SBJ/September 30 - October 6, 2002/For The Record

NBA union's grievance doesn't add up

At the World Congress of Sports in March, I happened to run into National Basketball Players Association Executive Director Billy Hunter. The conversation quickly turned to the operation of the NBA's collective-bargaining agreement and then focused on the agreement's escrow arrangement.

When I first read the NBA labor deal and got to the definitions section of Title VII, Section 12 — "Escrow Arrangement" — I thought a new language had been introduced. I was confronted by "Aggregate Compensation Adjustment Amount Shortfall," "Individual Compensation Adjustment Amount" and other defined shortfalls, overages, limits and amounts.

This is the most complex section of the collective-bargaining agreement. It requires players to pay back to the NBA salaries that exceed negotiated limits, and to have their contracts amended to reduce future payments by the team to conform to the agreement's economic limits. In March, players were having salary amounts escrowed. At that time, it was possible that the escrowed amounts would be paid to the league when the final accounting was completed in August. Hunter was not pleased, and he said that something had to be done.

The NBA escrow agreement is unique in sports because it is the enforcement section of a deal that contains a salary cap. It allows for the recovery of player compensation that exceeds the salary cap's limits. The NBA salary cap is 48.04 percent of basketball-related income, or BRI (which is basically the total of revenue from ticket sales, television, concessions, licensing, etc.). The escrow arrangement became effective for the 2001-02 season, so Hunter was faced with the prospect of his players having salary deducted if accountants determined that the rules of the collective-bargaining agreement had been exceeded.

It is important to recall that this agreement was negotiated during the lockout in 1999, which occurred when NBA salaries exceeded limits that allowed for the reopening of the old agreement. The deal that contains the escrow arrangement was part of the settlement of that dispute. Hunter's concerns in March of this year are now reality, and a storm is brewing.

To look at the tempest ahead, we need to look at the collective-bargaining agreement. The focus of the current deal is player salary control under what is termed a "soft" salary cap.

The collective-bargaining agreement is complete in its control of NBA players from the rookie draft to retirement. It sets team salary caps, rookie salary caps and individual player salary caps and limits the amount salaries in multiyear contracts can be increased from year to year.

The salary cap is termed "soft" because there are 11 exceptions to the individual player and team salary caps that teams can use to exceed it. The system is fine-tuned to control compensation in order to provide for financial stability in the league.

In any such agreement, with its complex rules, exceptions to rules and flexible salary structures, there must be a way to adjust if the soft cap allows salaries to rise too far over negotiated limits. For example, the soft cap is set at 48.04 percent of BRI ($40,271,000 per team in 2002-03) and exceptions allow salaries to rise above that amount. But when salaries exceed 55 percent of BRI, the escrow rules kick in to push salaries back to 55 percent.

Because of the salary cap exceptions, teams often go above the cap limit. If aggregate player salaries and benefits for the entire league exceed 61.1 percent, a luxury tax is imposed. (Assume, say, a $2.6 billion BRI for the league, which is a $51 million escrow limit per team. A team with a $70 million payroll, then, would pay $19 million as a tax.) The tax payments, in conjunction with the escrow payments, serve to keep salaries and benefits at 55 percent of BRI.

Remembering Hunter's displeasure, I was not surprised when I heard about his filing a grievance this summer. The reason for it has been elusive, however.

The union has a contractual right to grieve over a limited number of issues related to the escrow arrangement. For example, it can contest the NBA's calculation of the projected Aggregate Compensation Adjustment Amount, which is the amount of excessive salary set by the NBA and indicates the amount of salary that will be taken from player paychecks.

Furthermore, the agreement is very clear about who owns the money after the escrow agent pays it to the league: "All amounts remitted to the NBA by the escrow agent or NBA teams shall be the exclusive property of the NBA and the use and or distribution of all such amounts, including the allocation or distribution of such amounts to one or more NBA teams, if any, shall be within the NBA's exclusive distribution."

There is not a lot of wiggle room in that paragraph, but the payment of the money, it turns out, is the issue in the arbitration. The NBA has developed a plan that distributes the money to all team owners except those who paid the luxury tax.

The union, it seems, uses the circumvention language of the agreement, which says "that provisions of the agreement must be interpreted so as to preserve the essential benefits achieved by both parties to the agreement." The union claims that the NBA payment plan breaches the collective-bargaining agreement.

A grievance over a new contract provision is not rare, but the importance of this grievance is in its very existence. The language of the labor agreement is clear about the ownership of the money collected under the escrow arrangement, and a grievance shows only that the parties have not settled into a long-term labor-management relationship that eschews contentiousness for discussion and compromise.

Two major sports leagues, the NFL and the NBA, have excellent labor agreements that will serve both the players and the leagues well for the future. MLB and the NHL have problems and will be engaged in negotiations again to correct their flawed systems. By filing a grievance over the way escrow money is paid, the NBA players are setting off on an unfortunate course that may prove that a labor storm is in basketball's future.

Clark C. Griffith (cgriffith@sportsbusinessjournal.com) is a Minneapolis lawyer and arbitrator and former part owner of the Minnesota Twins.

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