Friday, January 9, 2009

Twelve Angry Men

The Portland Trail Blazers issued a rather nasty email to every other NBA team recently, threatening legal action against any team that attempts to sign Darius Miles for purposes of clocking a ninth and tenth game for Miles this season, which would result in (i) Miles’s $9 million salary for 2008-09 going back on Portland’s rolls for purposes of counting against the salary cap, and (ii) as a result thereof, Portland being required to pay several million dollars of luxury tax.

Here is the basic regulatory background of this situation. Under Article VII, Section 5 of the current NBA Collective Bargaining Agreement, a team may (subject to various exceptions and complications) sign a free agent from another team only if such free agent’s prospective salary would not cause the team to exceed the salary cap calculated for a given season.

Under Article VII, Section 4(h) of the Collective Bargaining Agreement, if a player is deemed by a physician selected jointly by the NBA and the Players Association to have suffered a career-ending injury, then the team can apply to have such player’s salary excluded from its salary-cap calculation. But, if the player ends up playing 10 games the following season, then the exclusion is void, and the player’s salary goes back into the salary-cap calculation. Let us note that the player is still entitled to get his money nonetheless. In this case, Miles’s contract was covered by insurance, so Blazers owner Paul Allen saved cash payment on Miles’s $9 million for 2008-09.

The January 8th email from Blazers President Larry Miller said the following:

Team Presidents and General Managers,
The Portland Trail Blazers are aware that certain teams may be contemplating signing Darius Miles to a contract for the purpose of adversely impacting the Portland Trail Blazers Salary Cap and tax positions. Such conduct from a team would violate its fiduciary duty as an NBA joint venturer. In addition, persons or entities involved in such conduct may be individually liable to the Portland Trail
Blazers for tortuously interfering with the Portland Trail Blazers' contract rights and perspective economic opportunities.
Please be aware that if a team engages in such conduct, the Portland Trail Blazers will take all necessary steps to safeguard its rights, including, without limitation, litigation.

Reportedly, after the Blazers’ intemperate missive, Cavaliers owner Dan Gilbert responded to the NBA owners’ group email list (side note: Can I be blind-carbon-copied on this list?) with the following rejoinder: “A pre-emptive threat of 'litigation' directed at all of your partners through a group e-mail does not sit well with me and seems to be incongruent with the spirit of keeping a 'fiduciary duty' and good 'partner-like duty' to your 'NBA joint venturers.'” That’s a fair point, but Gilbert, who like most businessmen surely disdains lawyers, had little to say about what Portland could actually do to him. Putting the warm fuzzies aside, what is really going on here?

As John Hollinger has explained, signing Miles and paying him for a couple games is an individually rational decision for any given team. Under current projections, about 7 teams (including the Blazers, if Miles plays ten games) will exceed the salary cap in 2008-09 and will be required to pay luxury tax, (see Article VII, Section 12(f) of the Collective Bargaining Agreement) which is split equally among all the 23 non-tax-paying teams. At the veteran’s minimum of $1,141,838 annually for an 8-year veteran, Miles would earn roughly $28,000 for two games. Any team that plays Miles in a way that triggers the Blazers’ luxury-tax liability will receive its 1/23 share of the Blazers’ luxury-tax payment, which would be about $9 million (the amount of Miles’s salary), as right now Portland’s calculated salary roll is just slightly below the cap line. Earning $391,000 of tax transfer for a $23,000 investment seems like a pretty good ROI – better than upgrading your luxury boxes!

Given that the Blazers are threatening some legal action against any team that challenges Portland, it might be useful to consider the strength of their legal claims. First is their claim of tortious interference. According to the Restatement (2d.) of Torts, Sections 766 and 767, the tort of “tortious interference with a contract” consists of (1) a contractual relationship, or an expectancy thereof, (2) an intentional act of interference with such relationship or expectancy, (3) causation of harm, and (4) quantifiable damages. The first problem is that Portland has no more contractual relationship with Miles. They severed ties with him early in 2008 when the doctor opined that he was not fit to play ball any longer; and insurance is now paying the contract for Portland. Even if the payments are coming over time rather than in a lump sum and there is still some outstanding contractual arrangement governing the payments, it is hard to see how a team that signs Miles now would be interfering with such arrangement. They wouldn’t. The issue of the salary-cap implications for Portland is separate from the actual cash payment of Miles’s salary. Could Portland argue that a team that signs Miles is interfering with Portland’s prospective contractual relationships, i.e. a free-agent deal with Shawn Marion, say? Perhaps, but the possibility thereof seems so sketchy and ill-defined as to make a legal claim very weak indeed.

The other potential claim is some sort of alleged violation of a team’s fiduciary duty to its partners. I do not have access to the partnership agreement that NBA team owners are party to, but it seems ridiculous to argue that part of each team’s fiduciary duty is not to take all permissible actions to compete with other teams. Furthermore, as a practical matter, how could the Blazers ever prove that a particular team, say the Grizzlies, signed Miles purely to trigger the Blazers’ luxury-tax liability and salary-cap exceedance? It's not clear how a good-faith signing would look different from a bad-faith signing. In fact, the worse the team is (and Memphis sure is bad), the more plausible it is that they could really use Miles. Boston's signing of Miles seems more likely to be a bad-faith move.

If the Blazers ever sued the Grizzlies for these alleged torts, the judge should rule for the Grizzlies on summary judgment. But can you imagine one NBA team taking the other to court? Really? I sure can’t. Without that background threat, any threat of a lawsuit is toothless.

In essence, Portland is saying with their letter that they don’t want Miles to ever make a living in the NBA again. I don’t believe he ever asked anyone for a medical opinion that his knee was finished. He wanted to keep playing! It is well-known that judges do not fondly regard attempts by an employer to prevent a former employee from finding work elsewhere.

The psychology at play with Blazers management is worth comment, as well. They may genuinely feel that Miles and other teams are attempting to screw them in bad faith. This reminds me of a situation I recently experienced where a colleague, whom I know somewhat vaguely, asked me to take care of her cat in my home for a year while she embarks on a trip around the world. I said, sure, I would love to, but the problem is that I’m already taking care of another friend’s three cats for several months, and I’m not sure if the existing three cats will be gone by the time you embark on your trip. Eventually, a few weeks before her trip, I told the world-traveller that I can’t do it because my existing three cats don’t seem to be leaving anytime soon. And instead of saying, OK, I understand, that’s too bad, she contacted the owner of my three cats to find out if she can expedite the departure of the three! Rather than taking the presence or absence of the three cats as an autonomous external parameter that is out of her domain and control, she took it as a bit of a personal affront. I suppose I would feel a sense of loss too in her situation: a liability that you thought you had eliminated is suddenly back on the books for what feels like a bad reason. Given that losses generally hurt worse than the equivalent gains, it would have been better for Portland to never get rid of the salary-cap liability in the first place, rather than having the liability, then enjoying the windfall of ditching it, then getting socked with it again. But ultimately, Portland should bear some moral responsibility for signing Miles to such a rich contract, just as this cat owner is responsible for deciding to leave the country for a year.

I read somewhere that perhaps Portland’s letter can be read as an implicit threat not of a lawsuit, but of future blackballing by Portland of any team, say Boston or Memphis, that chooses to sign Miles. The problem is that this is clearly a non-credible threat; Kevin Pritchard will surely not hesitate to swing a deal for, say, Rudy Gay if the price is right.

In sum, I would say that Portland’s leadership team is full of it. They need better lawyers and better psychologists to help them through this disappointment.

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