Union should like the idea. It will happen.

Those are the top 8 CBA issues. 

Another issue includes an amnesty clause allowing a team to dispose of one bad contract (we will call it the Scott Gomez clause) so it doesn’t count against the cap. They would still pay the player though. Such a change would be a surprise to see. Many owners will not want to reward poor management.

Other issues that will be discussed are international play and the Olympics, minimum salaries, retired player benefits, drug testing and supplementary discipline.

Will There Be a Lockout?

Talk of a lockout remains premature. There are too many positive indicators for the business that is hockey. There has been a $1 billion boost in revenue since 2005; the average player salary has gone from $1.4 to $2.4 million; the league has new national and regional TV deals; attendance is up; the league has a good stable of national sponsors; and there is great forward momentum.

Adjustments need to be made to the NHL CBA. However, we are not looking at an overhaul of the business model like we saw in 2005. The big difference now is that player salaries are tied to revenue – which was not the case in 2005. This provides more in the way of cost certainty and control.

So the sides will make those adjustments while keeping an eye on the bigger picture – a game and business that is getting bigger and seeking a larger international footprint.

Monday, July 9, 2012

USADA's Doping Case Against Lance Armstrong & Why Did the Feds Give Up On Case

According to reports, American cycling stars George Hincapie, Levi Leipheimer, David Zabriskie, and Christian Vande Velde are all reportedly going to testify against Armstrong in the USADA's doping case.

If this is in fact accurate, it makes you wonder why the Federal Prosecutors dropped its own investigation into Armstrong's doping

No reason was provided for ending the investigation. AndrĂ© Birotte Jr., the United States attorney for the Central District of California, announced the end of the investigation, which involved several federal agencies, in a brief statement. He did not cite a reason for the decision and declined to comment further. He said, 

"The United States Attorney determined that a public announcement concerning the closing of the investigation was warranted by numerous reports about the investigation in media outlets around the world." 

The roster of witnesses is quite compelling - particularly in the case of Hincapie. He and Armstrong were very good friends.

Sunday, July 8, 2012

Wednesday, July 4, 2012

Parise & Suter Contracts - A Circumvention of the CBA?

Zach Parise and Ryan Suter have signed the same long-term deal with the Minnesota Wild: 13 years at $98 million.
The deal breaks down as follows across the 13 years:

$12M, 12M, 11M, 9M, 9M, 9M, 9M, 9M, 8M, 6M, 2M, 1M, 1M

The contracts take both Parise and Suter to the age of 40.

The issue is this: do these contracts constitute a circumvention of the NHL CBA?

When assessing whether a contract constitutes a circumvention, reference is had to a number of factors, including the age of the player at the start of the contract, the total dollar value of the contract, the duration of the contract, the yearly cap hit, the player’s age at the end of the contract, the drop between the years at the end of the contract (called a diveback) and the number of throwaway years.

This last point, namely throwaway years, is important - have years been added to the back end of a contract to artificially lower the cap hit.

In this case, the last 3 years are worth 2 million, 1 million and 1 million. As well, the drop or diveback between years 10 and 11 is dramatic going from 6 million to 2 million.

When you include all the years in the deal, including the 3 throwaway years, the cap hit is $7.53 million. However, when you eliminate the last 3 years, and maintain the existing value for each year, the cap hit rises to $9.4 million.

That is a dramatic jump.

In the Kovalchuk arbitration case, arbitrator Bloch highlighted 4 contracts that constituted circumventions of the CBA. Here are the deals complete with yearly breakdowns:

(a) Marian Hossa: $7.9, 7.9, 7.9, 7.9, 7.9, 7.9, 7.9, 4.0, 1.0, 1.0, 0.75, 0.75

(b) Chris Pronger: $7.6, 7.6, 7.2, 7.0, 4.0, 0.525, 0.525

(c) Marc Savard: $7.0, 7.0, 6.5, 5, 1.5, 0.525, 0.525

(d) Roberto Luongo:$10.0, 6.716, 6.714, 6.714, 6.714, 6.714, 6.714, 6.714, 3.382, 1.618, 1.0, 1.0

These 4 contracts also have throwaway years (bolded/underlined) and divebacks. These contracts were considered circumventions.

The Kovalchuk contract was a lot more aggressive in its structure. To revisit the contract, here are your links:

Ultimately, the Parise and Suter deals fit the profile of contracts that have been found to circumvent the CBA. They have multiple throwaway years, a substantial diveback and end at the age of 40 when they will have likely already retired.

The NHL and NHLPA agreed on some new guidelines involving long-term deals post-Kovalchuk, including special calculations for deals that take a player past the age of 40. 

However, arguably those new guidelines do not appear to excuse contracts that are more generally designed or structured to artificially reduce the cap hit. That is, they do not appear to excuse circumventions of the CBA. 

Still, though, there is the argument that the NHL may have agreed not to challenge these types of deals with  in light of the new rules.

It will be interesting to see how this all shakes out in the coming days. Will the NHL approve the deal (I suspect it will)? Will other GMs be upset since deals like this undermine competitive balance (cue Brian Burke)? Will these deals give the owners more of a reason to seek further restrictions on long-term deals during CBA negotiations?

Indeed, it will be interesting.